ARM: With the “Chip Tax” Boosting the Scene, Even Money-Soaked Orders Are “A Little Cold”

ARM (ARM.O) released its financial report for the first quarter of fiscal year 2026 (ending June 2025) after the U.S. stock market closed on the morning of July 31, 2025, Beijing time. The key points are as follows:

1. Key Data:$Arm(ARM.US) achieved revenue of $1.053 billion this quarter, a year-on-year increase of 12.1%, close to market expectations ($1.059 billion). The growth rate of the royalty business reached 25%, which is the main source of the company's revenue growth, while the licensing business declined. The company's gross margin was 97.2%, continuing to maintain at a high level.

2. Specific Business Situation: Licensing and Royalty Revenue are Nearly 1:1

a) This quarter's licensing business revenue was $468 million, with both year-on-year and quarter-on-quarter declines. The company recognized approximately $250 million in agreement revenue from the Malaysian government last quarter, and the same period last year was also a relatively high base;

b) This quarter's royalty business revenue was $585 million, a year-on-year increase of 25.3%. It was mainly driven by demand from AI-driven smartphones, data centers, automotive, IoT, and other terminal markets, with Neoverse chips expected to reach nearly 50% market share in hyperscale data centers this year. Additionally, the penetration of Armv9 and the successive launch of CSS products will be the driving forces for the continuous growth of the company's royalty business.

(Note: The CSS computing subsystem is a pre-assembled IP module that includes not only Arm CPU cores but also other IP parts, allowing enterprises to skip the integration phase and bring products to market faster)

3. Core Indicators: ① Annual Contract Value (ACV), the company's annual contract value this quarter was $1.53 billion, a quarter-on-quarter increase of 11.9%, with three CSS license upgrades this quarter; ② Remaining Performance Obligations (RPO), the company's remaining performance obligations this quarter were $2.23 billion, almost flat quarter-on-quarter, significantly below market expectations ($2.5 billion); ③ ACV/RPO ratio: This quarter's ACV/RPO was 0.68, showing an upward trend, indicating that the company's current order structure is more short-term oriented.

4. Operating Expenses: R&D expenses increased significantly, while sales expenses remained relatively stable. The company's R&D expenses this quarter were $650 million, a year-on-year increase of 34%. The significant increase in R&D expenses is mainly due to the company's increased investment in next-generation technology development.

The increase in R&D expenses has put direct pressure on the company's profit release, resulting in a noticeable decline in the company's profit this quarter.

5. Next Quarter Guidance: ARM expects revenue for the second quarter of fiscal year 2026 to be between $1.01 billion and $1.11 billion, with the midpoint being roughly flat compared to this quarter's revenue, close to market expectations ($1.06 billion); the company expects Non-GAAP EPS to be between $0.29 and $0.37, with the midpoint below market expectations ($0.35), mainly due to increased R&D investment.

Dolphin Research's Overall View: Guidance and Order Data Directly Affect Market Confidence

ARM's revenue and gross margin this quarter were close to market expectations, but there was a noticeable decline in profit, mainly due to the company's increased investment in R&D. Although the company's current gross margin remains at 97%, this quarter's R&D expense ratio has risen again to 61.7%, which will directly affect market expectations for the company's profit release.

Compared to current performance, the market is more focused on the company's guidance, annual contract value, and remaining performance obligations. Driven by three CSS license upgrades, the company's annual contract value reached $1.53 billion, but the company's guidance and order situation are relatively flat, especially since the company's remaining performance obligations have almost no growth quarter-on-quarter.

The current high valuation of ARM includes the market's expectation of the company's "sustained high growth and rapid valuation digestion," but the above situation will undoubtedly increase the market's concern about the company's "slowing growth, high investment, and difficulty in profit release."

There are three main focus points for ARM's business situation:

1) Royalty Business: It is the most stable part of the company. Although tariff impacts may cause fluctuations in the shipment of devices equipped with Arm IP, the growth momentum in AI/custom chips (such as Grace, Cobalt, Axion, Graviton) and the adoption of CSS/v9 technology will continue to drive the growth of royalty business revenue;

2) Licensing Business: Whether Arm's licensing revenue and annual contract value (ACV) can maintain a level far above its long-term target (i.e., mid-to-high single-digit percentage). Due to the accelerated growth of licensing business related to AI demand (i.e., the higher the computing demand, the more Arm products are applied), Arm's licensing revenue and annual contract value (ACV) have shown a trend above the target level.

3) R&D Investment Situation: Since the company's gross margin remains at a high level of 97%, operating expenses are also a key factor affecting the company's profit release. There are reports that Arm is conducting internal chip development work, and in this context, its continuously increasing R&D expenditure will also become a market focus. If the company maintains "high growth and high investment," the market can accept it, but once the growth rate slows down, high investment will directly become a burden for the company.

Since ARM's gross margin is quite stable, the company's performance growth mainly comes from revenue expansion and the decline in expense ratio under scale effects, so the performance on the revenue side will be the most critical.

From a short-term perspective: The company will still be driven by AI demand, combined with the company's current market value ($173 billion), corresponding to a PS of nearly 37 times for fiscal year 2026 (revenue year-on-year +17.6%). Referring to the company's historical PS valuation range of approximately 20-50 times, the current valuation is still slightly above the midpoint of the range. ARM's valuation is significantly higher than that of other IP peer companies (around 10 times PS), mainly due to the market's recognition of the company's industry position, customer structure, and growth potential. However, if the company fails to deliver a more satisfactory "report card," the company's stock price will also face corresponding pressure.

For ARM's investment, more emphasis is placed on the company's medium to long-term growth potential. Although the smartphone terminal market will be affected by industry factors, AI data centers, automotive, and other businesses will still bring growth to the company. With products such as NVIDIA's Grace CPU, Amazon's Graviton, Microsoft's Cobalt, and Google's Axion, the company will also continue to increase its market share in the data center field.

Overall, the medium to long-term logic of ARM's financial report remains, but "slowing revenue growth and significantly increased investment" will still affect the company's growth expectations, putting pressure on the company's current high valuation.

The following is Dolphin Research's specific analysis of ARM:

I. Overall Performance:

1.1 Revenue Side

ARM achieved revenue of $1.053 billion in the first quarter of fiscal year 2026 (i.e., 25Q2), a year-on-year increase of 12.1%, close to market expectations ($1.059 billion). The main increase came from the royalty business, which grew by 25% year-on-year this quarter, while the licensing business declined.

1.2 Gross Profit Side

ARM achieved a gross profit of $1.02 billion in the first quarter of fiscal year 2026 (i.e., 25Q2), a year-on-year increase of 12.9%. The gross margin for this quarter was 97.2%, a year-on-year increase of 0.7 percentage points. Since the company's gross margin has long remained above 95%, the gross profit performance is overall similar to the revenue side.

1.3 Operating Expenses

ARM's operating expenses in the first quarter of fiscal year 2026 (i.e., 25Q2) were $910 million, a year-on-year increase of 25.6%. The company once again increased its investment in R&D this quarter. The operating expense ratio for this quarter reached 86.3%, which directly squeezed the company's profit margin.

Breaking down the specific expense situation:

1) R&D Expenses: The company's R&D expenses for this quarter were $650 million, a year-on-year increase of 34%, as the company increased its investment in next-generation technology development. According to external media speculation, ARM may have already started internal chip development.

2) Sales and Administrative Expenses: The company's sales and administrative expenses for this quarter were $260 million, a year-on-year increase of 8.4%. Under the influence of revenue growth, sales and administrative expenses also increased.

1.4 Net Profit

ARM achieved a net profit of $130 million in the first quarter of fiscal year 2026 (i.e., 25Q2), with both year-on-year and quarter-on-quarter declines, below market expectations ($187 million). The company's gross margin is relatively stable, but the significant increase in R&D expenditure this quarter directly squeezed the net profit margin to 12.3%.

Since the company will maintain high operating expenses next quarter, with revenue roughly flat quarter-on-quarter, the company's net profit next quarter will still face pressure.

II. Business Segments: Steady Growth in Royalties, Licensing Shows Weakness Again

From ARM's business segment perspective, the proportion of royalty business revenue increased to 55%, mainly due to a 25% year-on-year growth in royalty business this quarter, while the licensing business declined.

2.1 Licensing Business

ARM's licensing business achieved revenue of $468 million in the first quarter of fiscal year 2026 (i.e., 25Q2), a year-on-year decline of 0.8%. This quarter, there were three CSS license upgrades, with part of the revenue recognized this quarter and the rest included in the remaining performance obligations.

The total number of customers remained unchanged this quarter, still at 358. The number of full license customers increased to 45, while the number of flexible license customers decreased by one, as a flexible license customer switched to a full license format.

Due to normal fluctuations in the timing and scale of signing multiple high-value agreements, as well as contributions from backlog orders, licensing business revenue varies each quarter. For the company, the main focus is on the annual contract value (ACV) to better understand the potential growth rate of the licensing business.

This quarter's annual contract value (ACV) increased to $1.53 billion, a quarter-on-quarter increase of 11.9%, driven by three CSS license upgrades this quarter. Under the current AI demand, the growth rate is far better than the company's previous long-term target of mid-to-high single-digit growth.

However, this quarter's remaining performance obligations (RPO) were $2.23 billion, basically flat, significantly below market expectations ($2.5 billion). Combined with the company's AVC/RPO indicator, the company's current order structure is more short-term oriented.

2.2 Royalty Business

ARM's royalty licensing business achieved revenue of $585 million in the first quarter of fiscal year 2026 (i.e., 25Q2), a year-on-year increase of 25.3%.

The royalty business remains the most stable part of the company, with royalty revenue from all target terminal markets growing this quarter, including smartphones, data centers, automotive, and IoT fields. Due to the continued popularity of flagship smartphones based on Armv9 and CSS, the growth rate in the smartphone field is an order of magnitude faster than the overall market.

The data center field remains a major focus for ARM, with the company's Neoverse chips expected to increase their market share in hyperscale data centers from 18% last year to nearly 50% this year:

a) In the general field, Arm continues to capture x86 market share with products such as Graviton, Google Axion, and Microsoft Cobalt;

b) In the AI field, the previous generation NVIDIA Hopper relied on external x86, while the new generation Grace Blackwell adopts an integrated Arm design, allowing Arm to leap from 0% market share in this field to near dominance.

On the other hand, the stepwise increase in CSS rates will support the royalty business. Armv8 is about 2.5%-3%, Armv9 is about 5%, the first generation CSS is about 10%, and the new generation CSS is over 10%. As more customers adopt CSS, forming a cycle of "higher value → higher rates → more customers → higher revenue."

Considering the growth of the data center market and the upgrade of CSS rates, the company's royalty business will continue to achieve steady growth, and the company's long-term focus remains.

Dolphin Research's related research on ARM

May 8, 2025, Conference Call "ARM (Minutes): Tariffs Have No Direct Impact on the Company"

May 8, 2025, Earnings Review "ARM: Guidance Warning "Cold Water", Valuation Bubble to Burst?"

February 6, 2025, Conference Call "ARM (Minutes): Future Focus on "Tax" Capability Growth"

February 6, 2025, Earnings Review "ARM: AI Helps Meet Performance, High Valuation Still a "Sweet Burden""

November 7, 2024, Conference Call "ARM: Cloud Services and Automotive Market Share Will Continue to Grow (FY25Q2 Conference Call)"

November 7, 2024, Earnings Review "ARM: AI Faith, Can It Support a Hundred Times Valuation?"

August 1, 2024, Conference Call "ARM: Downgrades Full-Year Royalty Revenue Forecast (FY25Q1 Conference Call Minutes)"

August 1, 2024, Earnings Review "ARM: Guidance Cools, AI Faith Cools"

May 9, 2024, Earnings Review "ARM: After the Carnival, Is AI Slowing Down?"

February 8, 2024, Earnings Review "ARM: How Long Can AI's Wings Fly?"

September 13, 2023, ARM In-Depth "ARM: After Selling Alibaba, Is SoftBank's Next Lifeline Really Worth $50 Billion?"