Every Arm Holdings Investor Should Keep an Eye on This Number

Core Insights - Arm Holdings has been one of the top-performing AI stocks over the past year, with a trading increase of 119% [1] Revenue Model - Arm does not generate revenue like typical semiconductor companies; it licenses its CPU architecture to partners such as Nvidia and Apple, collecting royalties when products are sold [2] - The two main sources of revenue for Arm are licensing and royalties, with royalties generally being the larger source [2][4] License Revenue - License revenue is crucial as it provides an early indication of future business performance, although it can be inconsistent from quarter to quarter [4] - In the most recent fiscal second quarter, license revenue decreased by 15% to $330 million due to a large prior license agreement [4] - Arm reports license revenue as annualized contract value (ACV), which increased by 13% to $1.25 billion in the second quarter [4] Royalty Revenue - Royalty revenue is a better reflection of current business performance and the adoption of new technologies, such as the Armv9 CPU architecture, which has a royalty rate approximately double that of the previous generation [5] - In the second quarter, royalty revenue rose by 23% to $514 million, significantly outpacing total revenue growth of only 5% [6] - Royalty revenue is influenced by the royalty rate charged and the number of products sold, indicating the market impact of Arm's technology [6] Future Outlook - Overall revenue may remain volatile in the upcoming quarters, but royalty revenue will provide a clearer picture of the business's strength [7]