Core Insights - Investors are cautious despite Arm Holdings plc's record-breaking Q2 fiscal 2026 earnings, with the stock declining about 7% post-results due to concerns over valuation and spending [1][7][15] Financial Performance - Arm Holdings reported Q2 revenues of $1.14 billion, a 34% year-over-year increase, surpassing estimates by 6.5%, marking the third consecutive billion-dollar quarter [2][7] - Royalty revenues reached a record $620 million, up 21% year-over-year, driven by increased adoption of Arm's architecture, particularly in data centers [3] - Licensing revenues climbed 56% to $515 million, reflecting the growing adoption of Arm's designs for next-generation AI chips [4] - Non-GAAP operating income was $467 million, a 43% increase year-over-year, with an operating margin of 41.1%, up from 38.6% [12] Strategic Positioning - Arm's compute platforms are integral to major tech companies, with significant performance and energy efficiency gains demonstrated by platforms like Google's Axion [9] - The company has formed a strategic partnership with Meta Platforms to enhance AI efficiency across various computing environments [8] - The launch of Lumex CSS, Arm's advanced mobile compute platform, is expected to enhance mobile AI capabilities [11] Future Outlook - For Q3 fiscal 2026, Arm expects revenues between $1.175 billion and $1.275 billion, indicating approximately 25% year-over-year growth [14] - Licensing is projected to rise by 25% to 30%, while royalties are expected to increase just over 20% [14] Valuation Concerns - Arm's forward price-to-sales ratio stands at 28.52, significantly higher than the industry average of 7.78, indicating a high-expectation phase [16] - The company's heavy reinvestment cycle and stretched valuation may limit short-term returns, leading to a cautious investment stance [17]

Core Viewpoint - Arm Holdings has demonstrated strong earnings performance in Q2 of fiscal 2026, with revenue and earnings surpassing consensus estimates [1] Financial Performance - Revenue increased by 34% year over year to $1.14 billion, with royalty revenue rising 21% to $620 million and licensing revenue surging 56% to $515 million [2] - Adjusted net income grew by 32% year over year to $417 million [2] Market Dynamics - The demand for Arm's products is significantly driven by artificial intelligence (AI), although the stock price remains volatile [3] - Despite a strong earnings report, the stock experienced a nearly 9% decline in pre-market trading due to weaker fiscal guidance and rising tariff concerns [3][4] Demand Trends - Hyperscalers and large enterprises are increasing their computing capacity, which benefits Arm due to its focus on energy-efficient chip architectures [5] - Arm's Neoverse computing platform is foundational for custom data center CPUs, with over 1 billion CPUs deployed and Neoverse royalties increasing over 100% year over year [7] Licensing and Royalties - Smartphone royalties grew faster than the overall market, driven by demand for Armv9 and Compute Subsystem (CSS) architectures [8] - Licensing activity showed strong performance, with annualized contract value increasing by 28% year over year [9] Research and Development - Arm is heavily investing in R&D for next-generation architectures and computing subsystems, leading to a 31% year-over-year increase in adjusted operating expenses to $648 million [10] - The company has not provided a clear timeline for new products, which complicates financial modeling and valuation [12] Growth Catalysts - Arm's CPUs are increasingly used by hyperscalers and AI model developers, enhancing their price-performance capabilities [13] - There is growing demand for Arm's CPUs and Lumex CSS platform as AI workloads transition from cloud to local devices [14] - Arm's involvement in the Stargate initiative, aimed at investing $500 billion in data center capacity, could drive long-term revenue [15] Valuation - Shares are trading at a high valuation of over 65 times forward earnings, reflecting confidence in royalty revenue from Arm-based chips [16] - The elevated valuation presents a lower margin for error, as any slowdown in AI infrastructure spending could negatively impact share price [16] Investment Strategy - Given the strong fundamentals and associated risks, a dollar-cost averaging strategy is recommended for investors to manage volatility while capitalizing on potential upside [17]

Core Insights - Arm reported Q2 FY26 revenue of $1.14 billion, a year-over-year increase of 34% and a quarter-over-quarter increase of 8% [4] - The company achieved a GAAP gross margin of 97.4%, up 1.2 percentage points year-over-year, maintaining its leading position globally [4] - Non-GAAP operating profit margin rebounded to 41% after a decrease in expense ratios, despite high R&D costs [3] Financial Performance - GAAP operating profit was $160 million, a 155% increase year-over-year, with a GAAP operating margin of 14%, up 6 percentage points [4] - Non-GAAP net profit reached $420 million, a 32% year-over-year increase, with a Non-GAAP net profit margin of 37%, down 1 percentage point [4] - GAAP net profit was $240 million, a 122% increase year-over-year, with a GAAP net profit margin of 21%, up 8 percentage points [4] Revenue Breakdown - License & Other revenue was $520 million, a 56% year-over-year increase, with 48 Arm Total Access contracts signed [7] - Royalty revenue reached $620 million, a 21% year-over-year increase, driven by growth in data centers, mobile, automotive, and IoT markets [10] - The company’s annual contract value (ACV) was $1.6 billion, a 28% year-over-year increase, while remaining performance obligations (RPO) were $2.25 billion, down 6% year-over-year [7] Market Position and Future Outlook - Arm's Neoverse CPU platform has been deployed in over 1 billion CPUs, with expectations that nearly 50% of new server CPU chips will be Arm architecture by 2025 [13] - The company anticipates Q3 revenue of $1.225 billion, a 25% year-over-year increase, and expects Royalty revenue to grow slightly above 20% year-over-year [13] - Management expressed confidence in the growth of the License business pipeline for the remainder of the year, particularly in China [13] Strategic Developments - Arm announced a strategic partnership with Meta to enhance AI efficiency across various computing layers [13] - The acquisition of DreamBig Semiconductor focuses on Ethernet and RDMA controller IP, which are important for scale-up and scale-out applications [13] - The management's reluctance to provide full-year guidance has raised concerns in the market, despite positive indicators from recent performance [14]

Core Insights - ARM's efficiency in computing platforms is approximately 50% higher than competing solutions, leading to significant adoption by major companies like NVIDIA, Amazon, Google, Microsoft, and Tesla [1][2] - The unprecedented demand for computing power is primarily based on ARM technology, contributing to over 100% year-on-year growth in the Neoverse business segment [1][2] - The Chinese market has shown strong performance with historical high demand, driven mainly by license revenue, including a large licensing deal [1][7] Financial Performance - In Q2, SoftBank-related revenue increased from $126 million to $178 million, a rise of $52 million, which serves as a future reference benchmark [5] - The revenue from SoftBank includes IP licensing and design services, with design services having a lower profit margin [5] Strategic Initiatives - ARM's acquisition of DreamBig Semiconductor is aimed at enhancing its Ethernet and DMA controller capabilities, which will expand its product offerings [3] - Collaboration with SoftBank on the Stargate project is expected to provide significant business opportunities in data center construction [3] Market Trends - The infrastructure business is growing at twice the average rate of other categories, with expectations of a 15% to 20% revenue share in ARM's royalty income [6] - The shift in data center computing from training to inference is anticipated, with strong demand for ARM's technologies in edge computing [7] Future Outlook - ARM maintains confidence in its future prospects based on current capital expenditures and the ongoing strong AI cycle [1][7] - The company plans to provide clearer guidance for Q4 based on its licensing reserves and the timing of large licensing deals [1][7]

Arm Holdings (NasdaqGS:ARM) Q2 2026 Earnings Call November 05, 2025 05:00 PM ET Company ParticipantsJason Child - CFOVivek Arya - Managing DirectorKrish Sankar - Managing DirectorRoss Seymore - Managing DirectorRene Haas - CEOTimm Schulze-Melander - PartnerJeff Kvaal - VP of Investor RelationsHarlan Sur - Executive Director of Equity ResearchConference Call ParticipantsJoe Quatrochi - Director and Equity Research AnalystSebastien Naji - Equity Research AnalystJim Schneider - Senior Equity AnalystLee Simpson ...