Arm plc(ARM) - 2026 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Revenue for Q2 reached $1.14 billion, up 34% year-on-year, marking the third consecutive billion-dollar quarter [4][11] - Royalty revenue hit a record $620 million, up 21% year-on-year, driven by growth across major markets [4][11] - Licensing revenue rose 56% to $515 million, reflecting strong demand for next-generation architectures [4][13] - Non-GAAP operating income was $467 million, up 43% year-on-year, resulting in a non-GAAP operating margin of 41.1% [15] Business Line Data and Key Metrics Changes - Royalty revenue from smartphones grew significantly, driven by higher royalty rates per chip and the deployment of Arm V9 and CSS chips [12][13] - Data center royalties more than doubled year-on-year due to the deployment of Arm-based chips by hyperscaler companies [12][13] - CSS licenses increased, with three new licenses signed during the quarter, bringing the total to 19 across 11 companies [7][13] Market Data and Key Metrics Changes - The demand for compute in data centers has surged, with Arm's neoverse royalties more than doubling year-on-year [21] - The automotive sector continues to grow, with significant advancements in AI performance for electric vehicles [9] - The software developer ecosystem has expanded to over 22 million, representing over 80% of the world's developer base, driving further demand for Arm's compute platform [9] Company Strategy and Development Direction - The company announced a strategic partnership with Meta to enhance AI efficiency across various compute layers [6] - Continued investment in R&D is prioritized to meet the increasing demand for Arm technology, particularly in AI [10][16] - The company is exploring opportunities beyond its current platform, including chiplets and complex SOCs [9][10] Management's Comments on Operating Environment and Future Outlook - Management highlighted that power has become a bottleneck in data centers, emphasizing the efficiency of Arm's compute platform [20] - The future demand for compute is expected to grow, particularly as AI workloads transition from cloud to edge devices [61] - The company remains confident in its long-term growth trajectory and strategy to enable AI everywhere [16][71] Other Important Information - Non-GAAP operating expenses were $648 million, up 31% year-on-year, reflecting strong R&D investment [15] - The company expects Q3 revenue of $1.225 billion, representing approximately 25% year-on-year growth [16] Q&A Session Summary Question: AI opportunity and data center deals - Management noted that power efficiency is critical, with Arm being about 50% more efficient than competitors, driving growth in the neoverse business [20][21] Question: Acquisition of Dream Big Semiconductor - The acquisition aims to enhance Arm's offerings in high-speed communications, particularly in data centers [24] Question: Related party revenue and SoftBank relationship - Management explained that the relationship with SoftBank provides significant opportunities for technology integration in data center solutions [27] Question: OPEX and go-to-market strategies - Management indicated that details on new products will be shared once milestones are achieved, focusing on R&D investments [30][32] Question: SoftBank contribution and revenue streams - The contribution from SoftBank was approximately $178 million, with expectations for continued strong revenue streams [36] Question: Stargate revenue opportunities - Management expressed optimism about the demand for compute, indicating that the opportunity has grown since the Stargate announcement [44] Question: Arm's penetration in data centers - Management confirmed that Arm technology is increasingly used across networking stacks, with expectations for royalty revenue to rise [52][53] Question: Chip demand and inference world - Management anticipates a shift from cloud-based training to edge-based inference, which will benefit Arm's position in the market [61] Question: Performance in China - The demand in China has been strong, with licensing being a significant driver of revenue growth [66]