Fiscal Q2 2027 earnings call, November 4, 2026: Silicon supply is secured, but first-generation margins will be modest and smartphones remain a drag

Arm Holdings reported fiscal second-quarter revenue of $1.44 billion, up 27% year-on-year, and said it now has "increased confidence" in generating up to $2 billion from its Arm AGI CPU across fiscal 2027 and 2028. In March the company talked about line of sight to $1 billion. Management attributed the higher figure to purchase orders from multiple customers extending through calendar 2027 and to supply agreements with companies in its supply chain. First commercial deliveries remain on track for fiscal Q4 2027. CFO Jason Child said any Q3 shipments "wouldn't be a lot," and that the company is "really targeting Q4."

AGI CPU: Supply, Not Demand, Was the Constraint

CEO Rene Haas framed the upgrade as a supply story. Demand, he said, is stronger than when the product was unveiled in March, with Meta "the chief customer" and additional customers beyond it. The harder work was securing wafers, substrates, testers and memory. "The confidence is the strongest it's been to date, and it's definitely stronger than it was 90 days ago in terms of securing that supply," Haas said. Management will update the number again with Q3 results, when it expects better visibility.

Bank of America's Vivek Arya pressed on whether a first-time chip vendor has the scale to compete for supply with AMD, which raised its server CPU outlook by several billion dollars the previous day. Haas conceded that AMD has decades of capacity relationships, but argued that Arm is not new to TSMC or to Micron, Samsung and SK Hynix. He described the effort as "a 5- to 10-year endeavor," not a one-year project. Arm did not detail volumes or commitments, so investors are still relying on management's word on the supply chain. Rack-level systems are being built with Supermicro, Lenovo and ASRock, and Oracle Cloud Infrastructure plans to offer AGI CPU instances in 2027.

Gross Margin Will Start Well Below Arm's Historic Profile

The call put numbers on the economics of Arm's move into silicon. Child said the first version should deliver gross margin "in the high 30s to low 40%" range, and later steered analysts to "the 30% to 40% range." He expects Arm to reach "the more market standard of 50% plus" only with the next generation, as it does more of the work in-house and relies less on partners. That is far below the margin on Arm's IP business, which helps explain why the company's operating margin of 44.2% will face pressure as silicon revenue scales.

Haas acknowledged that memory is the largest cost driver and that supply-chain costs are creating margin pressure. He said Arm has "some elasticity on pricing" and has already used it, adding that there is "probably some headroom" to raise prices on higher-core-count parts. He said he was "not as worried" about gross margin. Given management's own guidance of 30% to 40%, investors may reasonably take a more cautious view.

Management gave no new long-term silicon targets. Child recalled the original plan of roughly $2 billion a year in the following year and about $5 billion a year after that, and said upside is likely if the $2 billion is exceeded. An updated framework is expected at the next Arm Everywhere event, probably in the first half of 2027. Haas said the CPU total addressable market, which Arm put at $100 billion by 2030 in March, has since been raised by others, including AMD, and that "I think that's about right and maybe even could be undercalling it." He also said a second-generation chip should follow the industry's 18-to-24-month cadence.

Licensing Strength Is Real but Lumpy

License and other revenue rose 50% to $773 million, about $100 million above Arm's own expectations. Child attributed the beat to customers rushing to sign long-term commitments. Arm signed three new Arm Total Access agreements, bringing active subscriptions to more than 60, including the first for one of its major customers. It also signed four compute subsystem licenses, two for data center chips and two for smartphones. SoftBank contributed $209 million, up 17%, and Child expects a similar run rate for the rest of the year. Annualized contract value grew only 12%, which Child called "a useful measure of the underlying licensing trend." The gap between that and the 50% headline shows how much timing and accounting treatment inflate quarterly license revenue.

Child said the pipeline is "surprisingly strong," and that Arm had assumed most AI-driven licensing demand had already been captured. Instead, "the need for additional license and additional product variations and different technologies is not slowing down at all." He guided license revenue up "a little over 50%" in Q3 and said it should step up again in Q4. He declined to call $773 million a new structural level.

Royalties: Data Center Doubles, Smartphones Stall

Royalty revenue grew just 8% to $670 million, well behind licensing. Data center royalties doubled and physical AI grew 50%, but edge AI was roughly flat as memory costs hit mid- and low-tier smartphone volumes. Higher Armv9 and compute subsystem royalty rates offset the unit weakness. Arm now estimates its share of top-hyperscaler server deployments at more than 50% in calendar 2025, up from 15% in 2024, and expects it to exceed 60% by the end of calendar 2026. Haas listed two drivers: custom CPUs such as Graviton, Cobalt and Axion, and the shift of head-node CPUs attached to accelerators from x86 to Arm. He cited Nvidia's Vera Rubin and Google's move to Axion alongside its eighth-generation TPU.

The base is concentrated. Asked about customer concentration, Haas named Amazon, Google, Microsoft and Nvidia as the four companies that "command the majority of the royalties." Child said data center royalties will not reach one-third of the total by year-end, although they will "sometime soon." He reiterated confidence in triple-digit data center royalty growth for the next few years.

The Q3 guide is cautious on royalties, which Child expects to grow low teens sequentially and low single digits year-on-year, against a tough comparison and continued smartphone weakness. For next year, Child pointed to IDC's forecast of roughly flat smartphone units, with Armv9 adoption now above 50%, so the tailwind from rate gains is smaller. He nonetheless expects the mobile-related business to grow at least in the double digits, supported by CSS adoption and next-generation CSS at higher royalty rates. Comparisons ease from early 2027.

Competition and Performance Claims

William Blair noted that AMD claimed leadership in performance per watt for its Venice CPU the previous evening. Haas acknowledged that "Venice is a great product." He also clarified that the Signal65 test cited at OCP, which showed roughly twice the performance per rack of AMD's EPYC 9755, was run against the prior AMD generation. He did not claim a win against Venice, and he shifted the argument to performance per dollar and per watt for the standard product, and to custom flexibility for hyperscalers. Arm expects core counts to rise from 128 to 256 to "500-plus," with higher average selling prices following. It is also exploring networking and I/O additions, which Haas called an area of potentially "even larger differentiation," although he announced nothing.

Financials and Guidance

Non-GAAP operating expense rose 19% to $774 million, and non-GAAP operating income rose 37% to $638 million. Operating margin was 44.2%, up 300 basis points, and non-GAAP EPS was $0.52, up 33%. Trailing 12-month free cash flow was $1.1 billion. For Q3, Arm guided revenue to $1.54 billion, plus or minus $50 million, or about 24% growth at the midpoint. It guided non-GAAP operating expense to about $825 million and EPS to $0.56, plus or minus $0.04. The sequential rise in operating expense of about $51 million shows the cost of building out the silicon business ahead of meaningful revenue.

Partners shipped a record 10 billion Arm-based chips in the quarter, and Arm-based PCs reached 20% of global shipments. Physical AI is also gaining ground, with automotive royalties growing 50%.