Arm Holdings plc American Depositary Shares (ARM) Earnings

Management highlights

### Overall Financial Performance - Arm delivered a record Q1 FY27, with total revenue of $1.29 billion, up 22% year over year. Non-GAAP EPS was 45 cents, up 29% year over year and above the high end of prior guidance. - Non-GAAP operating income was $531 million, with a 41% non-GAAP operating margin, up 200 basis points year over year. Trailing 12-month free cash flow was $1.4 billion, supporting continued long-term R&D investment. ### Arm AGI CPU Business Updates - The Arm AGI CPU launched in March 2025, and initial product has now been delivered to multiple customers. Arm has secured manufacturing capacity to support the original $1 billion revenue opportunity across FY27 and FY28. - Total customer demand now exceeds $2 billion, with new customers added in the US and China, and management's confidence in achieving upside above the original $1 billion target has increased. Management is working with supply chain partners to expand capacity further, and will provide a detailed update at Q3 FY27 earnings. ### Core IP Business Momentum - Neoverse data center core shipments have surpassed 1.5 billion total cores, with 500 million cores shipped in the last 9 months (compared to 6 years for the first 1 billion cores). Multiple major industry players, including NVIDIA, Google, AWS, Microsoft, and Qualcomm, have launched or announced Arm-based AI infrastructure products. IDC reports spending on Arm-based accelerated server platforms has nearly doubled in the past two quarters and now surpasses x86 platforms. - Beyond data centers, Arm is seeing growing opportunity across AI PCs and physical AI. New Arm-based products include NVIDIA's RTX Spark agentic PC, Windows on ARM Snapdragon-powered AI PCs, and Google AI-enabled Chromebooks. In physical AI, NVIDIA's new Cosmos 3 and Isaac Groot robotics platform use an Arm-based CPU. - Arm's software ecosystem now supports more than 22 million developers worldwide. Recent updates include the new Performance developer platform with partner support, and the Arm MCP server which has surpassed 10,000 Docker downloads.

Guidance

- For Q2 FY27, Arm guides total revenue of $1.38 billion, plus or minus $50 million, representing 22% year-over-year growth at the midpoint. Licensing and other revenue is expected to grow ~30% year over year, while royalty revenue is expected to grow in the low teens year over year. - Non-GAAP operating expense is guided to ~$780 million, and non-GAAP EPS is guided to $0.47, plus or minus $0.04. - For full-year FY27 royalty growth, management expects full-year royalty growth to be in the high teens, down from the prior expectation of ~20%, due to incremental weakness across all segments of the smartphone market driven by BOM inflation from higher memory prices. Cloud AI royalty overperformance continues to offset this smartphone weakness. - Long-term 20%+ annual royalty growth guidance for FY28 and FY29 remains intact, as management expects smartphone market weakness to resolve in the back half of FY27, with growth returning to trend in subsequent years, while Cloud AI adoption continues to accelerate. - The initial gross margin for first-generation Arm AGI CPU is expected to remain in the high 30% to low 40% range, with margins expected to rise to 50% over a couple of years as more production work is brought in-house. No changes to this expectation from prior guidance.

Segment performance

Arm reports two core revenue segments for Q1 FY27: 1. Royalty Revenue: Total royalty revenue was $715 million, growing 22% year over year, and accounting for 55.4% of total company revenue. Data center royalty revenue more than doubled year over year, driven by hyperscaler deployment of Arm-based server chips and broad adoption in DPUs/SmartNICs. Edge AI/ smartphone royalty grew despite weak end-market smartphone demand, offsetting unit declines with higher royalty rates from increased penetration of Arm v9 architecture and compute subsystems. Physical AI royalty grew strongly, supported by secular expansion of ADAS and autonomous systems based on Arm technology. 2. Licensing and Other Revenue: Total licensing revenue was $574 million, growing 23% year over year, and accounting for 44.6% of total company revenue. This includes a $193 million contribution from the SoftBank technology licensing and design services agreement, with an expected quarterly run rate of ~$200 million for the remainder of FY27. Annualized Contract Value (ACV), a key metric for underlying licensing trends, grew 13% year over year, exceeding Arm's long-term growth expectations.

Risks & headwinds

- Global supply chain capacity constraints across wafers, substrates, memory, and test capacity limit Arm's ability to meet all excess demand for the Arm AGI CPU in the near term (FY27 and FY28). Management expects supply chain capacity to expand meaningfully by FY29-FY30. - Ongoing smartphone market weakness driven by BOM inflation from higher memory prices has negatively impacted royalty growth expectations for FY27, with weakness now extending beyond low-tier devices to mid- and upper-tier segments. - The semiconductor industry generally faces macroeconomic and end-market demand uncertainty that could cause actual results to differ from management's forward-looking guidance, as noted in Arm's SEC filings.

Analyst Q&A

• Q: What has driven increased management confidence in upside to the $1 billion Arm AGI CPU revenue target, and is the gross margin outlook changed from prior guidance? /

  A: Demand for the Arm AGI CPU has grown further, to above $2 billion, and management's confidence in securing the necessary supply (including wafers, substrates, test capacity, and memory) to deliver more than $1 billion in revenue across FY27 and FY28 has improved across all supply chain categories. The gross margin outlook remains unchanged: first-generation margins are expected to land in the high 30% to low 40% range, rising to 50% over a couple of years as more work is brought in-house. A detailed update on revenue and margin will be provided after Q3 FY27.

• Q: How has smartphone market weakness from memory BOM inflation impacted your full-year royalty growth outlook? /

  A: Industry smartphone demand has slowed more than initially expected, with weakness now extending beyond the low-end to mid- and upper-tier segments. As a result, full-year FY27 royalty growth is now expected to be in the high teens, down from the prior 20% expectation. However, ongoing overperformance in Cloud AI royalty growth is offsetting most of this smartphone weakness, and the long-term 20%+ annual royalty growth outlook remains intact for future years.

• Q: Is the long-term TAM for Arm AGI CPU larger than your original $100 billion projection for the end of the decade, and what is the supply outlook for outer years? /

  A: Growing demand for inference and agentic AI workloads, which are heavily CPU constrained, has led third-party estimates of the total addressable market to rise as high as $220 billion, meaning Arm's original $100 billion TAM projection may have been conservative. Near-term (FY27-FY28) supply chain capacity remains tight, but capacity for wafers and memory is expected to grow 70-100% by FY29-FY30, opening up further upside to Arm's long-term targets if demand remains strong.

• Q: Is the proliferation of low-cost open source AI models a net positive or negative for Arm's AGI CPU and IP businesses? /

  A: Arm is largely agnostic to model type, as both closed frontier models and low-cost open source models require CPUs and Arm IP to run, so the shift is at worst neutral for Arm. It could be net positive, as open source models are often smaller and more likely to be deployed at the edge, which is Arm's core market. More open source models also drive higher innovation and broader deployment of AI across different form factors, all of which run on Arm-based compute.