Key Takeaways

• Strong Value-Based Pricing Power: Demonstrated by smartphone royalty revenue growing 40% despite only 4% unit growth, showing Arm’s ability to capture significantly more value per chip through V9 adoption and pricing power. This decoupling of revenue from units is a fundamental shift in their business model.
• V9 + CSS Creating New Growth Layers: V9 architecture enables continuous price increases through generational improvements (unlike previous versions), while CSS licenses (which can command 2x+ royalty premiums) doubled year-over-year. Current V9 penetration at 25% of royalties provides a substantial runway for growth.
• Licensing Business Healthier Than Expected: Despite a 15% YoY decline, licensing performed better than -25% guidance with ACV up 13% and RPO growing 10% sequentially. Management noted strong demand across all segments driven by AI compute requirements, with 7% annual price increases on ATA contracts.
• Cloud/AI Momentum Building: Major milestones with Microsoft Azure Cobalt and Google GCP Axion are now in general availability, plus NVIDIA Grace Blackwell shipments beginning. Management sees strong synergies between general-purpose Arm computing and AI workloads in data centers driving adoption.
• Maintained Strong FY25 Guidance: Revenue guidance of $3.8-4.1B (18-27% growth) maintained, with high-teens royalty growth expected. Management showed confidence in their visibility, citing 3-5-year customer roadmap visibility and a strong CSS pipeline, particularly in the automotive and mobile sectors.

Arm delivered strong Q2 FY25 results with a total revenue of $844 million, exceeding guidance. Royalty revenue grew 23% year-over-year to $514 million, hitting a record level driven by V9 adoption and CSS deployments. Notably, smartphone royalties increased 40% despite only 4% unit growth, demonstrating Arm’s pricing power and value-based strategy. Licensing revenue, while down 15% year-over-year to $330 million, performed better than expected (-15% vs -25% guided) with Annual Contract Value (ACV) growing 13% and RPO up 10% sequentially.

Guidance and Outlook:
Management maintained full-year FY25 revenue guidance of $3.8-4.1 billion (18-27% growth) with Q3 revenue expected at $920-970 million. They project high-teens royalty growth for the full year, driven by smartphone mix shifts toward Arm-based chips and CSS ramping. Operating expenses are expected to be around $2.05 billion, representing a 19% increase as they invest in R&D.

Investor Sentiment:
Questions focused heavily on three areas: licensing strength/sustainability, V9 adoption trajectory, and China market dynamics. Investors appeared encouraged by management’s detailed explanations of licensing visibility and the structural changes in the V9 business model that enable continued price increases. The clarity around smartphone outperformance (40% revenue growth vs 4% units) seemed to resonate well. However, some skepticism emerged around PC market penetration and AI catalysts, though management maintained confidence in their 50% PC market share goal.

Market Positioning:
Management effectively positioned Arm as a key enabler of AI across the computing spectrum, from edge to cloud. They highlighted significant wins with major cloud providers (Microsoft Azure, Google GCP) and NVIDIA’s Grace Blackwell while emphasizing their dominant position in mobile and growing automotive opportunities. The team’s confidence in achieving a 50% PC market share and their detailed explanation of the path to get there suggested strong visibility into future growth drivers.

Future Catalysts:
Several growth drivers were highlighted: CSS adoption in mobile and automotive, cloud deployment acceleration, PC market share gains, and AI driving demand across segments. Management appeared particularly confident about smartphone royalty growth continuing to outpace units and the expansion of CSS licensing, which doubled year-over-year. The emphasis on having 3-5-year visibility into customer roadmaps added credibility to their growth projections.

The overall tone of the call was confident but grounded, with management providing detailed support for their growth narrative while acknowledging areas of market weakness (IoT, networking) and competitive challenges. Their ability to quantify value drivers and provide specific customer examples appeared to resonate well with investors seeking to understand Arm’s evolving business model.

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