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ARM Holdings' latest revenue report provided many positives, recording royalty revenue, spurring robust growth in key end markets, and all-year guidance. However, despite the headline beat, the stock fell by 8% in trading after hours. What reflects the sell-offs reflect investor concerns is that, although the results are strong, it does not mean a rise in expectations after this year's sharp rally, and the concept of slower adoption of new technologies such as ARMV9 could be slower. The stock's response highlights how many arms are already on sale as AI winners, with little room for anything but blowing away.
In the June quarter (FYE26 in the first quarter), ARM recorded revenue of $1.05 billion. This was essentially in line with the $1.06 billion analyst expectations, with a adjusted EPS of $0.35, with a precisely consistent consensus. The company's biggest profit driver, royalty revenue, rose 25% year-on-year to $585 million, benefiting from an increase in adoption of the ARMV9 architecture and increased chip ramp-ups based on ARM's Computational Subsystem (CSS). Licenses and other revenues fell from 1% a year ago to $468 million due to normal fluctuations in transaction timing. The annual contract amount increases the healthy 28% per year to $1.53 billion, highlighting stable demand for ARM's designs. Still, as stocks already grow more than 30% a year, the “inline” nature of the results proves that investors are looking for amazing surprises.
Loyalty won this quarter, breaking down the performance of the segment. Smartphone and data center deployments, particularly AWS Graviton, Microsoft's Cobalt, Google's Axion and Nvidia's Grace, helped to drive a $585 million royal tally. Under the license, MediaTek's Dimenity 9400 SOC and OPPO and Vivo's flagship smartphones supported demand, but CFO Jason Child admitted a modest mistake compared to the smartphone sector's desires. Although IoT's contributions remained strong, early shipments of CSS-based chips gave loyalty a meaningful boost. Cars with fewer contributors compared to mobile phones and the cloud showed stable profits, but remained a long-term growth pillar, rather than a short-term profit driver.
Compared to Wall Street's forecasts, the quarter was a technical beat. Earn ahead of Factset's $1.05 billion consensus and EPS lined up accurately at $0.35. But while the management's forward guidance was strong, it essentially reaffirmed expectations rather than setting up a new bar. For the second quarter, ARM Guide revenues ranged from $1.01 to $1.1 billion (midpoint $1.06 billion, along with consensus) and from $0.29 to $0.37 (midpoint $0.33, slightly below $0.35 in Q1). Operating expenses are projected to rise to $655 million from $619 million in the first quarter. All year, management increased the midpoint of revenue guidance to around $4 billion, representing 24% year-on-year growth, with loyalty growth expected for senior teens, with licensing increasing by around 30%.
CEO Rene Haas highlighted that AI demand remains a major growth driver, pointing to ARM's positioning as a CPU for AI workloads across the cloud and the edge. He cited AWS disclosures that over 50% of the CPU capacity installed over the past two years use arm-based Graviton chips. Haas also pointed to progress on AI PCS, with the Snapdragon X-Series platform gaining traction and over 100 designs expected by 2026. At the same time, he confirmed that ARM is valuing designing its own shiplets and designing a complete chip beyond IP licenses.
The Q&A session highlighted both optimism and anxiety. Analysts asked about the pace of CSS and ARMV9 adoption. The CFO child acknowledged that ARMV9's contribution to royalty had stagnated this quarter, but emphasized that adoptions were on track to reach 60-70% of total royalty over time. Analysts also questioned the timing of license revenue recognition given the broad outcomes associated with large transactions. Management responded by pointing out healthy annual contract values and strong customer engagement, but the Q4 guidance scope was intentionally maintained widespread due to uncertainty.
Investors have also crossed the keys on risk. Increase in operating expenses – forecast to rise further in the second quarter – Even if revenue increases, it will put pressure on margins in the short term. The possibility that ARM would begin designing its own chips raised questions about execution risks and potential channel competition with existing licensees, which are also customers. Macro conditions, including US tariff policy and slowing demand for androids in China, add additional uncertainty. Management downplayed direct tariff exposure, but it remains limited to acknowledging visibility into the indirect impact on final demand.
Despite these concerns, emotions remain broadly constructive. Analysts have noted the strong strategic positioning of ARM in the AI, data centers and IoT markets. The company's entire year of guidance procures and record royalty performance will strengthen its role as a central player in the next wave of semiconductor innovation. However, after revenue selloff reflects the face of the high bar arm. If stocks have already doubled since the 2023 IPO, meeting expectations is not enough.
In the future, investors will be closely watching:
- The ARMV9 and CSS pace are being adopted royalty, especially across smartphones and servers.
- Performing large-scale license transactions.
- Progress in data center deployments by AWS, Microsoft, Google, and Nvidia.
- R&D spending is projected to be higher in the coming quarters.
- Clarity about potential movements on chip design and impact on customer relationships. Conclusion: ARM has offered a record quarter and raised its entire year guide, but the sharp sell-offs of stocks reflect the demand for investors more than “inline.” AI workloads drive growth, deepen hyperschool partnerships, and the arms are well positioned, but they need to run with technology adoption and manage upward costs to justify premium ratings.
