Arm (ARM.US) royalties shrunk month-on-month by 45 million, and revenue exceeding expectations, it's hard to hide hidden concerns about growth

According to Woofun AI, Arm (ARM.US) announced results for the second fiscal quarter ending September. Although revenue reached 1.44 billion US dollars and exceeded market expectations of 1.38 billion US dollars, the stock price showed a downward trend after the market.

This divergence revealed a core contradiction in financial reporting: under the appearance of revenue exceeding expectations, the month-on-month decline in royalty revenue raised deep concerns about the quality of growth in the market. Investors were not appeased by simple revenue figures, but were keenly aware of potential cracks in the revenue structure, causing stock prices to fall under pressure after the favorable news was released.

The revenue structure was thoroughly dismantled, and authorized revenue became the dominant force driving growth, while royalty revenue showed a month-on-month decline in fatigue. According to consistent market expectations, royalties for the quarter should be $721 million, actually $670 million, with a shortfall of about $51 million; authorized revenue exceeded expectations of approximately $148 million. According to data compiled by Woofun AI, for every $100 increase in Arm's revenue, about $84 of which comes from “licensing and other” businesses, the scale of this increase is about five times the increase in royalties. The authorized contract value (ACV) for the same period was US$1.79 billion, up 12% year over year; chip shipments in a single quarter exceeded 10 billion units for the first time.

This structural difference is due to the time difference between the two revenue recognition mechanisms: licensing revenue is affected by the pace of signing and execution of large contracts, and is often confirmed during the chip design stage; while royalty revenue needs to wait for chips equipped with Arm technology to actually be shipped before it can be collected in accordance with the terms of the contract, so it lags behind authorized revenue for several quarters.

Additionally, adjusted earnings per share were recorded at 52 cents, which was higher than adjusted expectations prior to the earnings report. According to US GAAP, net profit for the quarter was $130 million, down 45.4% year over year, and was $238 million in the same period last year. The decline was mainly due to one-time factors: in the same period last year, revenue of $131 million was recognized due to the sale of Artisan basic chip IP to Cadence, which formed a high base; the current quarter took into account fair value losses of $46.6 million in listed equity investments and $4.9 million in credit losses related to Arm China. The more critical variable is the month-on-month performance of royalties: total royalties for the latest quarter were reduced by about $45 million compared to the previous quarter, and lower than the level at the end of last year. Although data center royalties doubled year over year, total royalties only increased by about $50 million year over year. If data center royalties increase by more than $50 million, it means that other businesses, such as mobile phones, are shrinking year-on-year; vice versa. Earlier, Arm mentioned in a conference call that high-end phones used higher-rate technology to support mobile phone business revenue when the terminal market was weak, but quantifying the impact of the mobile phone business this season requires considering changes in shipments and single-chip royalties at the same time. Currently, the data is not enough to completely dispel doubts about the contraction of non-data center businesses.

The evolution of business models has further increased the complexity of revenue recognition, particularly changes in cloud vendor procurement models and production capacity constraints for AGI chips. In the past, when cloud vendors deployed self-developed processors based on the Arm architecture, Arm mainly charged licensing fees and royalties; now, Arm designs its own AGI CPUs for data centers and sells chips directly to customers, and the path for converting the same cloud vendor's expenses into Arm revenue has become diverse.

However, capacity bottlenecks limited the immediate contribution of this new model. When the AGI CPU was released in March of this year, management indicated that customer demand for the next two fiscal years would exceed $2 billion, but only maintained a revenue forecast of $1 billion at the time, showing that customer willingness to purchase was at least double what Arm expected to deliver. Management was still seeking supply chain capacity at the time, but later said it was more certain that it would surpass the previous revenue outlook.

Notably, according to the schedule announced at the time, the first mass-produced chip sales revenue is not expected to appear in the report until the fourth quarter of fiscal year 2027. This means there is a long cycle of capacity climbing, mass production verification, and delivery between the buyer's intention to purchase and Arm's completion of sales.

This time difference explains why chip sales revenue has not been significantly reflected in this quarter's results, and also determines that investors must focus on longer-term guidance rather than short-term fluctuations.

Looking ahead, the median revenue guidance for next quarter is US$1.54 billion, which is only less than 1% higher than market expectations of US$1.53 billion. Guidance that slightly exceeds expectations is difficult to boost market sentiment. The higher-than-expected results reflect the performance of the quarter that has ended, while the guidelines represent the company's conservative attitude towards revenue expectations for the next quarter. The fall in stock prices after the market shows that the market is more concerned about the sustainability of growth than the highlights of a single quarter. For Arm's data center business, there are two separately trackable cash flows in the financial report: one goes into royalty revenue with customer chip shipments, and the other one needs to wait for Arm's own chips to be delivered.

This dual-track revenue tracking logic requires investors to evaluate Arm's value not only based on the size of licensing contracts, but also pay close attention to the month-on-month trend in royalty revenue and the progress of mass production of AGI chips. Until supply chain capacity is gradually released, Arm's growth story still needs to find a balance between license expansion and royalty payments. Any delay in this process may trigger the market to reprice its long-term growth potential.