Q2 2026 Arm Holdings PLC Earnings Call
<unk> financial officer.
During the call arm will discuss forecasts targets and other forward looking information regarding the company and its financial results.
While these statements represent our best current judgment about future results and performance. Our actual results are subject to many risks and uncertainties that could cause results to differ materially.
In addition to any risks that we highlight during this call important risk factors that may affect our future results and performance are described in our registration statement on form 20-F filed with the SEC.
<unk> assumes no obligation to update any forward looking statements.
We will refer to non-GAAP financial measures. During this discussion reconciling reconciliations of certain of these non-GAAP financial measures to their most directly comparable GAAP financial measures can be found in our shareholder letter as Canada discussion of projected non-GAAP financial measures that are not able to recognize reconcile without unreasonable efforts and supply.
Rental financial information.
Our earnings related materials are on our website at investors that arm dot com and with that I'll turn the call to Renee Renee.
Thank you, Jeff and welcome everyone.
We continue as fiscal year 2020 sake with strong momentum fueled by accelerating demand for AI compute for middle lots in the smallest of edge devices to megawatts in the world's largest hyperscale data centers.
Artificial intelligence is reshaping every layer of technology in arm is the only compute platform delivering AI everywhere.
Q2 was our best second quarter ever with revenue of 1.14 billion up 34% year on year, marking our third consecutive billion dollar quarter.
Royalty revenue reached a record $620 million up 21% year on year, driven by growth in all major markets, including data center smartphones automotive and Iot.
Unprecedented compute demand has led to our datacenter new versus royalties to more than double year on year.
<unk> revenue rose, 56% to $550 million as companies continue choosing arm to build their next generation AI products.
Our strong results listed non-GAAP EPS above the high end of guidance.
During the quarter, we announced a strategic partnership with meta to scale AI efficiency across every layer of compute.
From AI enabled wearables to AI data centers on a consistent compute platform.
This partnership combines arms leadership in energy efficient compute with med is innovation and AI infrastructure, and <unk> technologies to deliver richer and more efficient AI experiences to billions of people worldwide.
In the data center access to power has now become the bottleneck and this has accelerated adoption of arms <unk> compute platform, which has now surpassed $1 billion Cpus deployed.
Our compute forms the foundation of custom silicon from leading partners, including Nvidia Grace AWS.
AWS Graviton, Google Axion, and Microsoft Cobalt.
For example, Google's arm based accident ship delivers up to 65% better price performance, while using 60% less energy and as a result, google's migrating the majority of their internal workloads to run on arm.
Customers are increasingly deploying <unk> Cpus alongside their AI accelerators to orchestrate massive clusters, highlighting the versatility and scalability of our platform.
The addition of five new stargates sites this quarter further expands visibility into future AI capacity and reinforces arm central role in Hyperscale build out.
Is AI chip design becomes more complex, our compute sub systems or CSS are helping customers accelerate their development cycles and reduced execution risk.
Demand for CSS continues to exceed expectations.
During the quarter, we signed three new CSS licenses, one each in smartphone tablets and data centers.
Bringing our total to 19 CSS licenses across 11 companies.
We also expanded our collaboration with Samsung, which is leveraging CSS for its <unk> family of chipsets.
Driving up to 40% AI performance over previous non CSS generation.
As a result, the top four Android phone vendors are now shipping CSS power devices.
CSS has quickly become the starting point for customers building next generation silicon operating faster time to market and delivering higher royalty rates for arm.
In the quarter, we also launched <unk> CSS, our most advanced mobile compute platform to date.
Jeff Kvaal: Chief Executive Officer and Jason Child, Arm's Chief Financial Officer. During the call, Arm will discuss forecasts, targets, and other forward-looking information regarding the company and its financial results. While these statements represent our best current judgment about future results and performance, our actual results are subject to many risks and uncertainties that could cause results to differ materially. In addition to any risks that we highlight during this call, important risk factors that may affect our future results and performance are described in our registration statement on Form 20F filed with the SEC. Arm assumes no obligation to update any forward-looking statements. We will refer to non-GAAP financial measures during the discussion.
<unk> enables reach rich on on device <unk> experiences such as real time translation image enhancement and personal assistance.
And as a result, Google's migrating, the majority of their internal workloads to run on arm.
Flagship devices from partners like <unk> and vivo are expected to ramp later this year, bringing console quality performance and new AI capabilities directly to mobile devices.
At the edge AI is transforming how people interact with their devices and their hands homes and vehicles.
Customers are increasingly deploying arm new over CPUs alongside their AI accelerators to orchestrate, massive, clusters highlighting the versatility, and scalability of our platform.
Google launched the pixel 10 smartphone featuring the new arm based <unk> chip, which runs Gemini models up to two six times faster and twice as efficiently as prior generations.
The addition of 5 new Stargate sites, this quarter further expands visibility into future AI capacity and reinforces arm Central role in the hyperscale buildout.
Nvidia began shipping its arm based <unk> Sparc system for AI developers, a compact desktop supercomputer for local model training fine tuning in inference.
As AI chip design, becomes more complex, our compute subsystems or css are helping customers accelerate, their development cycles and reduce execution risk.
Jeff Kvaal: Reconciliations of certain of these non-GAAP financial measures to their most directly comparable GAAP financial measures can be found in our shareholder letter, as can a discussion of projected non-GAAP financial measures that we are not able to reconcile without unreasonable efforts and supplemental financial information. Our earnings-related materials are on our website at investors.arm.com. With that, I'll turn the call to Rene. Rene.
Demand for CSS continues to exceed expectations.
In automotive a flagship electric vehicle built on arms platform introduced advanced Park assist voice control and safety features featuring arms automotive enhanced technologies.
During the quarter, we signed 3 new CSS licenses 1 each in smartphone, tablets and they data centers.
Bring our total to 19 CSS licenses across 11 companies.
Test those next generation arm based AI five chip delivers up to 40 times faster AI performance, enabling the next wave of intelligent vehicles and autonomous machines.
We also expand our collaboration with Samsung, which is leveraging CSS for its X and O's family of chipsets.
Driving up to 40% AI performance over previous, non-CSS generation.
Rene Haas: Thank you, Jeff, and welcome, everyone. We continue its fiscal year 2026 with strong momentum, fueled by accelerating demand for AI compute, from milliwatts in the smallest of edge devices to megawatts in the world's largest hyperscale data centers. Artificial intelligence is reshaping every layer of technology, and Arm is the only compute platform delivering AI everywhere. Q2 was our best second quarter ever, with revenue of $1.14 billion, up 34% year-on-year, marking our third consecutive billion-dollar quarter. Royalty revenue reached a record $620 million, up 21% year-on-year, driven by growth in all major markets, including data center, smartphones, automotive, and IoT. Unprecedented compute demand has led to our data center Neoverse royalties to more than double year-on-year. Licensing revenue rose 56% to $515 million as companies continue choosing Arm to build their next-generation AI products. Our strong results lifted non-GAAP EPS above the high end of guidance.
Our leadership in AI is amplified by our unmatched software developer ecosystem now more than 22 million strong.
As a result, the top 4 Android phone vendors are now shipping CSS, power devices.
Representing over 80% of the world's developer base.
<unk> system as a powerful growth engine for arm.
CSS is quickly becomes the starting point for customers building. Next Generation, silicon offering faster, time to Market and delivering higher up. The World trades for arms.
Every new arm based device brings more developers, which drives more software innovation, which in turn fuels greater demand for our compute platform across every market we serve.
In the quarter, we also launched Lumix CSS. Our most advanced mobile compute platform to date.
As mentioned in our last call. We are continuing to explore the possibility of moving beyond our current platform into additional compute to sub systems shipped bullets or complex associates.
Lumix enables rich on-device AI experiences, such as real-time translation, image enhancement, and personal assistance.
As a result, we continue to accelerate the investment in our R&D as we are seeing increased demand from our customers.
Flagship devices from Partners, like Oppo, and Vivo are expected to ramp later this year. Bringing console quality performance and new AI capabilities directly to mobile devices.
More tomorrow.
At the edge, AI is transforming. How people interact with the devices in their hands homes and vehicles.
AI is shaping how the world computes and arm as a foundation, making it possible.
For millwork the megawatts, we delivered the performance efficiency and scalability to meet this moment in the years ahead.
Google launched. The pixel 10, smartphone. Featuring the new arm-based tensor G5 chip, which runs Gemini models up to 2.6 times faster and twice as efficiently as prior Generations.
And with that I'll hand, it over to Jason.
Thank you Renee.
We have delivered another strong quarter.
Revenue grew 34% year on year to <unk>, one 4 billion.
Rene Haas: During the quarter, we announced a strategic partnership with Meta to scale AI efficiency across every layer of compute, from AI-enabled wearables to AI data centers on a consistent compute platform. This partnership combines Arm's leadership in energy-efficient compute with Meta's innovation in AI infrastructure and open technologies to deliver richer, more efficient AI experiences to billions of people worldwide. In the data center, access to power has now become the bottleneck, and this has accelerated adoption of Arm's Neoverse compute platform, which has now surpassed 1 billion CPUs deployed. Our compute forms the foundation of custom silicon from leading partners, including NVIDIA Grace, AWS Graviton, Google Axion, and Microsoft Cobalt. For example, Google's Arm-based Axion chip delivers up to 65% better price performance while using 60% less energy. As a result, Google is migrating the majority of their internal workloads to run on Arm.
Nvidia began shipping. Its arm-based dgx spark system for AI developers. A compact desktop supercomputer for local model training, fine-tuning and inference.
A record for Q2, it exceeded the midpoint of our garden guidance range by $75 million and marked our third consecutive quarter above $1 billion.
Royalty revenue exceeded our expectations growing 21% year on year to a record $620 million versus our guidance of mid teens.
In automotive a flagship electric vehicle built on arms platform. Introduced Advanced Park, assists, voice control and safety features, featuring arms Automotive, enhanced Technologies.
The biggest growth contributors were smartphones with higher royalty rates per chip and in data center, where we continued to see share gains from custom hyperscale or chips.
Tesla's Next Generation, arm-based AI 5 chip delivers up to 40 times faster AI performance enabling the next wave of intelligent vehicles and autonomous machines.
Royalty revenue from smartphones grew in order of magnitude faster than the market as multiple Oems ramp smartphones based on arm benign and CSS chips.
Our leadership in AI is Amplified by our unmatched software developer ecosystem. Now more than 22 million strong representing over 80% of the world's developer base.
This ecosystem is a powerful growth engine for arm.
Data center royalties doubled year on year, given the continued deployment of arm based chips by Hyperscale companies.
Every new ARM-based device brings more developers, which drives more software innovation, which in turn fuels greater demand for a compute platform across every market we serve.
Automotive and Iot both continued to grow year on year and contributed to our strong royalty performance.
Overall royalty rove growth rates continue to reflect arms, increasing royalty rates and rising market share.
Rene Haas: Customers are increasingly deploying Arm Neoverse CPUs alongside their AI accelerators to orchestrate massive clusters, highlighting the versatility and scalability of our platform. The addition of five new Stargate sites this quarter further expands visibility into future AI capacity and reinforces Arm's central role in the hyperscale buildout. As AI chip design becomes more complex, our compute subsystems, or CSS, are helping customers accelerate their development cycles and reduce execution risk. Demand for CSS continues to exceed expectations. During the quarter, we signed three new CSS licenses, one each in smartphones, tablets, and data centers, bringing our total to 19 CSS licenses across 11 companies. We also expanded our collaboration with Samsung, which is leveraging CSS for its Exynos family of chipsets, driving up to 40% AI performance over the previous non-CSS generation. As a result, the top four Android phone vendors are now shipping CSS-powered devices.
as mentioned in our last call, We are continuing to explore the possibility of moving beyond our current platform into additional compute to subsystems chiplets or complex SS.
Turning now to license.
As a result, we continue accelerating the investment in our R&D as we are seeing increased demand from our customers.
for our more from our
License and other revenue was $515 million up 56% year on year.
AI is shaping how the world computes and arm is a foundation making it possible.
Growth was driven by strong demand for next generation architectures and deeper strategic engagements with key customers.
For Milow to megawatts, we deliver the performance efficiency and scalability to meet this moment and the years ahead.
We further expanded our license and services agreement with Softbank.
And with that, I'll hand it over to Jason.
Thank you, Renee.
We also signed for HCA and <unk> CSS deals.
These agreements reflect the continued investment by our customers and next generation <unk> technology.
As always licensing revenue varies quarter to quarter due to the timing and size of high value deals. So we continue to focus on annualized contract value or <unk> as a key indicator of the underlying licensing trend.
We have delivered another strong quarter, total revenue, grew 34% year-on-year to 1.14, billion dollars a record for YouTube, it exceeded the midpoint of our garden guidance range by 75 million and marked. Our third consecutive quarter above 1 billion dollars,
ACD grew 28% year on year, maintaining its strong momentum following the 28% year on year growth we reported in Q1.
Royalty Revenue, exceeded our expectations growing 21%. Year-on-year to a recorded 620 million versus our guidance of mid teens.
This is well above our usual run rate of low teens growth rate low teens growth and is also above our long term expectation of mid to high single digit growth for license revenue.
The biggest growth contributors were smartphones, with higher royalty rates per chip, and in data centers, where we continue to see share gains from custom hyperscaler chips.
Rene Haas: CSS has quickly become the starting point for customers building next-generation silicon, offering faster time to market, and delivering higher-than-world trades for Arm. In the quarter, we also launched Lumix CSS, our most advanced mobile compute platform to date. Lumix enables rich on-device AI experiences such as real-time translation, image enhancement, and personal assistance. Flagship devices from partners like OPPO and Vivo are expected to ramp later this year, bringing console-quality performance and new AI capabilities directly to mobile devices. At the edge, AI is transforming how people interact with their devices in their hands, homes, and vehicles. Google launched the Pixel 10 smartphone, featuring the new Arm-based Tensor G5 chip, which runs Gemini models up to 2.6 times faster and twice as efficiently as prior generations. NVIDIA began shipping its Arm-based DGX Spark system for AI developers, a compact desktop supercomputer for local model training, fine-tuning, and inference.
Royalty revenue from smartphones, grew an order of magnitude faster than the market as multiple oems ramped smartphones based on rb9 and CSS chips.
Turning to operating expenses and profit non-GAAP operating expenses were $648 million up 31% year on year on strong R&D investment and slightly below guidance.
Data center royalties double year on year, given the continued deployment of arm-based chips by hyperscaler companies.
These investments in R&D reflect ongoing engineering head count expansion to support customer demand for more on technology, including continued innovation and next generation architectures, compute subsystems, and possibly triplets or complete Soc.
Automotive and iot both continue to grow year-on-year and contributed to our strong royalty performance.
Overall royalty growth, growth rates continue to reflect arms, increasing royalty rates and rising market share.
Turning that a license.
For example over the past four years, we've invested heavily in developing the technology that makes up the <unk> compute subsystems for smartphones, which we announced in September. This project took around a thousand man years with a team size, peaking over 450 engineers and required around hundreds of bill.
Licensed and other revenue was $515 million, up 56% year-on-year.
And deeper strategic engagements with key customers.
We further expanded our license and services agreement with Southbank.
We also signed 4 ATA, and 3 CSS deals.
<unk> $1 of investment.
<unk> of millions of dollars of investment luminaire.
These agreements reflect the continued investment by our customers in. Next Generation arm technology.
<unk> CSS has attracted strong market interest and we're already seeing royalty revenue from an early licensee.
Rene Haas: In automotive, a flagship electric vehicle built on Arm's platform introduced advanced park assist, voice control, and safety features featuring Arm's automotive-enhanced technologies. Tesla's next-generation Arm-based AI5 chip delivers up to 40 times faster AI performance, enabling the next wave of intelligent vehicles and autonomous machines. Our leadership in AI is amplified by our unmatched software developer ecosystem, now more than 22 million strong, representing over 80% of the world's developer base. This ecosystem is a powerful growth engine for Arm. Every new Arm-based device brings more developers, which drives more software innovation, which in turn fuels greater demand for our compute platform across every market we serve. As mentioned in our last call, we are continuing to explore the possibility of moving beyond our current platform into additional compute to subsystems, chiplets, or complex SoCs.
Yeah.
non-GAAP operating income was $467 million up 43% year on year.
This resulted in a non-GAAP operating margin of 41, 1% and an improvement from 38, 6% a year ago.
As always, licensing Revenue, varies quarter to quarter due to the timing and size of high-value deals. So we continue to focus on annualised, contract value or ACV as a key indicator of the underlying licensing trend.
non-GAAP EPS was <unk> 39, 39 <unk>.
ACB grew 28% year on year, maintaining strong momentum following the 28% year-on-year growth. We reported in q1
<unk> <unk> above the midpoint of our guidance range.
Driven by both higher revenue and slightly lower opex.
Turning now to guidance our guidance reflects our current view of our end markets and our licensing pipeline.
This is well above our usual run rate of low teens growth rate of low teens growth, and is also above our long-term expectations of mid to high single-digit growth for licensed Revenue.
Turning to operating expenses and profits.
For Q3, we expect revenue of $1 <unk> 5 billion.
Plus or minus $50 million.
At the midpoint. This represents revenue growth of about 25% year on year.
Non-gaap operating expenses were 648, million of 31% year-on-year, on strong, R&D investment, and slightly below guidance.
We expect royalties to be up just over 20% year on year and licensing to be up 25% to 30% year on year.
We expect our non-GAAP operating expense to be approximately $720 million and our non-GAAP EPS to be 41, plus or minus <unk>.
Rene Haas: As a result, we continue to accelerate the investment in our R&D as we are seeing increased demand from our customers for more from Arm. AI is shaping how the world computes, and Arm is the foundation making it possible. From milliwatts to megawatts, we deliver the performance, efficiency, and scalability to meet this moment and the years ahead. With that, I'll hand it over to Jason. Thank you, Rene. We have delivered another strong quarter. Total revenue grew 34% year-on-year to $1.14 billion, a record for Q2. It exceeded the midpoint of our guidance range by $75 million and marked our third consecutive quarter above $1 billion. Royalty revenue exceeded our expectations, growing 21% year-on-year to a record of $620 million versus our guidance of mid-teens.
These investments in R&D reflect ongoing engineering headcount expansion to support customer demand for more armed technology, including continued innovation in Next Generation architectures. Compute subsystems and possibly chiplets or complete soc's.
Our higher revenue allows us to both accelerate R&D investment and pass through upside to EPS.
We are seeing strong demand from our customers for on technology, which gives us confidence in our long term growth trajectory and our strategy to enable AI everywhere in the cloud at the edge and in physical devices.
For example, over the past four years, we've invested heavily in developing the technology that makes up the Lumx compute subsystems for smartphones, which we announced in September. This project took around a thousand man-years, with a team size peaking at over 450 engineers, and required around hundreds of billions of dollars in investment.
Hundreds of millions of dollars in investment.
And we will continue investing aggressively in R&D to capture these opportunities and ensure that AI runs on arm.
Lumx CSS has attracted strong Market interest and we're already seeing royalty revenue from an early licensee.
With that I'll turn the call back to the operator for the Q&A portion of the call.
Thank you to ask a question you will need to press star one on your telephone and wait for your name to be announced in the interest of time. Please limit yourself to one question only and rejoin the queue for any follow ups to withdraw your question. Please press star one on one again.
Non-gaap operating income was 467. Million of 43% year-on-year.
In a non-gaap operating margin of 41.1% and an improvement from 38.6% a year ago.
Rene Haas: The biggest growth contributors were smartphones with higher royalty rates per chip, and in data center, where we continue to see share gains from custom hyperscaler chips. Royalty revenue from smartphones grew an order of magnitude faster than the market, as multiple OEMs ramped smartphones based on Armv9 and CSS chips. Data center royalties doubled year-on-year, given the continued deployment of Arm-based chips by hyperscaler companies. Automotive and IoT both continued to grow year-on-year and contributed to our strong royalty performance. Overall, royalty growth rates continue to reflect Arm's increasing royalty rates and rising market share. Turning now to license. License and other revenue was $515 million, up 56% year-on-year. Growth was driven by strong demand for next-generation architectures and deeper strategic engagements with key customers. We further expanded our license and services agreement with SoftBank. We also signed four ATA and three CSS deals.
We will now go to the first question.
Non-gaap EPS was 39. 39 cents, 6 cents above the midpoint of our guidance range driven by both higher revenue and slightly lower Opex.
And your first question today comes from the line of Sebastian <unk> from William Blair. Please go ahead.
turning now, to guidance our guidance, reflects our current view of our end markets, and our licensing pipeline,
Yes, good afternoon, and congrats on the nice results Renee I wanted to ask about the AI opportunity theres been a seemingly nonstop stream of new data center deals announced over the last quarter, calling for Telegent gigawatts of additional computing capacity to be stood up how do you feel about arms strategic positioning with respect to these AI.
For Q3 we expect revenue of 1.225 billion dollars plus or minus 50 million.
At the midpoint, this represents Revenue growth of about 25% a year on year.
We expect royalties to be up just over 20% year on year and Licensing to be up 25 to 30% year on year.
Deals and what do you view as the opportunity across the Buildout.
Thank you for the question that Sebastian.
We expect our non-gaap operating expense to be a pro approximately 720 million and our non-gaap EPS to be 41 cents plus or minus 4 cents.
As a board member of Softbank and also given our heavy involvement there with Stargate in regular dialogue with open AI.
Our higher Revenue allows us to both accelerate R&D investment and pass through upside to eps.
I believe I have a unique perspective in terms of visibility in terms of this market.
One thing that's become quite evident is that power has become the bottleneck.
We are seeing strong demand from our customers for arm technology, which gives us confidence in our long-term growth trajectory and our strategy to enable AI everywhere in the cloud at the edge and in physical devices.
Rene Haas: These agreements reflect the continued investment by our customers in next-generation Arm technology. As always, licensing revenue varies quarter to quarter due to the timing and size of high-value deals, so we continue to focus on annualized contract value, or ACV, as a key indicator of the underlying licensing trend. ACV grew 28% year-on-year, maintaining strong momentum following the 28% year-on-year growth we reported in Q1. This is well above our usual run rate of low-teens growth, and is also above our long-term expectation of mid to high single-digit growth for license revenue. Turning to operating expenses and profits, non-GAAP operating expenses were $648 million, up 31% year-on-year on strong R&D investment and slightly below guidance. These investments in R&D reflect ongoing engineering headcount expansion to support customer demand for more Arm technology, including continued innovation in next-generation architectures, compute subsystems, and possibly chiplets or complete SoCs.
For everyone and power not only means access to energy, but everything underneath it in terms of.
And we will continue investing aggressively in R&D to capture these opportunities and ensure that AI runs on arms.
Infrastructure build out turbines transformers.
With that, I'll turn the call back to the operator, for the Q&A portion of the call.
Everything associated with generating power.
So in that environment.
Everyone wants to move the most efficient compute platform as possible.
<unk> is about 50% more efficient than competitive solutions, we've seen that across the board and benchmarks, but also more importantly in real life performance and Thats, why we see Nvidia Amazon, Google Microsoft Tesla, all using our best technology.
Thank you to ask a question. You will need to press star 1 and 1 on your telephone and wait for your name to be announced in the interest of time. Please limit yourself to 1 question only and rejoin the queue for any follow-ups to withdraw your question. Please press star 1 and 1 again.
I'll go to the first question.
and your first question today,
Because on the line of Sebastian knotty from William Blair, please go ahead.
We've seen unprecedented demand for compute and all the incremental compute that we've seen announced literally has all been based on arm. So that's driving huge growth opportunity for us and it's one of the indicators as to why we've seen such growth in our <unk> business.
Than doubling year over year.
Great. Thank you.
Thank you.
Your next question comes from the line of David.
Yeah, good afternoon and congrats on the nice results. Renee I want to ask about the AI opportunity. There's been a seemingly non-stop stream of new data center deals announced over the last quarter calling for tens of gigawatts of additional Computing capacity to be stood up. How do you feel about arms strategic positioning with respect to these Aid deals and what do you view as the opportunity? Uh, across the buildout?
Kotowski from Wells Fargo. Please go ahead.
Rene Haas: For example, over the past four years, we've invested heavily in developing the technology that makes up the Lumix compute subsystems for smartphones, which we announced in September. This project took around 1,000 man-years with a team size peaking over 450 engineers and required around hundreds of millions of dollars in investment. Lumix CSS has attracted strong market interest, and we're already seeing royalty revenue from an early licensee. Non-GAAP operating income was $467 million, up 43% year-on-year. This resulted in a non-GAAP operating margin of 41.1%, an improvement from 38.6% a year ago. Non-GAAP EPS was $0.39, 6 cents above the midpoint of our guidance range, driven by both higher revenue and slightly lower OpEx. Turning now to guidance. Our guidance reflects our current view of our end markets and our licensing pipeline.
Yes, thanks for taking the question.
I noticed in the filing.
Announced their intention to acquire.
Dream Big semiconductor curious just kind of what's behind that and how does that kind of fold into your plans to potentially expand beyond your current kind of offering platform.
Yes. Thank you for the question.
So dream Big is a great company, they've got a lot of interesting intellectual property, particularly around the Ethernet area and already made controllers, which are very very key for.
Uh, thank you for the question that Sebastian, um, you know, as a as a board member of SoftBank and also given, uh, our heavy involvement, uh, there with, with Stargate and regular dialogue with, with openai, uh, I believe I have a, a unique perspective in terms of, uh, visibility in terms of this Market, 1 thing that's become quite evident. Is that power, uh, has become the bottleneck, uh, for everyone and and power. Uh, not only means access to energy, but everything underneath it, in terms of
Scale up and scale out networking so when we look at the demand for what's going on inside the datacenter and particularly in the area of high speed Communications.
Power. So in that environment, uh, everyone wants to move the most efficient compute platform as possible.
That type of technology will be very helpful for us to broaden our offering to end customers. So we're very excited about about the company and <unk> got some fantastic engineers.
Yeah.
Thanks.
Arm is about 50% more efficient than competitive solutions. We've seen that across the board in benchmarks, but also, more importantly, in real-life performance. That's why we see Nvidia, Amazon, Google, Microsoft, and Tesla all using our best technology.
Your next question comes from the line of Jim Schneider from Goldman Sachs. Please go ahead.
Rene Haas: For Q3, we expect revenue of $1.225 billion, ±$50 million. At the midpoint, this represents revenue growth of about 25% year-on-year. We expect royalties to be up just over 20% year-on-year, and licensing to be up 25% to 30% year-on-year. We expect our non-GAAP operating expense to be approximately $720 million, and our non-GAAP EPS to be $0.41, ±$0.04. Our higher revenue allows us to both accelerate R&D investment and pass through upside to EPS. We are seeing strong demand from our customers for Arm technology, which gives us confidence in our long-term growth trajectory, and our strategy to enable AI everywhere, in the cloud, at the edge, and in physical devices. We will continue investing aggressively in R&D to capture these opportunities and ensure that AI runs on Arm.
Good afternoon, and thanks for taking my question I noticed in your <unk>.
Closures that you saw a material step up in related party revenue. So I was wondering if you could maybe talk a little bit about theres also been many announcements related to just target <unk> and softbank since the last earnings call. So can you maybe give us any kind of color you can on the nature of that relationship and now things are changing in terms of design activities. Thank you.
We've seen unprecedented demand for compute and all the incremental compute that we've seen announced literally, has all been based on arm. So, that's driving huge growth opportunity for us. And it's 1 of the indicators as to why we've seen such growth in our neoverse business, uh, more than double your year-over-year.
From the line of do. Khaki from Wells, Fargo, please go ahead.
So.
One of the ways to think about Stargate and particularly given the relationship between <unk> and Softbank is a huge opportunity for arm to partner with Softbank.
And Softbank as partners to provide technology into all of those solutions.
Yeah, thanks for taking the question. I I noticed in the in the filing you uh, announced your intention to acquire a dream, big semiconductor, curious just kind of what's behind that and how does that kind of fold into your plans? You know, to, to potentially expand beyond your current kind of offering platform.
So without getting into too many specifics, but at a high level. If you think about what's associated with building out these data centers.
You have the compute obviously you had the networking you have everything associated with power distribution you have potential technology that gets into the power mechanism of the data center and then everything associated with even potential assembly of the data center. So as a result of all the work that Softbank and Softbank family of companies are.
Rene Haas: With that, I'll turn the call back to the operator for the Q&A portion of the call.
Operator: Thank you. To ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. In the interest of time, please limit yourself to one question only and rejoin the queue for any follow-ups. To withdraw your question, please press star one and one again. We will now go to the first question. Your first question today comes from the line of Sebastian Naji from William Blair. Please go ahead.
Yeah, thank you for the question. Uh, so dream big is a great company. Uh, they've got a lot of interesting intellectual property, particularly around the, the ethernet area. And, uh, already made controllers, which are very, very key for scale up and scale out networking. So, when we look at, uh, the demand for what's going on inside the data center, and particularly in the area of high-speed Communications,
Our doing it provides a huge opportunity for arm to provide solutions into that space. So that at a high level is the way to think about how the.
That type of Technology will be very helpful for us to broaden our offering to end customers. So, uh, we're very excited about, uh, about the company and and dream Biggs got some fantastic engineers.
The Softbank family works together on these designs.
Thank you.
Thank you.
Your next question.
Your next question comes from the line of Jim Schneider from Goldman Sachs. Please go ahead.
Sebastien Naji: Yeah, good afternoon and congrats on the nice results. Rene, I wanted to ask about the AI opportunity. There's been a seemingly nonstop stream of new data center deals announced over the last quarter, calling for tens of gigawatts of additional computing capacity to be stood up. How do you feel about Arm's strategic positioning with respect to these AI deals, and what do you view as the opportunity across the buildout?
It comes from the line of Al <unk> from Deutsche Bank. Please go ahead.
Hi, guys. Thanks for let me ask a question I wanted to go back to the Opex side of things I know it was a little bit below your guide in the second quarter, but the fourth or third quarter. It looks like it's going to step up again kind of a bigger picture. One you mentioned about exploring different sorts of go to market methodologies triplets et cetera. When do you expect to give us more.
Rene Haas: Thank you for the question, Sebastian. As a board member of SoftBank and also given our heavy involvement there with Stargate and regular dialogue with OpenAI, I believe I have a unique perspective in terms of visibility in terms of this market. One thing that's become quite evident is that power has become the bottleneck for everyone. Power not only means access to energy, but everything underneath it in terms of infrastructure, buildout, turbines, transformers, everything associated with generating power. In that environment, everyone wants to move the most efficient compute platform as possible. Arm is about 50% more efficient than competitive solutions. We've seen that across the board in benchmarks, but also, more importantly, in real-life performance. That's why we see NVIDIA, Amazon, Google, Microsoft, Tesla, all using Arm-based technology.
Color on when that's going to go from exploration to return on investment or the actual strategy, how should we monitor that and expect to get more information from you.
Good afternoon. Thanks for taking my question. Um, I noticed in your uh, disclosures that you saw a material Step Up in related party Revenue. So I was wondering if you could maybe talk a little bit about, uh, and you there's also been many announcements related to, to Stargate and, uh, and soft Bank since the last earnings saw. Some can maybe give us any kind of color, you can on the nature of that relationship. And now things are changing in terms of design activities. Thank you. Thank you.
so,
Yes, thank you for asking.
The best detail I can give you is there's nothing I can talk to you about today in terms of timeline about products or technologies.
When the time comes for us to announce it youll see that youll be the first to know in terms of what we're doing right now the best commentary I can give is that everything associated those solutions does require a significant level of R&D.
As you've seen that on the guidance going forward. Our revenue go forward is higher than our our Opex increase which is something we've been very careful to manage so we feel comfortable about that but at the same time, what we're looking at in terms of the opportunity for compute and more importantly, compute using arm.
It has never been greater so as a result, we want to make sure. We're in the best position possible to capture it. We're looking at all possibilities in terms of how to do that and when we're ready to talk about what that is we will certainly advise.
1 of the ways to think about Stargate, uh, and particularly given the relationship between arm and SoftBank is a, a huge opportunity for armed to partner with SoftBank and SoftBank Partners to provide, uh, technology into all those Solutions. Uh, so without getting into too many of the specifics, but at a high level, if you think about what's associated with building out these data centers, you have the compute, obviously, you have the networking, you have everything associated with power distribution. You have, uh, potential technology that gets into the power mechanism of the data center and then, uh, everything associated with even potential assembly of the data center. So, as a result of all the work that SoftBank and the SoftBank family of companies are are doing. It provides huge opportunity for armed to provide Solutions into that space. So that at a high level is the way to think about how the the SoftBank family works together on these designs.
Thank you.
Rene Haas: We've seen unprecedented demand for compute, and all the incremental compute that we've seen announced literally has all been based on Arm. That's driving huge growth opportunity for us, and it's one of the indicators as to why we've seen such growth in our Neoverse business, more than doubling year over year.
Your next question.
The only thing I would add is.
Comes from the line of Boss SEMO from Deutsche Bank. Please go ahead.
I think last quarter, we said as soon as the way, we think about when we announce something.
If it were to be something related to <unk>. It would be once theres tape out once their samples back and once it is actually non council customer orders and we achieve all three of those milestones. That's when we would probably talk about something because this would be a new business and something we haven't done before so.
Sebastien Naji: Great. Thank you.
Operator: Thank you. Your next question comes from the line of Joe Kvatrakl from Wells Fargo. Please go ahead.
Hi guys. Thanks for let me ask you a question. I wanted to go back to the Opex side of things. I know it was a little bit below your guide in the second quarter but the fourth or third quarter, looks like it's going to step up again, kind of a bigger picture 1. You mentioned about exploring different sorts of go to market methodologies chiplets, Etc. When do you expect to give us more color on when that's going to go from exploration to?
Jason Child: Yeah, thanks for taking the question. I noticed in the filing you announced your intention to acquire DreamBig Semiconductor. Curious just kind of what's behind that, and how does that kind of fold into your plans to potentially expand beyond your current kind of offering platform?
So whenever those milestones are achieved that that's when you should expect to hear from us.
Return on investment or the actual strategy, how should we monitor that and and and expect to get more information from you?
Thank you.
Thank you.
Your next question comes from the line of Vivek Arya from Bank of America. Please go ahead.
Yeah.
Thanks for taking my question I just wanted to clarify how much was the softbank contribution in Q2 versus what you thought and then what is baked in for Q3 and hopefully if you have the number for Q4.
Rene Haas: Yeah, thank you for the question. DreamBig Semiconductor is a great company. They've got a lot of interesting intellectual property, particularly around the Ethernet area and RDMA controllers, which are very, very key for scale-up and scale-out networking. When we look at the demand for what's going on inside the data center, particularly in the area of high-speed communications, that type of technology will be very helpful for us to broaden our offering to end customers. We're very excited about the company, and DreamBig's got some fantastic engineers.
The real question is how long Kansas.
Not really rate persist and if you do move into physical chips on chip Gladstone or any other products as far as target does it start to cannibalize.
Licensing stream.
Yes.
Yes. So thanks for the question in terms of the impact it was about a $50 million increase from last quarter. So last quarter. We I think we are at about $126 million. It actually went up $52 million. So now about $178 million and that's that's a good run rate to assume going forward.
Operator: Thank you. Your next question comes from the line of Jim Schneider from Goldman Sachs. Please go ahead.
The only way it would change is if we have any additional deals and again. These are license plus design services. So think of it as being licenses to our IP to work with Softbank on exploring solutions, but then think of the.
and when we're ready to talk about what that is, uh, we will certainly, you know, advise yeah, the only thing I would add is um,
Jim Schneider: Good afternoon. Thanks for taking my question. I noticed in your disclosures that you saw a material step up in related party revenue. I was wondering if you could maybe talk a little bit about, and there's also been many announcements related to Stargate and SoftBank since the last earnings call. Can you maybe give us any kind of color you can on the nature of that relationship and how things are changing in terms of design activities? Thank you.
The design services being effectively kind of a funded R&D model and so that's a lower margin revenue of course. So so these are.
In terms of how long.
Jason Child: One of the ways to think about Stargate, and particularly given the relationship between Arm and SoftBank, is a huge opportunity for Arm to partner with SoftBank and SoftBank's partners to provide technology into all those solutions. Without getting into too many of the specifics, but at a high level, if you think about what's associated with building out these data centers, you have the compute, obviously. You have the networking. You have everything associated with power distribution. You have potential technology that gets into the power mechanism of a data center, and then everything associated with even potential assembly of a data center. As a result of all the work that SoftBank and the SoftBank family of companies are doing, it provides huge opportunity for Arm to provide solutions into that space. That, at a high level, is the way to think about how the.
The.
These revenue streams will will occur.
I think the last quarter we said as soon as you know, the way we think about when we announced something, uh, if it were to be, you know, something related to full, soc's it would be. Once there's tape out once their samples back and once there's actually non-cancellable customer orders when we achieve all 3 of those Milestones, that's when we would probably talk about something, because this would be a new business and something we haven't done before. So, uh, you know, so so whenever those Milestones are achieved, that's, uh, that's when you should expect to hear from us.
Thank you.
We're not at Liberty to say, yes, but I would say as Renee said at some point.
Thank you.
And the next year or so youll hear us talk about what what products those might be but obviously, that's not just up to us. It's when softbank is ready to talk about what what these products could could look like and what the revenue profile et cetera is and so and.
Your next question comes from the line of VC area, from Bank of America. Please go ahead.
And so when that would occur.
Likely to assume that there would be some different revenue source, whether its royalties or or.
Gross revenue from selling attempted if it in fact, it's a full soc. Those are all things that are still to be worked out and I would think of that as being.
Uh, thanks for taking my question. Um I just wanted to clarify how much was the soft Bank uh, contribution in Q2 versus what you thought and then what is baked in for Q3? And and hopefully, if you have the number for Q4, and the real question is, how long can this, uh, you know, quarterly rate? Uh, persist, and if you do, move into physical chips, or, or chiplets, or, or any other products, as part of Target, does it start to cannibalize, uh, this uh, licensing, uh, stream. Thank you.
To some extent cannibalistic of whatever the current license and design services, but then of course, if there is a product you could also assume there could be successive generations of products after that in which case you could you could stack royalty between licensed the design services that then of course, there could also be royalties or whatever the.
Jason Child: SoftBank family works together on these designs.
Operator: Thank you. Your next question comes from the line of Wassim from Deutsche Bank. Please go ahead.
[Analyst] (Deutsche Bank): Hi guys. Thanks for letting me ask a question. I wanted to go back to the OpEx side of things. I know it was a little bit below your guide in the second quarter, but the third quarter looks like it's going to step up again. Kind of a bigger picture one. You mentioned about exploring different sorts of go-to-market methodologies, chiplets, etc. When do you expect to give us more color on when that's going to go from exploration to return on investment or the actual strategy? How should we monitor that and expect to get more information from you?
The revenue relates to whatever the product that shifts in market is so so I would think of it as very much durable revenue in that.
If softbank wasn't related party, we would just be booking licensed and design services and it wouldn't be related party, but then the numbers would be pretty similar.
And so the fact that the related party.
I think is probably what makes it look somewhat unique but but the reality is we also as I already mentioned.
Rene Haas: Yeah, thank you for asking. The best detail I can give you is there's nothing I can talk to you about today in terms of timeline about products or technologies. When the time comes for us to announce it, you'll be the first to know in terms of what we're doing. Right now, the best commentary I can give is that everything associated with those solutions does require a significant level of R&D. Now, as you've seen on the guidance going forward, our revenue go forward is higher than our OPEX increase, which is something we've been very careful to manage. We feel comfortable about that. At the same time, what we're looking at in terms of the opportunity for compute, and more importantly, compute using Arm, has never been greater.
This is not really just between us and Softbank. They also have contracts with many others open AI other star Gate.
Yeah, so, uh, thanks for the question in terms of the the impact it was about a 50 million increase from last quarter. So, last quarter, I think we're at about 126 million. It actually went up 52 million. So now about 178 million. Uh, and that's, you know, that's a good run rate to assume going forward. Uh, you know, the only way it would it would change is if we have any additional deals. Um, and again, these These are licensed plus uh, Design Services. So think of it as being licenses to our IP, to to, to work with SoftBank on, you know, exploring Solutions. But then think of the um, you know, the Design Services being effectively kind of a funded R&D model. Um and so that's a, that's a lower margin revenue, of course. So so these uh, you know, in terms of how long um, you know, the the these revenue streams will will occur. Um, you know, we're not at Liberty to say, yeah, but I would say, you know, as Renee said at some point, um, you know, probably in the next year or so, you'll hear us talk about
<unk> partners as well so so I would think of this as all being part of a larger effort.
Thank you.
Thank you.
Your next question comes from the line of Tim Mitchell.
Atlanta from Rothschild NK Redburn. Please go ahead.
Okay, great. Thank you for taking my questions I had.
Two please just following on on the stock eight theme and the sites can you maybe just talk about the shape of what that revenue opportunity looks like on a sort of one three and five year view.
What, uh, what products those might be. But obviously, that's not just up to us. It's what it's when softbank's ready to talk about what, what these products could could look like and and what the revenue profile Etc is. And so uh and so when that would occur, you know, it's it's likely to assume you know that that would be, you know, some of a different Revenue Source. Whether it's royalties or or, you know, uh, you know, gross revenue from selling a chip. If if it in fact it's it's a full SOC. Th those
Rene Haas: As a result, we want to make sure we're in the best position possible to capture it. We're looking at all possibilities in terms of how to do that. When we're ready to talk about what that is, we will certainly advise.
Just kind of when it's going to start having an influence on the revenue the annual revenue quarterly revenue of the business.
And then my second question was just to make sure I wasn't sure quote it right you talked about the <unk> CSS.
Jason Child: Yeah. The only thing I would add is, I think last quarter we said, as soon as the way we think about when we announce something, if it were to be something related to full SoCs, it would be once there's tape out, once there's samples back, and once there's actually non-cancelable customer orders. When we achieve all three of those milestones, that's when we would probably talk about something because this would be a new business and something we haven't done before. Whenever those milestones are achieved, that's when you should expect to hear from us.
That's.
A product that you launched in September but I think you also said that you already have loyalty revenues associated with that if you could just maybe expand on that a little bit that would be really helpful. Thank you.
Sure sure I'll take the first part of that question and I'll, let Jason take out take the second half.
Without giving you a kind of a go forward forecast of $1 35 years, maybe a way to think about it is back in January of this year.
[Analyst] (Deutsche Bank): Thank you.
<unk> AI.
Operator: Thank you. Your next question comes from the line of Vivek Arya from Bank of America. Please go ahead.
With Oracle and Softbank announced Stargate, which was a 500 billion.
Those are all things that are, uh, still to be worked out. And yeah, I would, I would think of that as being, you know, to some extent, cannibalistic of whatever the current license and Design Services. But then, of course, you know, if there is a product, you could also assume there could be successive, you know, generations of products after that, in which case you could, you could stack royalty between licensed and designed services. But then, of course, there could also be royalties or whatever the, um, you know, the revenue relates to whatever the the product that ships and Market is so. So I, I would think of it as very much durable Revenue in that, you know, I think um, you know, if SoftBank wasn't a related party, we would just be booking licensed and designed services, and it wouldn't be related to party, but the, the numbers would be, you know, pretty similar. Uh, and so, the fact that they're related party, you know, I think is, is probably what makes it look some unique. But but the reality is we also as Renee already mentioned, um, this is not really just between, you know, us and SoftBank they
Project to build out data centers over the next number of years. When we go back to where we are now 11 months later I would say the demand picture for compute is greater than it was at that time.
Vivek Arya: Thanks for taking my question. I just wanted to clarify how much was the SoftBank contribution in Q2 versus what you thought? What is baked in for Q3? Hopefully, if you have the number for Q4. The real question is, how long can this quarterly rate persist? If you do move into physical chips or chiplets or any other products as part of Stargate, does it start to cannibalize this licensing stream? Thank you.
Also have contracts with many others open AI other Stargate, uh, Partners as well. So, so I think if this is all being part of a of a larger effort,
Thanks.
Thank you.
So this is a bit of why youre seeing all kinds of different.
Your next question comes from the line of Tim schwarzer, milanda from Rothschild and Co Redbarn. Please go ahead.
Accelerated announcements around spend et cetera, et cetera. So if nothing else I think the opportunity for compute has only grown since we made that stargate announcement and to be clear that that announcement is around.
Jason Child: Yeah. Thanks for the question. In terms of the impact, it was about a $50 million increase from last quarter. Last quarter, I think we were at about $126 million. It actually went up $52 million, so now about $178 million. That's a good run rate to assume going forward. The only way it would change is if we have any additional deals. Again, these are license plus design services. Think of it as being licenses to our IP to work with SoftBank on exploring solutions. Then think of the design services being effectively kind of a funded R&D model. That's a lower margin revenue, of course. In terms of how long these revenue streams will occur, we're not at liberty to say yet, but I would say, as Rene said, at some point.
A joint partnership with open AI and Softbank being equity partners.
Investment for compute.
So we are quite.
We are quite bullish in terms of this overall demand for compute right now.
As in the way of realizing that potential.
Is all of the infrastructure required around the power, but from everything that we can tell from people we talked to inside the ecosystem.
The demand for compute to train these new models reinforcement learning to make them, great and then inference to serve them the demand opportunity as is.
Yeah great. Thank you for taking my uh questions. I had um 2. Please just following on on the the Stargate theme and and the sites. Can you maybe just talk about the the shape of what that Revenue opportunity looks like on a sort of 13 and 5 year view um just kind of when it's going to start having an influence on the revenue, uh the annual revenue quarterly revenue of the business and then my second question was just to make sure I I wasn't sure I caught it right. You talked about, um, the Lumix CX CSS. Um, I think that's, you know, a product that you launched in September, but I think you also said that you already have royalty revenues associated with that. If, if you could just maybe expand on that a little bit, that would be really helpful. Thank you.
Stronger than when we announced that 11 months ago. So this is why we are accelerating all the investments that we've talked about to take advantage of that opportunity on the <unk> CSS royalty question I'll, let Jason answer that one.
Personality Jason, taking it take the second half uh without giving you a kind of a go forward, 4 cast of 135 years. Uh maybe a way to think about it is back in January of this year. Uh
Jason Child: Probably in the next year or so, you'll hear us talk about what products those might be. Obviously, that's not just up to us. It's when SoftBank's ready to talk about what these products could look like and what the revenue profile, etc., is. When that would occur, it's likely to assume that there would be some different revenue source, whether it's royalties or gross revenue from selling a chip, if in fact it's a full SoC. Those are all things that are still to be worked out. Yeah, I would think of that as being, to some extent, cannibalistic of whatever the current license and design services. Then, of course, if there is a product, you could also assume there could be successive generations of products after that, in which case you could stack royalty between license and design services.
Openai uh, with Oracle and SoftBank announced Stargate, which was a 500 billion dollar.
Yes, so I would say.
The the licensee that's already.
Actually that we're already seeing a royalty from that is I would say earlier than expected and the way because we just launched this in September the way the way. It's happened. So quickly is this actually.
We're not able to say, which partnered is but it is a partner where this is not their first CSS. This is our second CSS. So as a result, there was already kind of close partnerships on the first generation and so then when we launched the next generation because the teams that are already been working pretty close to each other it allows.
<unk> that second generation to be adopted very quickly.
Project to build out data centers uh over the next number of years. When when we go back to where we are now, 11 months later, I would say the demand picture for compute is is greater than it was at that time. Uh so this is a bit of why you're seeing all kinds of different uh accelerated uh announcements around spend etc, etc. So if nothing else, I think the opportunity for compute has only grown uh since we made that Stargate announcement and and to be clear that that announcement uh is around uh a joint partnership with uh, openai and SoftBank being Equity Partners uh in this
And for <unk>.
Royalties to come really just.
Within a couple of months after the technology was delivered so so kind of a unusual a little ahead of what we had expected but it very much speaks to exactly why CSS has been.
Jason Child: There could also be royalties or whatever the revenue relates to, whatever the product that ships and market is. I would think of it as very much durable revenue in that I think if SoftBank wasn't a related party, we would just be booking license and design services, and it wouldn't be a related party, but the numbers would be pretty similar. The fact that they're a related party, I think, is probably what makes it look somewhat unique. The reality is, as Rene already mentioned, this is not really just between us and SoftBank. They also have contracts with many others, OpenAI, other Stargate partners as well. I would think of this as all being part of a larger effort.
More successfully than we thought when we launched it two years ago, it's really about speeding up time to market and this is an excellent example of that occurring.
Great. Thank you.
Investment for compute. So, we're, we are quite, uh, you know, we are quite bullish in terms of this overall demand for compute right now, what's in is in the way of realizing that potential is all of the infrastructure required around the power, but from everything that we can tell from people, we talked to inside the ecosystem, uh, the demand for compute to, to train these new models, reinforcement learning to make them great and then
Thank you.
Thanks Keith.
Your next question comes from the line of Harlan sur from Jpmorgan. Please go ahead.
Uh, inference to serve them, the demand opportunity is, uh, is.
Hey, good afternoon. Thanks for taking my question I know.
You talked about Neil versus royalties going to X year over year with all these cloud base continues ramping and then on top of that with these high performance AI clusters right, they're using more gpus or smart next that are also using arm cores on the networking side data center switching and routing chips have multiple arm cores embedded.
Stronger than we can now set 11 months ago. So this is why we're accelerating all the Investments that we talked about to, uh, to take advantage of that opportunity on the lumx. Uh, CSS royalty question. I'll I'll let Jason, uh, answer that 1.
Sebastien Naji: Thanks, Steve.
In them for things like telemetry load balancing overall system management, but bottom line is that theres significant arm compute going into all aspects of the data center right.
Operator: Thank you. Your next question comes from the line of Tim Redfern from Rothschild & Co. Please go ahead.
Jim Schneider: Yeah, great. Thank you for taking my questions. I had two, please. Just following on the Stargate theme and the sites, can you maybe just talk about the shape of what that revenue opportunity looks like on a sort of one, three, and five-year view, just kind of when it's going to start having an influence on the annual revenue or quarterly revenue of the business? My second question was just to make sure I wasn't sure I caught it right. You talked about the Lumix CSS. I think that's a product that you launched in September, but I think you also said that you already have royalty revenues associated with that. If you could just maybe expand on that a little bit, that would be really helpful. Thank you.
Also even seen arm, taking over X 86 in the service provider network and markets as well so last fiscal year cloud and networking accounted for about 10% of royalty revenues were midway through this fiscal year, maybe you guys could just true us up by itself.
<unk> has increased its approaching 15% 20% of total royalty revenues for the team any color here would be great.
Yes, I'll, let Jason address numbers, but thank you for being a great salesman and describing our penetration across domains youre, 100% right there.
Theres arm technology in virtually every set of the networking stack.
Yeah. So I I would say um the the the license, see that's already uh actually that we're already seeing royalties from that. That is I'd say earlier than the next expected and and the way because we just launched this in September, the way the way it's happened. So quickly is this actually, uh, you know, we're not we're not able to say which partner it is, but it is a partner where this is not their first CSS. This is their second CSS. So as a result, there was already kind of close partnership, uh, on the first generation. And so, then when we, uh, launched the Next Generation, because the teams that had already been working pretty close to each other, it allowed that second generation to be adopted uh, very quickly uh, and for, uh, royalties to to come really just to, you know, within a couple months after the technology was delivered. So so kind of unusual little head head of what we'd expected, but it very much speaks to exactly why CSS has been, uh, you know, more successful even than we thought when we launched.
The Bluefield technology at Melville Ox GPU base that's arm.
Significant.
Two years ago, it was really about speeding up time to market, and this is an excellent example of that occurring.
It's technology that goes into the switches around Tomahawk and Arista.
Great. Thank you.
Rene Haas: Sure. I'll take the first part of that question. I'll let Jason take the second half. Without giving you a kind of go-forward forecast of one, three, five years, maybe a way to think about it is back in January of this year. OpenAI with Oracle and SoftBank announced Stargate, which was a $500 billion project to build out data centers over the next number of years. When we go back to where we are now, 11 months later, I would say the demand picture for compute is greater than it was at that time. This is a bit of why you're seeing all kinds of different accelerated announcements around spend, etc., etc. If nothing else, I think the opportunity for compute has only grown since we made that Stargate announcement. To be clear, that announcement is around.
Thank you, thanks. Thank you.
All using arm technology. So we are we are definitely seeing it.
Your next question comes from the line of Harland. So from JP Morgan, please go ahead.
Acceleration of all that.
And at the same time I think the power efficiency piece, it's probably probably the biggest accelerant I think we're going to see just in terms of <unk>.
Being able to offload as much as everything you can on too.
The more power efficient domain of the compute platform. So.
I'll, let Jason comment on royalties scheme in terms of where that is going directionally.
Hey, Harlan so on the royalties.
It ended the year at around 10 ish percent and so we're certainly with the growth rate in infrastructure being.
Double I'd say all the other categories and overall average royalty you should expect it to continue to increase we'll provide a full update at the end of the year, but your trajectory of somewhere in the 15% to 20% range is not a bad assumption and probably a reasonable expectation for where we are.
Rene Haas: A joint partnership with OpenAI and SoftBank being equity partners in this investment for compute. We are quite bullish in terms of this overall demand for compute. Right now, what is in the way of realizing that potential is all of the infrastructure required around the power. From everything that we can tell from people we talk to inside the ecosystem, the demand for compute to train these new models, reinforcement learning to make them great, and then inference to serve them, the demand opportunity is stronger than when we announced that 11 months ago. This is why we're accelerating all the investments that we talked about to take advantage of that opportunity. On the Lumix CSS royalty question, I'll let Jason answer that one.
Hey, good afternoon. Thanks for taking my question. Renee, you talked about new virtual realities going to X over here with all these clouds, based CPUs, ramping. And then, on top of that, with these high performance AI clusters, right? They're using more dpus or smart Nicks that are also using arm cores on the networking side data center switching and routing chips have multiple arm cores embedded, you know, in them for things like Telemetry low, balancing overall system management. So bottom line is that there are significant arm compute going into all aspects of the data center, right? Um, we're also even seeing armed taking over x86 in the service provider, networking markets, as well. So last fiscal year cloud and networking accounts for about 10% of royalty revenues were Midway through this fiscal year. Maybe you guys could just throw us up. I assume
this next has increased is it approaching 15 20% of total royalty revenues for the team. Any color here would be great.
<unk> trend throughout the year, So I would say, it's probably going great SaaS.
SaaS or than we expected a year ago.
Thats right great.
Great. Thank you.
Thank you.
Thank you.
Our next question comes from the line of Chris Sakai from TD Cowen. Please go ahead.
Yes, hi, thanks for taking my question.
I had a question for Renee you know clearly you kind of highlighted how we have strengthened.
Smartphones and also increasing market share in data center.
I'm kind of curious when you look over the next few years, how do you see chip demand in token generation playing out.
Implications for all of them, especially as you move into more of an influence world that edge devices may play a bigger role.
Alright, I think.
Jason Child: Yeah. I would say the licensee that's already, actually that we're already seeing royalties from, that is, I'd say, earlier than expected. The way, because we just launched this in September, the way it's happened so quickly is this actually. We're not able to say which partner it is, but it is a partner where this is not their first CSS. This is their second CSS. As a result, there was already kind of close partnership on the first generation. When we launched the next generation, because the teams had already been working pretty close to each other, it allowed that second generation to be adopted very quickly and for royalties to come really just within a couple of months after the technology was delivered.
From some accounts of people, who I talk to will say that today on some of these data centers.
These build outs of multi 100 megawatts, that's still and again, depending on how you define training versus in for instance, reinforcement learning.
Json comment on on the loyalties uh scheme in terms of where that is going directionally.
Majority of computer is being used for per training still.
That clearly will flip well at some.
It has to we think.
And then that demand starts to move to to influence.
What we're seeing is all kinds of demand for different architectures and compute type of solutions to run in France not in the cloud.
Obviously, youre going to not rely 100% of something on the edge, but today, it's the reverse it's about 100% on the cloud and we think that is going to change.
Uh, Hey Harlen. So uh, on the the royalties. Yeah, I mean it ended the year at around 10% and so you know we're certainly with the growth rate in infrastructure. Being you know we're double let's say all the other categories and overall average royalty you you should expect it to continue to increase. Uh we'll provide a full update at the end of the year. But you know, your trajectory is somewhere in the 15th per to 20% range is is not a bad assumption and and probably reasonable expectation for where we uh, expected Trend throughout the year. So I would say it's probably going great.
Faster than we expected a year ago.
Jason Child: Kind of unusual, a little ahead of what we had expected, but it very much speaks to exactly why CSS has been more successful even than we thought when we launched it two years ago. It's really about speeding up time to market, and this is an excellent example of that occurring.
That's right. Great. Great. Thank you. Thank you.
Thank you.
We are seeing already.
Lots of demand for the Cpus and Lou makes that have these scalable matrix extensions and these are extensions that allow you to run.
Your next question comes from the line of Chris Sanka from TD Cowen. Please go ahead.
Have a question.
AI workloads at higher performance, that's only going to continue and I think for arm that is enormous trend for us.
Jim Schneider: Great. Thank you.
Jason Child: Thank you.
Operator: Thank you. Your next question comes from the line of Harlan Sur from JP Morgan. Please go ahead.
Two levels number one huge trend for us because.
Harlan Sur: Hey, good afternoon. Thanks for taking my question. Rene, you talked about Neoverse royalty going 2x year over year with all these cloud-based CPUs ramping. Then on top of that, with these high-performance AI clusters, right, they're using more GPUs or smart NICs that are also using Arm cores. On the networking side, data center switching and routing chips have multiple Arm cores embedded in them for things like telemetry, load balancing, overall system management. The bottom line is that there's significant Arm compute going into all aspects of the data center, right? We're also even seeing Arm taking over x86 in the service provider networking markets as well. Last fiscal year, cloud and networking accounted for about 10% of royalty revenues. We're midway through this fiscal year. Maybe you guys could just chew us up. I assume this mix has increased.
The further you move away from the cloud at the battery level devices.
That's a domain that arm can play in the sense of the software workload running exclusively there but at the same time.
I have a question for Renee, you know, clearly, you kind of highlighted how we have strengthened our smartphones and also increasing market share in data center. I'm kind of curious when you look over the next few years, how do you see, chip, demand, and token generation playing out. Um, and its implications for arm, especially as we move into more of an influence world with Edge devices. May play a bigger role
Customers would love a scalable software solution between the cloud and the edge and that's a lot of what's behind the.
Announcement that we made with meta.
October.
This is around working in such a way with meta where whether theyre running something in the cloud or running in the edge for developers Theyre able to port models in such a way that.
It's as efficient as possible no matter, where you are running so.
Oh, I I, I think, you know, from from some accounts of of people who I talked to will say that today on some of these data centers, uh, these build outs of multi, hundred megawatts that still. And again, depending on how you define training versus inference and reinforcement. Learning majority of of compute is being used for portraying still, uh, that, that clearly will will flip. Uh, well at some point, it has to we think, uh, and then that demand starts to to move to, uh, to inference
This is all I think a good thing for us because more tokens speeds more compute more compute means more compute needed at the edge and more compute at the edge is really good for us because thats a I think we're in a very very unique position to address that.
Harlan Sur: Is it approaching 15% to 20% of total royalty revenues for the team? Any color here would be great.
Thank you Audra and negotiated.
Rene Haas: Yeah. I'll let Jason address numbers, but thank you for being a great salesman and describing our penetration across domains. You're 100% right. There's Arm technology in virtually every set of the networking stack. The BlueField technology at Mellanox, GPU-based, that's Arm. Significant technology that goes into the switches around Tomahawk and Arista are all using Arm technology. We are definitely seeing an acceleration of all that. At the same time, I think the power efficiency piece is probably the biggest accelerant I think we're going to see just in terms of being able to offload as much as everything you can onto the more power-efficient domain of the compute platform. I'll let Jason comment on the royalties scheme in terms of where that is going directionally.
Thanks.
We will now take our final question for today and the final question comes from the line of Lee Simpson Morgan Stanley. Please go ahead.
Great. Thanks for fitting me in and well done everyone on a great quarter.
China is maybe 22% of sales as Q.
I was just wondering what is driving that is it more licensing royalties.
Strength in the quarter and the quarter.
Maybe just as you look at the licensing pipeline for the rest of the year.
Have you seen more reason to be confident in the growth this year for licensing, especially as you look to Q4, which as I believe we said before there is potential for good renewal deals this year. Thanks.
Uh what we're what we're seeing is uh all kinds of demand for different architectures and compute type of solutions to run inference not in the cloud. Uh, obviously you're going to not rely 100% on something on the edge. But today, it's the reverse its about 100% on the cloud and we think that is is going to change. Um, we are seeing uh, already, uh, lots of demand for the CPUs and Lumix that have these scalable Matrix extensions and these are the extensions that allow you to run, uh, AI workloads, uh, at higher performance, that's only going to continue. Uh, and I think for arm that is a, uh, enormous trend for us, um, on on 2 levels number 1, huge trend for us because uh, the the, the further you move away from the cloud onto battery level devices, that's a domain that arm can can play in, in the sense.
Thanks for the question Lee in terms of the the China performance, Yeah. It definitely has done well.
Of the software workload running exclusively there. But the same time.
And I would just overall say the demand in China looks to be as strong as we've ever seen.
Customers would love a scalable software solution between the cloud and the edge. And that's a lot of what's behind the um
Jason Child: Hey, Harlan. On the royalties, yeah, I mean, it ended the year at around 10% or so. We're certainly, with the growth rate in infrastructure being double, I'd say, all the other categories in overall average royalty, you should expect it to continue to increase. We'll provide a full update at the end of the year, but your trajectory of somewhere in the 15% to 20% range is not a bad assumption, and probably a reasonable expectation for where we expect to trend throughout the year.
Did have one of our largest license deals.
<unk> come out of China.
And so I would say license was.
Announcement that we made with meta uh in October. Uh this is around working in such a way with meta where whether they're running something in the cloud or running in the edge for developers, they're able to Port the models in such a way that
Slightly more of a I would say more of the over performance came from license royalties are also growing strong in China, as well, but but license was a little bit of a bigger driver this quarter.
Our pipeline indicates that we have a pretty strong.
It's as efficient as possible no matter where you're running. So this is all I think a a good thing for us because more tokens means more compute. More compute means more compute needed at the edge and more computer to the edge is really good for us because that's a I think we're in a very very unique position to address that.
Pretty strong license pipeline for the remainder of the year.
Thank you.
Rene Haas: I would say it's probably going.
In terms of overall license revenue.
Thank you.
Jason Child: Great.
Rene Haas: Faster than we expected a year ago.
Hard to say as we get into Q4, there are some large deals as we always have.
Jason Child: That's right.
Rene Haas: Great. Great. Thank you.
Jason Child: Thank you.
We will now take our final question for today. And the final question comes from the line of Lee. Simpson Morgan Stanley. Please go ahead.
Operator: Thank you. Your next question comes from the line of Chris Sanker from TD Cowen. Please go ahead.
In terms of timing right now we're just guiding on Q3, but next quarter, we will definitely have much more.
Harlan Sur: Yeah. Hi, thanks for taking my question. I had a question for Rene. Clearly, you kind of highlighted how we have strength in smartphones, and also increasing market share in data centers. I'm kind of curious, when you look over the next few years, how do you see chip demand and token generation playing out, and its implications for Arm, especially as we move into more of an inference world where edge devices may play a bigger role?
Clarity around.
What deals are going to be able to land in Q4, and whether theres any pull forward or push outs or whatnot, but but.
As a reminder, we.
The deal cycles on large license deals are usually six to nine months.
And we don't really lose deals.
It's really just to note. It's really just about what exactly are the market needs for our customers and when do they need it.
Great. Uh thanks for fitting me in and uh well done everyone and a great quarter. Uh I see China is maybe 22% of sales this queue uh and I was just wondering what is driving that does it more licensing or royalties uh for strength in the quarter in the quarter and maybe just as you look out to the licensing pipeline for the rest of the year. Um, have you seen more reason to be confident in the growth this year for licensing? Especially as you look to queue for which, as I believe we've said before there's potential for good renewal deals this year.
Thanks.
Given the certain the current capex forecast and all the the AI cycles that continue to be as strong as they've been for the last couple of years.
Rene Haas: Oh, I think from some accounts of people who I talk to will say that today, on some of these data centers, these buildouts of multi-hundred megawatts, that still, and again, depending on how you define training versus inference and reinforcement learning, the majority of compute is being used for training still. That clearly will flip. Well, at some point, it has to, we think, and then that demand starts to move to inference. What we're seeing is all kinds of demand for different architectures and compute type of solutions to run inference not in the cloud. Obviously, you're going to not rely 100% on something on the edge, but today, it's the reverse. It's about 100% on the cloud, and we think that is going to change. We are seeing already.
Have a lot of confidence, but we will give you a little more detail next quarter on on what is going to land in Q4.
That's great. Thanks, Jay Thank you Lee.
Thank you that was our final question for today I will now hand, the call back to Randy for closing remarks.
Thank you and thank everyone for the questions as we stated we could not be more happy with the results last quarter.
Uh huh.
Royalties at a record 34% growth year on year, just just terrific.
Results, but more importantly, when we think about the opportunity for arm going forward.
The future has never been brighter and brighter because if we look at what's going on with artificial intelligence artificial intelligence is driving unprecedented demand for compute.
Rene Haas: Lots of demand for the CPUs and Lumix that have these scalable matrix extensions, and these are the extensions that allow you to run AI workloads at higher performance. That's only going to continue. I think for Arm, that is an enormous trend for us on two levels. Number one, huge trend for us because the further you move away from the cloud onto battery-level devices, that's a domain that Arm can play in the sense of the software workload running exclusively there. At the same time, customers would love a scalable software solution between the cloud and the edge. That's a lot of what's behind the announcement that we made with Meta in October.
And given the unprecedented demand for compute we're seeing all kinds of constraints on power and infrastructure to deliver that compute which means that the compute that's being delivered for AI needs to be as efficient as possible. That's also a great place for arm and then as more and more of this AI compute moves from the cloud to edge.
Mrs and requires the most sufficient compute on the planet that's a great place for arm too. So we are extremely excited about the future going forward. We continue to invest to ensure that we can take advantage of that opportunity.
But license was a little bit of a bigger driver this quarter, um, and, you know, our pipeline indicates that we have a, a pretty strong, um, pretty strong license pipeline for the remainder of the year. Uh, in terms of overall licensed Revenue. Uh, you know, hard to say, uh, as we get into Q4, there are some, you know, large deals as we always have. Uh, in terms of timing, you know, right now we're just guiding on Q3 but, uh, you know, next quarter will, you know, definitely have much more, uh, Clarity around. You know what deals are are going to be able to land in Q4 and whether there's any pull forwards push outs or whatnot. But but you know as a reminder we we don't you know the deal Cycles on large licensed. Deals are usually 6 to 9 months uh and and we don't really lose deals. Uh, it's it's really just a note. It's really just about what exactly are the market needs for our customers and when do they need it? Um and given you know the certain the current capex, you know, kind of forecasts and
And on behalf of everyone inside arm, who made this quarter happen and to our partners and customers. Thank you so much and thank you for all the questions.
And all the the AI cycles that continue to be as strong as they've been for the last couple of years. Uh you know have a lot of confidence but we'll we'll give you a little more detail next quarter on on, what's going to land in Q4.
Rene Haas: This is around working in such a way with Meta where whether they're running something in the cloud or running in the edge for developers, they're able to port the models in such a way that it's as efficient as possible no matter where you're running. I think this is all a good thing for us because more tokens means more compute. More compute means more compute needed at the edge, and more compute at the edge is really good for us because that's a, I think we're in a very, very unique position to address that.
That's great. Thanks. Thank you, Lee.
Thank you. That was our final question for today. I will now hand the call back to Renee for closing remarks.
Thank you. And, uh, and thank everyone for, for the questions. Um, you know, as we stated we, we could not be more happy with the the results last quarter, uh,
Jim Schneider: Thanks a lot, Rene. Appreciate it.
Operator: Thank you. We will now take our final question for today. The final question comes from the line of Lee Simpson, Morgan Stanley. Please go ahead.
Sebastien Naji: Great. Thanks for fitting me in. Well done, everyone, and a great quarter. I see China is maybe 22% of sales this Q. I was just wondering, what is driving that? Is it more licensing or royalties for strength in the quarter? Maybe just as you look out to the licensing pipeline for the rest of the year, have you seen more reason to be confident in the growth this year for licensing, especially as you look to Q4, which, as I believe we said before, there's potential for good renewal deals this year? Thanks.
Jason Child: Thanks for the question, Lee. In terms of the China performance, yeah, it definitely has done well. I would just overall say the demand in China looks to be as strong as we've ever seen. We did have one of our largest license deals actually come out of China. I would say license was slightly more of a, I'd say, more of the overperformance came from license. Royalties are also growing strong in China as well, but license was a little bit of a bigger driver this quarter. Our pipeline indicates that we have a pretty strong license pipeline for the remainder of the year. In terms of overall license revenue, hard to say as we get into Q4. There are some large deals, as we always have, in terms of timing.
royalties at a record 34% growth year on year just uh, just terrific uh results. But more importantly, when we think about the opportunity for arms going forward, uh, the the future has never been brighter brighter because if we look at what's going on with artificial intelligence, artificial intelligence is driving, unprecedented demand for compute and given the unprecedented demand for compute. We are seeing all kinds of constraints on on Power and infrastructure to deliver that compute which means that the compute that's being delivered, for AI needs to be as efficient as possible. That's also a great place for arm and then as more and more of this AI compute moves from the cloud to Edge devices and requires the most efficient compute on the planet. That's a great place for arm to. So we are extremely excited about the future. Going forward, we continue to invest to ensure that we can take advantage of that opportunity and uh on behalf of everyone uh inside arm who made this quarter happen and to our partners uh and customers. Thank
Thank you so much and thank you for all the questions.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect
Jason Child: Right now, we're just guiding on Q3, but next quarter, we'll definitely have much more clarity around what deals are going to be able to land in Q4 and whether there's any pull forwards, push outs, or whatnot. As a reminder, the deal cycles on large license deals are usually six to nine months, and we don't really lose deals. It's really just about what exactly are the market needs for our customers and when do they need it. Given the current CapEx kind of forecasts and all the AI cycles that continue to be as strong as they've been for the last couple of years, have a lot of confidence, but we'll give you a little more detail next quarter on what's going to land in Q4.
Jim Schneider: That's great. Thanks, Jason.
Jason Child: Thank you, Lee.
Operator: Thank you. That was our final question for today. I will now hand the call back to Rene for closing remarks.
Rene Haas: Thank you. Thank everyone for the questions. As we stated, we could not be more happy with the results last quarter. Royalties at a record, 34% growth year on year, just terrific results. More importantly, when we think about the opportunity for Arm going forward, the future has never been brighter because if we look at what's going on with artificial intelligence, artificial intelligence is driving unprecedented demand for compute. Given the unprecedented demand for compute, we are seeing all kinds of constraints on power and infrastructure to deliver that compute, which means that the compute that's being delivered for AI needs to be as efficient as possible. That's also a great place for Arm.
Rene Haas: As more and more of this AI compute moves from the cloud to edge devices and requires the most efficient compute on the planet, that's a great place for Arm too. We are extremely excited about the future going forward. We continue to invest to ensure that we can take advantage of that opportunity. On behalf of everyone inside Arm who made this quarter happen, and to our partners and customers, thank you so much. Thank you for all the questions.