Arm’s record second quarter has a growth split that matters for its stock forecast: licensing supplied roughly 84% of the additional revenue, while royalties rose 8%. The chip designer reported $1.443 billion in sales for the quarter ended September 30, up 27% from a year earlier, in its November 4 shareholder letter filed with the SEC.
That makes the next quarter’s revenue mix the useful test for investors. Arm expects $1.54 billion in fiscal third-quarter revenue at the midpoint of its guidance. TECHi’s calculation shows that if licensing merely holds at the latest quarter’s level, royalties would need to climb about 14.5% sequentially to reach that midpoint. That is a conditional threshold, rather than a mix forecast from management.
Article Brief
Key Takeaways
3 Points18s Read
- Growth mixLicense and other revenue supplied $258 million of Arm’s $308 million year-over-year revenue increase, about 84%.
- Next-quarter thresholdWith licensing flat sequentially, royalties would need to grow 14.5% to reach the $1.54 billion Q3 revenue midpoint.
- A dated CPU opportunityArm targets first commercial AGI CPU deliveries in January–March 2027; its up-to-$2 billion revenue outlook spans two fiscal years combined.
Where Arm’s revenue growth came from
The headline growth rate combines two businesses moving at different speeds. License and other revenue reached $773 million, compared with $515 million a year earlier. Royalties reached $670 million, compared with $620 million. The following reconstruction uses Arm’s reported figures, in millions of dollars.
| Revenue line ($ millions) | Q2 FY2027 | Q2 FY2026 | Increase | Share of total increase |
|---|---|---|---|---|
| License and other | 773 | 515 | 258 | 83.8% |
| Royalty | 670 | 620 | 50 | 16.2% |
| Total revenue | 1,443 | 1,135 | 308 | 100% |
The calculation behind the headline is straightforward: licensing added $258 million, royalties added $50 million, and total revenue increased $308 million. Dividing $258 million by $308 million gives 83.8%, rounded to 84%.
That is a measure of the source of this quarter’s year-over-year increase. It does not mean licensing represents 84% of total revenue, or that 84% of Arm’s business depends on one contract. Licensing actually represented about 53.6% of the quarter’s sales. Those are different denominators, and confusing them would overstate the concentration finding.
Arm attributed licensing growth to the timing and size of high-value agreements and contributions from its backlog. Such agreements can create strong reported quarters without establishing a smooth quarterly growth rate. For a stock valued on years of AI infrastructure expansion, the distinction between recognized license revenue and a broader royalty acceleration matters.
The company’s annualized contract value metric offers another perspective. It rose 12% to $1.790 billion, well below the 50% increase in reported license and other revenue. Arm defines that metric as a normalized measure of licensing contracts; it excludes future royalties. It should not be treated as total company revenue, cash collections or a substitute for backlog.
The discrepancy is not evidence that the reported sales are defective. It shows why extrapolating a particularly strong licensing quarter can produce an aggressive forecast. Investors need evidence that the underlying contract base and subsequent customer shipments can support the recognized revenue over time.
The Q3 forecast needs another $97 million
Arm’s fiscal third-quarter guidance calls for revenue of $1.54 billion, plus or minus $50 million, and adjusted diluted earnings of $0.56 a share, plus or minus $0.04. The midpoint requires $97 million more revenue than the second quarter, a sequential increase of about 6.7%.
Management did not provide a licensing-versus-royalty split for that forecast. These three illustrative combinations therefore describe what would be required to reach the same total. They are arithmetic sensitivities, with no probabilities attached, and assume those two reported revenue lines sum to the midpoint.
| Illustrative assumption | License revenue ($m) | Royalty revenue ($m) | Required sequential change |
|---|---|---|---|
| Licenses hold flat | 773.0 | 767.0 | Royalties +14.5% |
| Licenses fall 10% | 695.7 | 844.3 | Royalties +26.0% |
| Royalties hold flat | 870.0 | 670.0 | Licenses +12.5% |
The flat-license case is particularly useful because it isolates the royalty requirement. Subtracting $773 million from the $1.540 billion midpoint leaves $767 million. That would be $97 million above the latest $670 million royalty result, or 14.5% sequential growth.
If licensing falls 10%, the required royalty increase becomes roughly 26%. Conversely, if royalties stay flat, licensing needs to rise about 12.5%. There are many combinations between those cases; Arm can beat or miss guidance without landing on any one of them.
For shareholders, the composition affects how repeatable the result looks. Reaching the midpoint with broader royalty growth would support a different interpretation from reaching it through another jump in license recognition. A revenue beat alone would not resolve that distinction. Readers following the company’s wider estimates can compare subsequent results with the dated assumptions on TECHi’s Arm forecast page.
AI demand is visible, but the royalty base is wider
Arm said data-center royalty revenue doubled from a year earlier. That is significant evidence for its AI infrastructure opportunity, but the company did not disclose an absolute dollar amount in that statement. Doubling one component cannot be assumed to mean that Arm’s entire royalty business doubled.
Total royalties grew 8%. Arm identified memory-pricing pressure on smartphones as a constraint. The result illustrates how a growing server business can coexist with a slower overall royalty increase when other large markets face pressure.
The strongest argument against a cautious reading is that licensing can lead royalty growth. Customers first license designs, then develop and ship products that generate royalties. A strong licensing quarter can therefore represent future deployment rather than a short-lived accounting event. The missing information is how quickly those agreements translate into shipments, and how much royalty revenue each produces.
There is also a useful counterpoint in the customer breakdown. External-customer revenue rose from $713 million to $1.019 billion, while related-party revenue increased from $422 million to $424 million. On the reported rows, external customers supplied $306 million of the $308 million total increase. That supports the breadth of the growth source, although those categories do not disclose every customer’s identity or eliminate concentration risk.
Cash conversion complicates the earnings picture
Arm’s adjusted operating income increased 37% to $638 million, with an adjusted operating margin of 44.2%. GAAP operating income was $201 million, up 23%, with a 13.9% margin. Both improved in dollars, but the substantial difference between the measures matters for assessing the economics available to shareholders.
The cash-flow statement supplies a separate test. Quarterly operating cash flow fell to $207 million from $567 million. Arm’s non-GAAP free cash flow fell to $110 million from $411 million. Its reconciliation subtracts $72 million of capital expenditure, $5 million of purchased intangible assets and $20 million of payments on intangible-asset obligations from operating cash flow.
One quarter does not establish a structural cash problem. Trailing-12-month free cash flow was $1.096 billion, compared with $1.073 billion a year earlier, and cash plus short-term investments totaled $3.621 billion. Arm therefore entered the next stage of investment with substantial liquidity.
Working-capital movements help explain why revenue growth did not translate directly into quarterly cash growth. The cash-flow statement showed a $203 million use from contract assets, compared with $30 million a year earlier, alongside other liability movements. Those are reasons to monitor collections and conversion across several quarters, rather than treat the $110 million quarter as a permanent run rate or infer misconduct.
GAAP net income also fell even as operating income increased. The filed financial statements show other nonoperating income and losses moving from positive $128 million to negative $2 million. It would be misleading to describe the net-income decline as proof that the core operating business contracted. Equally, adjusted earnings do not make the excluded costs irrelevant.
The 2027 CPU opportunity needs careful dating
Arm’s move into its own AGI CPU products adds another potential growth engine. The shareholder letter said initial commercial deliveries remain on track for fiscal Q4 2027, meaning January through March 2027. Purchase orders and samples are distinct from those commercial deliveries and their eventual recognized revenue.
Management expressed greater confidence in up to $2 billion of AGI CPU revenue across fiscal 2027 and fiscal 2028 combined. That is neither $2 billion every year nor a statement that the entire amount has already been recognized. The distinction is material when attaching a revenue forecast to the stock.
Selling silicon also changes the questions investors should ask. Product availability, delivery schedules and working-capital requirements become more important alongside licensing and royalty rates. The extraordinarily high gross margin of the current business should not automatically be applied to future chip sales. Arm has not supplied enough product-level financial detail here to make that extrapolation reliable.
TECHi’s earlier analysis of Arm’s agentic-AI CPU opportunity examined that strategic shift. The new earnings give investors a nearer checkpoint: whether the existing licensing engine can support the next quarter while royalties broaden, before the new CPU contributes commercial deliveries.
What changes the Arm stock forecast
The constructive case is that data-center royalties keep expanding, licensing remains healthy and cash conversion improves as customer payments catch up. That combination would make the current growth look more durable. The weaker case is that licensing recognition slows while smartphone pressure persists, leaving the royalty business to meet a substantially larger sequential requirement.
The early market observation was cautious. In a fixed Yahoo Finance market-data observation, Nasdaq-listed ARM traded at US$187.50 at 4:13:48 p.m. EST on November 4, about 2.2% below that day’s $191.80 regular-session close. Provider delay was unspecified, and after-hours trading can be thin. This observation does not establish why investors sold or predict the next session’s opening price.
A defensible forecast here is conditional rather than a new price target: the case for sustained growth strengthens if royalties close more of the gap to the Q3 midpoint without requiring another large licensing step-up. The case weakens if strong reported revenue repeatedly arrives without comparable progress in normalized contracts, royalties and cash conversion.
What to watch
Arm’s earnings call is scheduled for 5 p.m. EST on November 4. The immediate questions are the expected Q3 revenue mix, smartphone assumptions and AGI CPU delivery timing. The next operating checkpoints are the fiscal Q3 results and the planned January–March 2027 commercial CPU deliveries. Those disclosures can test the growth bridge; the record revenue headline alone cannot.