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    ARM
    Earnings call· Dec 2024(Q3 FY25)

    ARM HOLDINGS PLC /UK ARM

    Feb 5, 2025 Source

    Executive summary

    Arm Holdings plc Q3 FY25 — Record Revenue Driven by AI Demand and v9/CSS Adoption

    Arm delivered a record Q3 FY25, with revenue and royalties driven by robust AI demand and increasing adoption of its v9 architecture and Compute Subsystems across data centers and mobile. The company is accelerating R&D investments to capitalize on future AI opportunities, despite a slight moderation in ACV growth and the v9 royalty mix. Management remains confident in long-term growth, projecting continued momentum into the next quarter.

    Highlights

    5

    • Record total revenue of $983 million, exceeding the high end of guidance.

    • All-time record royalty revenue of $580 million, up 23% year-on-year.

    • Full-year FY25 revenue guidance midpoint increased to $4 billion, representing 24% YoY growth.

    • Strong adoption of v9 and Compute Subsystems (CSS) driving share gains in data centers and flagship smartphones.

    • Licensing revenue increased 14% year-on-year to $403 million, surpassing forecasts.

    Concerns

    3

    • Non-GAAP operating costs reached a record $522 million due to heightened R&D investments.

    • Annualized Contract Value (ACV) growth of 9% YoY was "a little lower than the recent run rate of low teens".

    • v9 adoption, as a percentage of total royalties, stalled at 25% for a few quarters, below prior expectations.

    Guidance & targets

    11
    CategoryTargetConfidence
    Q4 FY25 Revenue
    $1.175 billion and $1.275 billion
    high materiality
    High
    Q4 FY25 Non-GAAP Operating Expense
    approximately $590 million
    medium materiality
    High
    Q4 FY25 Non-GAAP EPS
    $0.48 to $0.56
    high materiality
    High
    FY25 Full Year Revenue
    around $4 billion
    high materiality
    High
    FY25 Full Year Royalty Revenue Growth Rate
    high teens year-on-year
    medium materiality
    High
    FY25 Full Year License Revenue Growth
    around 30% year-on-year
    medium materiality
    High
    FY25 Full Year Non-GAAP Operating Expenses
    about $2.1 billion
    medium materiality
    High
    FY25 Full Year Non-GAAP EPS
    $1.56 and $1.64
    high materiality
    High
    Long-term Full Year Revenue Growth
    20%
    high materiality
    High
    Long-term Royalty Growth Rate
    mid-20% growth rate
    medium materiality
    Medium
    Long-term ACV Growth
    mid- to high single digits
    low materiality
    High

    Operational metrics

    10
    Total Revenue
    $983 million19% year-on-year growth
    Q3 FY25

    Record total revenue, exceeded high end of guidance.

    Royalty Revenue
    $580 million23% year-on-year growth
    Q3 FY25

    All-time record royalty revenue, driven by v9 adoption and CSS shipments.

    Licensing Revenue
    $403 million14% year-on-year increase
    Q3 FY25

    Better than forecasted, varies quarter-to-quarter due to timing and size of high-value agreements.

    Annualized Contract Value (ACV) Growth
    9%year-on-year
    Q3 FY25

    A little lower than the recent run rate of low teens, but above long-term plan.

    Remaining Performance Obligations (RPO)
    down slightlysequentially
    Q3 FY25

    As Arm delivered products that released revenue from backlog into the P&L.

    Non-GAAP Operating Costs
    $522 million
    Q3 FY25

    Highest level, due to heightened R&D spending.

    Non-GAAP Operating Profit
    $442 million
    Q3 FY25

    Near-record levels, achieved while increasing investments.

    Developer Community Size
    more than 20 million
    Q3 FY25

    World's largest developer community.

    Related Party Revenue Share
    25%
    Q3 FY25

    As a percentage of total royalties, consistent with prior quarter. Expected to fall to mid-teens over time.

    CSS Mix
    50-50
    Q3 FY25

    Refers to the mix of roughly a dozen CSS deals sold.

    Industry KPIs

    4
    MetricValueDetails
    Ai data center revenue—
    Design wins socket pipeline—
    Node platform ramp schedule—
    End market segment revenue mix—

    Deals & partnerships

    2
    OpenAI, Oracle, SoftBank, Microsoft, NVIDIAProject Stargate for AI infrastructure deployment$100 billion immediately, $500 billion over time

    A significant infrastructure project in the United States, with Arm as the CPU of choice for the platform, combined with Blackwell CPU with Grace.

    SoftBank Group, OpenAICristal intelligence to develop AI agents for knowledge work

    Focuses on agentic AI and agents moving across every node of the hardware ecosystem, enabling AI workloads on Arm's pervasive compute platform.

    Risks & headwinds

    4
    Heightened R&D spendingQ3 FY25

    $522 million in Q3 FY25

    Mitigation: Balancing increasing investments for long-term growth with near-term profitability.

    Timing of large license dealsQ4 FY25

    Q4 FY25 revenue guidance range slightly wider

    Mitigation: High confidence in deal closure, but timing can be hard to forecast and some may slip into the next fiscal year.

    Slowing ACV growth rateQ3 FY25

    9% YoY in Q3 FY25, lower than recent low teens

    Mitigation: Management expects royalties to be the primary long-term growth driver, with v9 and CSS offering higher royalty rates.

    v9 adoption mix stallingQ3 FY25

    25% of total royalties for a few quarters

    Mitigation: Viewed as a 'good thing' as it indicates a longer runway for future growth towards the expected 60-70% v9 mix, driven by OEM product transitions.

    What to watch in Q4 FY25

    5

    v9 Adoption Rate

    next quarter and beyond
    Current25% of total royalties
    TargetAcceleration towards 60-70% of total royalties

    Why it matters

    v9 adoption is a key indicator for future royalty revenue growth, as it carries a higher royalty rate than v8.

    The fact that it's slowed as a percentage of total, again, as I said, is actually a good thing because that just gives us, as you said and already indicated, it gives us, I think, a better view into the growth because we still believe it's going to reach the 60% to 70% as a percentage of total royalties.

    Q&A highlights

    6

    How do Project Stargate and Cristal intelligence expand Arm's opportunity in AI, and what is the long-term financial benefit, especially for licensing?

    Rene Haas explained that Arm is the CPU of choice for Stargate, a significant infrastructure project, and Cristal intelligence focuses on agentic AI across all devices. Both represent huge opportunities as AI workloads will run on Arm's pervasive compute platform, driving demand for v9 and CSS. Jason Child added that licensing strength is driven by AI and the need for v9/CSS technology, with Q4 licensing expected to grow ~60% YoY due to large AI/CSS-driven deals.

    “For Arm, we are extremely excited to be the CPU of choice for such a platform. Combined with the Blackwell CPU with Grace, Arm will be the CPU of choice for the initial configurations.”

    asked by Lee Simpson · answered by Rene Haas

    2 min read6 chapters

    Detailed Narrative

    01

    AI-Driven Momentum and Record Performance

    Arm reported record total revenue of $983 million and an all-time high royalty revenue of $580 million, up 23% year-on-year, for Q3 FY25. This strong performance was primarily fueled by increasing AI demand across all end markets, driving continued adoption of Arm's v9 architecture and Compute Subsystems (CSS). The company exceeded its revenue guidance and is projecting further growth, with Q4 FY25 revenue expected to surpass $1 billion.

    02

    Strategic AI Partnerships and Ecosystem Expansion

    Arm is strategically positioned at the center of the AI ecosystem through key collaborations. Project Stargate, a significant AI infrastructure initiative with OpenAI, Oracle, and SoftBank, will utilize Arm as the CPU of choice. Additionally, the joint development of Cristal intelligence with SoftBank and OpenAI aims to create AI agents for knowledge work, expanding Arm's reach from the cloud to the edge and enabling AI workloads on pervasive Arm-based devices.

    03

    Data Center Share Gains and Custom Silicon

    Arm continues to gain significant share in the data center market, with major hyperscalers customizing silicon on Armv9 and CSS. AWS reported that over 50% of new CPU capacity installed in the past two years was on Graviton, with over 90% of its top 1,000 EC2 customers using the technology. Microsoft Cobalt, Google Axion, and NVIDIA's Grace Arm-based chips, including the GB10 Superchip, further underscore Arm's growing influence in AI data centers.

    04

    Royalty and Licensing Dynamics

    Royalty revenue growth was driven by v9 adoption and initial shipments of CSS-based chips, particularly in smartphones and data centers. Licensing revenue increased 14% year-on-year to $403 million, exceeding forecasts, as partners commit to advanced technology for AI. While Annualized Contract Value (ACV) growth was 9% YoY, slightly below recent trends, management emphasized that royalties will be the primary long-term growth driver, with v9 and CSS offering higher royalty rates.

    05

    Investment in Next-Generation Technologies

    Arm is accelerating investments in R&D, leading to non-GAAP operating costs reaching $522 million in Q3 FY25. This heightened spending is crucial for developing future revenue streams and next-generation technologies to meet the rapidly evolving demands of AI. The company aims to balance these long-term growth investments with near-term profitability, as evidenced by near-record non-GAAP operating profit of $442 million.

    06

    v9 and CSS Adoption Trends

    The adoption rate of Armv9 as a percentage of total royalties reached 25% this quarter, up from 15% a year ago, with absolute v9 dollars growing at a triple-digit rate. While the percentage mix has stalled, management views this as a positive, indicating a longer runway for future growth towards an expected 60-70% v9 mix. Compute Subsystems (CSS) are also gaining significant momentum, carrying royalty rates roughly double that of v9, which itself is double v8, with CSS rates increasing annually.

    AI-generated summary of the company’s earnings call. Not investment advice.