Arm's FY25Q2 covers July through September 2024.
Arm FY25Q2 Earnings Highlights:
Revenue $844M, up 5% year over year, down 10% sequentially.
GAAP gross margin 96.2%, still the highest globally (CDNS 86.6%, Moutai 91.2%).
GAAP operating income $64M, swung to profit year over year, down 65% sequentially; GAAP operating margin 8%.
Non-GAAP operating income $326M, down 15% year over year, down 27% sequentially; Non-GAAP operating margin 39%, among the top globally for semiconductors.
GAAP net income $107M, swung to profit year over year, down 52% sequentially; GAAP net margin 13%.
Non-GAAP net income $317M, down 20% year over year, down 17% sequentially; Non-GAAP net margin 38%, among the top globally for semiconductors.
Even though Arm boasts a gross margin near 100%, its GAAP operating profit remains very low, and it frequently posted losses in the past. The main reason is elevated R&D expense, which accounted for 60% of revenue this quarter, while sales and marketing expense accounted for 29%. However, after stripping out the sizable stock-based compensation, the non-GAAP operating margin has held around 40%.
Business Segments:
License & Other revenue $330M, down 15% year over year, down 30% sequentially.
Signed 6 Arm Total Access (ATA) agreements this quarter, 39 cumulative; Arm Flexible Access (AFA) now has 269 customers; ATA annual fees increase 7% per year, three-year renewals; company expects most customers to migrate to various ATA versions.
ACV $1.253B, up 13% year over year, up 5% sequentially; RPO $2.385B, down 1% year over year, up 10% sequentially, of which 27% recognized within 12 months, 16% within 13-24 months.
Expect FQ3 Licensing revenue flat year over year; Licensing weakness due to revenue recognition timing, bookings strong, book-to-bill ratio 1.7; expect backlog to grow this fiscal year but not significantly.
Royalty revenue $514M, up 23% year over year, up 10% sequentially.
Arm v9-related revenue as a percentage of Royalty revenue held at 25%, same as last quarter, mainly because more mid-tier phones without v9 shipped this quarter; management says this does not affect the long-term v9 trend.
Phone customers' average shipments up 4% year over year this quarter, but company phone Royalty revenue up nearly 40% year over year; MediaTek Dimensity 9400 is the first phone customer to adopt Arm v9 CSS.
Typically License revenue generates Royalties 2-3 years later; phones fastest, datacenter and automotive slower; Royalty rate: CSS > v9 > v8.
Expect FQ3 Royalty revenue up 20% year over year; automotive, cloud, networking market share continue to rise, while IoT and industrial remain weak and drag growth; expect FY25 full-year Royalty revenue up high-teens (previously low-20s%).
Arm FY25Q2 Earnings Call Highlights:
Expect next quarter revenue $920M-$970M, up 12%-18% year over year; License & Other revenue flat year over year, Royalty revenue up 20% year over year.
Expect FY25 full-year revenue $3.8B-$4.1B (unchanged), up 18%-27% year over year; Non-GAAP net income $1.5B-$1.7B (unchanged), up 16%-32% year over year.
Did not terminate Qualcomm license, only issued termination warning notice; guidance already accounts for this, no expense accrued.
Arm's biggest issue remains low growth; its biggest advantage is high stability.