US Stock Market: Arm Holdings tops Q2 forecasts on AI demand, shares fall on royalty growth concerns

Arm Holdings delivered stronger-than-expected quarterly results and issued an upbeat revenue forecast for the current quarter, reflecting sustained demand for artificial intelligence infrastructure. However, the chip designer's shares fell nearly 7% in after-hours trading after the company flagged weaker smartphone royalty trends for the coming quarter, Reuters reported.

The British semiconductor intellectual property company projected second-quarter revenue of $1.38 billion, ahead of Wall Street expectations of $1.34 billion, according to LSEG data. It also forecast adjusted earnings of 47 cents per share, exceeding analysts' estimates of 43 cents per share.

AI drives growth in licensing and royalties

Demand for Arm's chip architecture continues to benefit from the rapid expansion of AI computing, particularly in data centres where cloud providers are deploying custom processors.

Major technology companies including Alphabet and Amazon are increasingly developing in-house AI chips based on Arm's architecture, supporting growth in both licensing revenue and royalty payments as more advanced chips are shipped.

Arm's first-quarter royalty revenue climbed 22% year-on-year to $715 million, while licensing revenue increased 23% to $574 million.

The company also posted first-quarter revenue of $1.29 billion and adjusted earnings of 45 cents per share, comfortably beating analysts' expectations of $1.26 billion in revenue and 40 cents per share in adjusted profit.

Smartphone weakness weighs on sentiment
Despite the strong AI outlook, investors reacted negatively after Arm indicated that smartphone royalty growth would soften in the current quarter.

Reuters reported that the company expects smartphone royalty growth of roughly 10% to 15%, with management pointing to memory shortages affecting handset production. The company noted that smartphone royalties are expected to decline sequentially in the next quarter, contributing to the after-hours share decline.

Finance Chief Jason Child said the company's overall spending plans and financial outlook remain unchanged despite the temporary weakness in the smartphone segment.

Data centre business accelerates
Arm is seeing rapid momentum in the data centre market, where AI workloads are driving demand for energy-efficient processors.

The company said it has shipped 1.5 billion Arm cores for data centres over the past six years, with approximately 30% of those shipments occurring during the last nine months, highlighting the accelerating pace of AI infrastructure deployment.

Growing inference workloads—where AI models generate responses to user queries—are creating increased demand for central processing units, complementing graphics processors used for AI training.

Arm has also expanded its strategy by developing its own data centre CPU, moving beyond its traditional licensing business.

New AI chip gains traction
Arm's AGI CPU, introduced earlier this year, is performing better than initially expected.

The company said customer demand for the processor now exceeds $2 billion across fiscal 2027 and 2028, and it has already shipped the product to multiple customers.

Oracle has agreed to purchase the new chip, Reuters reported, although Arm did not disclose the size of the agreement.

The company also said it has secured enough supply capacity to support more than $1 billion worth of chip shipments, reflecting improving manufacturing availability.

Analysts remain optimistic
While Arm maintained its long-term outlook, Jefferies analysts project sales from the company's new chip could reach $18 billion in fiscal 2031, above Arm's own forecast of $15 billion.

Management did not revise its long-term projections during the earnings announcement, but continued strength in AI infrastructure spending suggests the company remains well positioned to benefit from growing demand for power-efficient processors used in cloud computing and next-generation AI applications.