ARM: With SoftBank as a backer, a 'hot commodity' in the AI chain?

ARM (ARM.O) released its financial report for the second quarter of fiscal year 2026 (ending September 2025) after the U.S. stock market closed on the morning of November 6, 2025, Beijing time. Key points are as follows:

1. Key Data: ARM achieved revenue of $1.135 billion this quarter, a year-on-year increase of 34.5%, slightly better than market expectations ($1.059 billion). The company's revenue increase of $80 million this quarter was equally contributed by the licensing business and royalty business, both of which grew this quarter. The company's gross margin was 97.4%, maintaining a high level above 97%.

2. Specific Business Conditions: Licensing and Royalty Revenue Remain Close to 1:1

a)$Arm(ARM.US) This quarter's licensing business revenue was $515 million, a quarter-on-quarter increase of $50 million. Previously, the company's single-quarter licensing revenue reached $600 million, mainly due to a nearly $250 million revenue recognition from the Malaysian government in that quarter. Excluding this special case, the company's licensing business shows an upward trend. The company added 3 fully authorized customers this quarter, reaching a total of 48, with a total customer base of 360.

b) This quarter's royalty business revenue was $620 million, a year-on-year increase of 20.6%, mainly driven by demand from data centers and smartphones. The increase in Neoverse (data center product line) patent fees and the launch of CSS products were the main drivers of the company's royalty business growth.

(Note: The CSS computing subsystem is a pre-assembled IP module that includes not only Arm CPU cores but also other IP parts, allowing enterprises to skip the integration phase and bring products to market faster)

3. Core Indicators: ① Annual Contract Value (ACV), the company's annual contract value this quarter was $1.6 billion, a quarter-on-quarter increase of 4.7%. It is estimated that the revenue increment brought by new contracts this quarter is about $250 million, showing steady growth; ② Remaining Performance Obligations (RPO), the company's remaining performance obligations this quarter were $2.25 billion, a slight quarter-on-quarter increase of 0.6%, below market expectations ($2.54 billion); ③ ACV/RPO ratio: This quarter's ACV/RPO was 0.71, maintaining an upward trend, indicating that the company's current order structure is more short-term oriented.

4. Operating Expenses: The company's R&D expenses this quarter were $690 million, a year-on-year increase of 36%. The continued increase in R&D expenses is mainly due to the company's intensified exploration of chiplets and complex SoCs to cover more complex computing scenarios. As the company's revenue growth rate is also 35%, the company's R&D expense ratio remains at 61%. The long-term high proportion of R&D expenses will directly affect the company's profit release, with the current net profit margin at 21%.

5. Next Quarter Guidance: ARM expects third-quarter fiscal year 2026 revenue to be $1.175-1.275 billion, with a midpoint of $1.225 billion, a quarter-on-quarter increase of 8%, better than market expectations ($1.11 billion); the company expects Non-GAAP EPS to be $0.37-0.45, better than market expectations ($0.35).

Dolphin Research's Overall View: Steady Performance, AI Chain's "Hot Commodity"

ARM's overall performance this quarter was quite good, with both revenue and profit exceeding market expectations, mainly benefiting from the rebound in both licensing and royalty businesses. Although the company's R&D spending is still increasing, the revenue growth rate has returned to 30%, ultimately driving the company's operating profit recovery.

Compared to the current performance, the market is more focused on the company's guidance, annual contract value, and remaining performance obligations:

1) Management Guidance: The company expects next quarter's revenue to be $1.175-1.275 billion, better than market expectations ($1.11 billion), with a midpoint of $1.225 billion, a quarter-on-quarter increase of 8%. Dolphin Research estimates that the quarter-on-quarter revenue increase next quarter will mainly come from the royalty business, as the next quarter is a relatively peak season for electronic product sales, and the royalty business will be driven by downstream shipments.

2) Annual Contract Value (ACV): A Forward Indicator of Next Quarter's Revenue. The company's annual contract value this quarter was $1.6 billion, a slight quarter-on-quarter increase of 4.7%. Combined with the company's revenue situation this quarter, Dolphin Research estimates that the amount of old contracts converted into this quarter's revenue is about $380 million, while "new contracts included in this quarter's revenue + this quarter's royalty revenue" totals about $750 million;

3) Remaining Performance Obligations (RPO): The company's remaining performance obligations this quarter were $2.25 billion, below market expectations ($2.5 billion). From the ACV/RPO ratio, the company's current orders are structurally more short-term, in line with the relatively urgent demand in the current AI market.

Considering the above three indicators, Dolphin Research believes that ARM's current operational performance is quite good, maintaining a steady upward trend. As for the only RPO not meeting expectations, given the steady growth of ACV, this "below expectation" is also acceptable. The high proportion of short-term orders also reflects the more urgent demand of the company's current customers in AI and other fields.

Considering ARM's current market value ($169.6 billion), corresponding to the company's fiscal year 2027 net profit of about 100 times PE (assuming revenue +28.8%, gross margin 98%, tax rate 13.3%). With the high growth of AI Capex, the company's future growth certainty is relatively high. In the context of x86 weakness, more manufacturers are willing to adopt the ARM architecture to develop their own chips. Due to the AI industry's prosperity and the company's unique "ecosystem positioning," the market generally gives the company a valuation consideration of nearly 100 times PE.

Regarding ARM's investment: ① In the short term, the company's financial report this time is still good, and although the data does not have an "explosive" performance, it also shows a steady upward trend; ② In the long term, as x86 gradually declines, major companies such as NVIDIA, Microsoft, Google, and Apple are all embracing the ARM structure. With the continuous growth of AI Capex, the market believes that the company can digest the current high valuation through continuous growth.

Overall, in the current situation of continuous heat in AI Capex, ARM has "uniqueness" and "relative certainty" in the entire AI industry chain. Although the company's performance this time is not "surprising," it is also developing steadily upward. Even with the current valuation of 100 times, as long as the "AI heat does not diminish" and "the company's performance does not bomb," the company's high valuation can still continue.

Additionally, it is worth noting that the company has a major backer—"SoftBank." SoftBank has been quite active in the AI market, including joining Stargate and additional investment in Open AI. If SoftBank leverages ARM's platform for another round of capital operations, it will bring greater imagination space to the company.

The following are Dolphin Research's charts on ARM's financial report and related data: