Arm Stock Drops 8% Despite 25% Royalty Revenue Rise and $1 Billion Revenue Milestone

Arm Holdings, listed on NASDAQ under the ticker ARM, has reported exceptional results for the first quarter of its fiscal year 2026, ending on June 30, 2025. The company announced a quarterly revenue exceeding $1 billion, marking the second consecutive quarter to achieve this milestone. Royalty revenue soared by 25% year-on-year, reaching $585 million, largely attributable to the increasing adoption of Armv9 architecture and the deployment of Arm-based chips in data centers.

The Arm Compute Subsystems (CSS) have significantly contributed to this growth by reducing development costs and time-to-market for Arm’s partners. Innovations like the Zena CSS for automotive markets have seen immediate success, securing design wins and engaging with a substantial proportion of global automotive OEMs. Noteworthy users of Arm's automotive platform include leaders like Tesla, Mercedes-Benz, and Honda. Arm’s strategic initiative to capitalize on AI-driven workloads in the automotive sector further reinforces its market presence.

During the quarter, Arm secured three additional CSS licenses, including two tailored for datacenter chips and one for personal computers, reflecting robust demand. With 16 CSS licenses across 10 companies, Arm is cementing its foundation in these critical areas of computing.

A formidable rise has been seen in enterprises running datacenter workloads on Arm Neoverse-based chips, witnessing a 14-fold increase since 2021. Leading technology firms such as Google and Microsoft have incorporated Arm-based Grace Blackwell AI superchips to enhance performance and efficiency, with major players including AWS and Oracle using this technology to handle production workloads.

In the smartphone sector, prominent OEMs are integrating Arm's mobile platform in their latest devices and silicon designs. Xiaomi, with its XRING O1 silicon, and Samsung's Galaxy Flip 7 utilizing the Exynos 2500 chipset, showcase the implementation of Arm's CSS platform for mobile applications. Moreover, a major smartphone OEM has committed to integrating multiple future generations of Arm GPUs to boost AI and graphic capabilities in flagship smartphones through 2030.

In the realm of AI, Arm’s leadership continues to expand with the Arm Ethos-U85 NPU, which enhances performance and energy efficiency, providing powerful AI capabilities for IoT, drastically improving edge AI workloads and enabling high-tech applications like image recognition.

Arm Scalable Matrix Extension (SME2) is advancing AI workloads on Armv9 CPUs without requiring existing app code rewrites due to extensive Arm KleidiAI integrations, offering developers automatic access to enhanced performance and efficiency.

The company prides itself on an ecosystem comprising over 22 million software developers and 9 million apps running on Arm, indicating more than 80 percent reach of the global software development community.

In financial metrics, Arm reported an adjusted EPS of $0.35, an increase of 13% year-on-year. Revenue climbed to $1.05 billion, meeting previous forecasts, while royalty revenue marked a rise of 25% despite a slight decrease in license and other revenues by 1%. Adjusted gross margin improved by 50 basis points to 97.9%, although net income declined by 42% to $130 million, with significant increases noted in operating cash flow, free cash flow, and research and development expenditures.

CEO Rene Haas emphasized Arm’s pivotal role in AI workloads, stating that the company delivers unmatched performance and energy efficiency across its platforms. Strengthening royalty revenue illustrates Arm's growing influence across various sectors.

Looking ahead, management has outlined expectations for revenue to be between $1.00 billion and $1.10 billion in subsequent quarters, fueled by continued demand for AI-related products. The strategic focus on Compute Subsystem licenses and the development of AI-driven automotive technologies underline Arm's commitment to sustaining growth.

Despite the financial accomplishments, Arm shares experienced volatility, dropping 8% amidst broader tech stock surges, attributed to subsequent quarter forecasts not aligning with investor expectations. Nonetheless, Arm’s robust growth in royalty revenue and strategic development across key sectors provides an optimistic outlook for the company's long-term trajectory.