British central processing unit (CPU) designer Arm Holdings PLC (NASDAQ:ARM)’s second quarter as a Nasdaq-listed company brought in record quarterly revenues for the group, with earnings exceeding the top end of guidance.
Total revenues came to $824 million (£652 million), up 14% year on year, with royalty revenue up 11% and licensing revenue up 18%.
Arm receives royalties for every smartphone and device that incorporates its CPU architecture, while licensing revenues are generated by customers paying for access to Arm’s bank of software and intellectual property.
During the quarter, Arm signed five additional licensing agreements for its Total Access product, taking the total number of extant licences to 27, and added six net clients to its Flexible Access programme.
"Arm delivered another quarter of record revenues driven by continued adoption of the world’s most pervasive compute platform," said chief executive Rene Haas.
“More customers moving to higher-value Armv9 technology combined with market share gains in cloud server and automotive resulted in strong royalty growth. The AI wave drove licensing growth as these new devices require Arm’s performant and power-efficient compute platform."
Capital expenditure remains Arm’s Achilles heel. More than 50% of revenues went to research and development expenses alone, driven by a 20% increase in engineering headcount.
To partially offset this, Arm renegotiated the rate of share-based compensation.
But operating profit was still down 45% year on year to $134 million, representing a 16.3% operating margin.
Diluted earnings per share were down 55% to $0.08.
Non-GAAP free cash flow for the trailing 12 months was $724 million, up 63% year-over-year.
Arm sees future growth driven primarily through royalty revenues as the demand for advanced computing power increases.
Management believes Arm will increase its foothold in the automotive and cloud-computing sectors, while the latest Armv9 chip architecture will drive sales even further.
In the near term, the next quarter is expected to be another record setter, with revenues exceeding the previous communication guidance.
Artificial intelligence (AI) and large-language applications will drive demand for Arm’s CPU designs, said the group, with global tech players including Nvidia Corporation, Dell Technologies and Hewlett Packard Enterprises incorporating the Arm-based GH200 Grace Hopper Superchip.
In the core smartphone space, Google, Samsung, Vivo and Xiaomi all have announced new Arm-based smartphones that demonstrate generative AI and LLM capabilities.
Fourth-quarter revenue guidance is between $850 million and $900 million, with operating expenses expected to be around $490 million.
The market was overwhelmingly bullish on Arm’s latest results.
Shares are expected to open nearly 20% higher when the opening bell rings, bringing prices to a new record of $92.3.