Morgan Stanley: Arm earnings preview puts CPU revenue guidance in focus

Why are expectations for the September quarter short on surprises?

Arm will report its fiscal 2027 second-quarter results on 4 November. Morgan Stanley expects quarterly revenue of approximately $1.38 billion, broadly in line with market consensus, and adjusted earnings per share of $0.47, slightly below the consensus of $0.48.
The bank expects licensing revenue of $670 million and royalty revenue of $703 million, up 30% and 13% year on year, respectively, consistent with the direction of growth in the company’s guidance last quarter.
The royalty mix faces offsetting forces: cloud AI demand and data-center construction support infrastructure revenue, while weak handset shipments weigh on the client business, which still accounts for most royalty revenue. The company previously lowered its full-year royalty growth expectation from around 20% to a rate near the high single digits, and expected licensing revenue to at least offset that slowdown.

Based on Morgan Stanley’s discussions with investors, the market is watching whether Arm will formally raise fiscal 2028 CPU revenue guidance from over $1 billion to around $2 billion.
Management previously said CPU demand had exceeded $2 billion, but wafer and material constraints meant it could supply only around $1 billion at the time. Last quarter, the company said it had secured capacity for the $1 billion opportunity in fiscal 2027 and 2028, and originally planned a formal update when it reported fiscal third-quarter results for 2027. Based on the CEO’s recent comments on securing capacity, Morgan Stanley believes an increase to $2 billion is possible.

CPU and other new chip businesses require continued investment. Morgan Stanley expects non-GAAP operating expenses of $782 million for the September quarter, up 7% sequentially; testing and cloud demand could also push expenses above market expectations.
The company expects the first-generation CPU gross margin to be in the high 30% to low 40% range, rising to around 50% over the next few years. Morgan Stanley expects Arm’s overall gross margin to fall from 95.7% in fiscal 2027 to 88.0% in fiscal 2028, while its adjusted operating margin rises from 44.9% to 45.7% over the same period.
The bank forecasts fiscal 2028 revenue of $8.887 billion and adjusted earnings per share of $3.34, respectively 9% and 11% above market consensus as of 30 October. Sustained improvement in operating leverage while investing in new chip development is one condition for a more positive view of the company.

The bank maintains its Equal-weight rating and $212 price target on Arm. After the share price fell more than 25% in the prior month, it believes valuation better reflects fundamentals, but expects this earnings report mainly to confirm management’s previous statements and sees it as unlikely to catalyze the share price.
Regarding the accelerator product anticipated by some investors, Morgan Stanley believes a launch is possible, but more likely in calendar 2027 than alongside this earnings report.