Goldman Sachs: ARM licensing revenue boosts quarterly results, while weak royalties and chip gross margins constrain the outlook

What drove the quarterly earnings beat?

ARM’s fiscal 2027 second-quarter revenue was 1.443 billion dollars, above the market expectation of 1.377 billion dollars; earnings per share excluding stock-based compensation expense were 0.52 dollars, compared with the market expectation of 0.48 dollars.
Licensing and other revenue reached a record 773 million dollars, up 50% year over year. It was about 100 million dollars above the company’s expectations and also exceeded the market expectation of 667 million dollars. Customers accelerated their acquisition of long-term rights to use ARM technology, driving the growth in this revenue.
The company added 3 comprehensive technology access agreements, bringing active subscriptions to more than 60; it also signed 4 new compute subsystem licenses in the data-center and smartphone markets.

Royalty revenue for the quarter was 670 million dollars, below the market expectation of 708 million dollars. Growth in cloud AI and physical AI did not offset weakness in edge AI, while rising memory prices continued to weigh on smartphone demand.
Management expects pressure in the smartphone market to persist in the near term and guided to low-single-digit year-over-year growth in royalty revenue for the third quarter of fiscal 2027, in line with market expectations. The midpoint of the company’s revenue guidance for the quarter is 1.54 billion dollars, and the midpoint of its earnings-per-share guidance is 0.56 dollars, also broadly in line with market expectations.

Management said demand for AGI CPUs continues to strengthen and that it has received purchase orders from multiple customers, with the first commercial deliveries planned for the fourth quarter of fiscal 2027.
Over the past 90 days, a more diversified customer base and additional supply have increased management’s confidence in the company’s target of generating AGI CPU revenue totaling up to 2 billion dollars across fiscal 2027 to 2028, while it continues to expand capacity.

Goldman Sachs raised its fiscal 2028 CPU revenue forecast from 1 billion dollars to 1.5 billion dollars, raised its licensing revenue forecast and lowered its royalty forecast; its total revenue forecast for that fiscal year rose from 8.01 billion dollars to 8.674 billion dollars.
The higher revenue forecast did not translate proportionately into profit: Goldman Sachs lowered its fiscal 2028 gross margin forecast, excluding stock-based compensation expense, from 90.9% to 87.1%, while raising its earnings-per-share forecast only from 2.95 dollars to 3.00 dollars.
Goldman Sachs maintained its Sell rating and 160-dollar 12-month price target, citing near-term pressure on the royalty business, an unclear competitive advantage in chip manufacturing relative to peers, and a high valuation relative to peers. The firm could take a more positive view if royalty growth accelerates significantly or the scale of chip manufacturing becomes clearer.