Arm's record $1.44B quarter still got sold — royalties miss, shares drop 13%
Arm reported its best second quarter ever on November 4 — revenue of $1.44 billion, up 27% — but royalties of $670 million came in below the roughly $721 million analysts expected, net income fell 45%, and the shares dropped 13.08% on November 5. Licensing surged 50%, pointing to future royalties, and Amazon's Graviton commitments grew more than 20 times.
The News
Arm reported on November 4 its best second quarter ever. Total revenue for fiscal Q2 FYE27 — the quarter ended September 30 — came in at $1.44 billion, up 27% from a year earlier. It was the fifth straight quarter in which Arm's growth topped 20%. Licensing and other revenue jumped 50% to $773 million. Arm calls licensing a leading indicator of future royalties: chipmakers pay up front to use Arm's designs, and the royalty payments follow later, every time a chip ships. Royalty revenue itself was $670 million, up about 8% from a year earlier.
The market sold the print anyway. Royalties came in below the roughly $705–721 million analysts had expected (estimates vary by provider), and GAAP net income — profit after all costs, counted under standard accounting rules — fell 45% to $130 million, from $238 million a year earlier. That comparison is flattered by a $131 million year-ago gain on the Artisan disposal dropping out; GAAP operating income actually rose to $201 million from $163 million. Arm's shares fell 13.08% on November 5, closing at $166.72. The sell-off came even though the quarter beat the broader consensus: revenue of $1.44 billion against about $1.38 billion expected, and adjusted earnings per share of $0.52 against $0.47 expected. Adjusted earnings strip out one-off items to show the underlying run rate. Arm guided third-quarter revenue at about $1.54 billion, plus or minus $50 million.
The forward story is where Arm wants investors to look. The company said its confidence has increased in up to $2 billion of revenue from Arm AGI CPUs — processors built for artificial general intelligence workloads — over fiscal years 2027 and 2028, with the first commercial deliveries on track for the fourth quarter of fiscal 2027. Amazon's Graviton revenue commitments — the promises behind Amazon's own Arm-based server chips — grew more than 20 times year over year. And Arm's partners shipped more than 10 billion Arm-based chips in the quarter. Note: this is a November 4 earnings report that earlier runs missed — a catch-up, not a fresh announcement.
Licensing jumped 50% to $773 million — but royalties grew only about 8% and missed what analysts expected.
Why It Matters
Licensing and royalties are two halves of the same machine, and the quarter showed both at once. Licensing is the upfront fee a chipmaker pays to use Arm's designs; royalties are the small payment Arm collects on every chip that ships. When licensing jumps 50%, it usually means more chips — and more royalties — are coming down the line. That is why Arm calls it a leading indicator. The problem this quarter is that the royalties investors could see today, $670 million, grew only about 8% and missed what analysts expected. The future looked strong; the present looked soft.
The profit drop is the other half of the sell-off — but it needs its context. Net income fell 45% even as revenue hit a record, largely because the year-ago quarter included a $131 million one-off gain on the Artisan disposal; underlying GAAP operating income actually rose to $201 million from $163 million. The sell-off was about the royalty miss, not runaway costs. For a company whose shares had been priced for smooth growth, a royalty miss plus a profit drop was enough to send the stock down 13% in a day — even on a quarter that beat the headline consensus. The shares did steady: they closed Friday, November 6 at $174.62, up 4.74% on the day, recovering part of the drop.
Analyst's Take
Our call is Mixed. The quarter itself was a record, the licensing pipeline points to more royalties ahead, and the AGI CPU target and Graviton commitments give Arm a real growth story beyond phones. But the royalty miss and the 45% profit drop are exactly the numbers that decide whether the growth is paying off right now, and the market answered that question with a 13% fall. A record quarter that gets sold is a reminder that investors buy the trend in the recurring revenue, not the headline.
What to watch: third-quarter revenue against the roughly $1.54 billion guide; whether royalty growth re-accelerates as the licensing boom converts into shipped chips; and the first AGI CPU deliveries in the fourth quarter of fiscal 2027. If royalties catch up with licensing, the November 5 sell-off will look like an overreaction. If they do not, the market will ask harder questions about the cost of Arm's growth.
Are you bullish or bearish on this story?
By The Numbers
FAQ
Why did Arm's stock fall on a record quarter?
Because the numbers investors care most about disappointed. Royalty revenue — the money Arm collects on every chip that ships — came in at $670 million, below the roughly $705–721 million analysts expected, and GAAP net income fell 45% to $130 million — though that comparison includes a $131 million year-ago one-off gain dropping out, and operating income actually rose. A record headline was not enough to offset a miss in the recurring revenue.
What is the difference between licensing and royalty revenue?
Licensing is the upfront fee a chipmaker pays to use Arm's designs. Royalties are the small payment Arm collects on every chip that ships using those designs. Licensing comes first, so a jump in licensing usually means more royalties later — which is why Arm calls it a leading indicator of future royalties.
What are Arm AGI CPUs?
They are processors Arm is building for artificial general intelligence workloads — the heavy computing behind advanced AI systems. Arm says it has growing confidence in up to $2 billion of revenue from these chips over fiscal years 2027 and 2028, with the first commercial deliveries on track for the fourth quarter of fiscal 2027.
What is Graviton, and why does it matter to Arm?
Graviton is Amazon's own line of server chips, built on Arm designs, that power Amazon Web Services. Arm said Amazon's Graviton revenue commitments grew more than 20 times year over year — a sign that one of the world's biggest cloud operators is betting harder on Arm-based chips.
What is Arm guiding for next quarter?
Arm guided third-quarter revenue of about $1.54 billion, plus or minus $50 million. That would be another strong quarter, but investors will watch whether royalty growth re-accelerates as the licensing boom turns into shipped chips.
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Source: Arm