Arm Earnings: Can Data Center Growth Offset Mobile Headwinds?
Global semiconductor IP leader $Arm Holdings(ARM)$
Recently, the market has hyped the narrative of a server CPU shortage, triggering a rally in $Advanced Micro Devices(AMD)$
Core Financial Indicators
– Revenue: Consensus estimate is $1.23 billion, up 25% YoY. Previous guidance was $1.23 billion.
– GAAP Gross Margin: Consensus estimate is 97.7%, an increase of 0.5 percentage points YoY. This continues to lead most companies globally.
– GAAP Operating Income: $246 million, up 41% YoY. Non-GAAP Operating Income: $488 million, up 10% YoY. Previous guidance was $474 million.
– GAAP Net Income: $232 million, down 8% YoY. Non-GAAP Net Income: $438 million, up 5% YoY. Previous guidance was $438 million.
Three Things to Watch
Market Hype on Server CPU Shortage: Can Arm Server Royalty Revenue Continue Doubling?
The Arm Neoverse CPU platform has now deployed over 1 billion CPUs, including $NVIDIA (NVDA.US)$ Grace, $Amazon (AMZN.US)$ AWS Graviton, $Alphabet-C (GOOG.US)$ Axion, and $Microsoft (MSFT.US)$ Cobalt. It is expected that nearly 50% of new hyperscaler server CPU chips in 2025 will be Arm-based. In terms of revenue mix, data centers account for 10% of royalty revenue, and management has indicated this will rise to 15% to 20% in FY26.
Beyond contributing license revenue, data center server CPUs generate rapidly growing royalty revenue based on shipment volume. Last quarter, data center Neoverse royalty revenue more than doubled YoY. We need to see if this strong growth rate can continue this quarter.
Mobile Shipments Face Downward Expectations: Can Arm V9/CSS Support Bucking the Trend?
Although global smartphone shipments are expected to grow only 2% in 2025 according to Counterpoint data, Arm has still managed to achieve double-digit growth in mobile royalty revenue. This is driven by businesses with higher royalty rates, such as Arm V9 (which accounts for over 30% of royalty revenue) and CSS.
Historically, the royalty rate for Arm V8 was about 2.5% to 3% of the chip ASP. In contrast, Arm V9 is about 5%, the first-generation CSS reached about 10%, and the second-generation CSS is expected to exceed 10%. However, the global mobile market in 2026 faces a severe hit from skyrocketing memory prices. If shipments decline significantly, it will inevitably drag down Arm's royalty revenue to some extent since mobile accounts for 45% of the total. Management's response to this risk requires close attention.
Will Management Provide Full-Year Guidance?
The market has long criticized Arm, noting that its biggest problem is low growth while its biggest advantage is high certainty. Management's previous refusal to provide full-year guidance caused the market to lose confidence, as management cited fears that the range would be too wide. Additionally, the stock is suppressed by sentiment regarding SoftBank's ongoing need to sell down stakes for liquidity.
However, thanks to the doubling of data center royalty revenue last quarter and optimistic guidance on its significantly increased share of total revenue, the market began to believe Arm could also ride the AI wave. The market still hopes to see management provide full-year guidance to boost investor confidence.
Option Market Signals
Ahead of Arm's highly anticipated earnings report, the options market is signaling elevated expectations with implied volatility sitting at 62.79%, well above the 40.27% historical volatility and ranking in the 70th percentile. The put/call ratio stands at 1.18 with total open interest of 775.85K contracts, suggesting a slight defensive tilt among market participants.
Looking at the February 6 weekly expiration, call volume is heavily concentrated around the $120 strike with over 8,000 contracts traded, indicating bullish bets on a potential post-earnings breakout, while put open interest clusters in the $95 to $107 strike range, reflecting downside hedging activity as traders brace for what could be a volatile reaction to the chipmaker's quarterly results.
Summary
Arm is constrained by weakness in the mobile market, but the stock price has likely already priced this in sufficiently. The explosion of the data center business remains the deciding factor for whether earnings can beat expectations.
It is worth noting that a review of the past 9 quarters shows the stock closed higher on earnings day only twice.
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