Arm Holdings plc

Thank you and welcome to our first quarter fiscal 27 earnings call. On the call are Rene Haas, Arms Chief Executive Officer and Jason Child, Arms Chief Financial Officer. Today's call contains forward-looking information about the company and its financial results. While these statements represent our best current judgment, our business is subjected to many risks and uncertainties that could cause actual results to differ materially. Important risk factors that may affect our business and future financial results are described in our annual report on Form 20F filed with the SEC. Arm assumes no obligation to update any forward-looking statements. We will also refer to non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in our shareholder letter. As can a discussion of certain projected non-GAAP financial measures that we are not able to reconcile without unreasonable efforts and supplemental financial information. Our earnings material are available at investors.arm.com and with that I'll turn the call over to Rene.

Thank you Ian and welcome everyone. Arm delivered a record first quarter and a strong start to fiscal 2027. Our results reflect growing demand for the Arm Compute platform as AI expands across cloud infrastructure, edge devices, and the physical world. Revenue reached $1.29 billion, up 22% year over year, driven by record first quarter licensing and royalty revenue. Royalty revenue grew 22% to $715 million. Licensing revenue grew 23% to $574 million, and non-GAAP EPS increased 29% to 45 cents above the high end of our guidance. AI is changing where and how compute happens. We're seeing that in the data center where the transition to ARM continues to accelerate. And we're seeing it beyond the data center as AI expands into PCs, smartphones and physical AI applications. Across each of these markets, customers are increasingly standardizing on the ARM compute platform. These trends are the driving demand for the ARM AGI CPU. We introduced the ARM AGI CPU in March to give customers another way to deploy the ARM compute platform. Since that time, we've made significant progress. Initial product has now been delivered to multiple customers, and we have secured the manufacturing capacity needed to support the $1 billion opportunity we outlined last quarter across fiscal 2027 and fiscal 2028. Demand now exceeds $2 billion as we continue to add new customers, including multiple customers in the US and China, while the overall value of our pipeline has continued to strengthen. We're also working closely with our manufacturing and supply chain partners to expand capacity. Our confidence in achieving upside to our $1 billion opportunity for the ArmAGI CPU business has increased in the past 90 days. This momentum is part of a much broader shift already taking place across their NeoVerse business. Data center royalties more than doubled year over year once again as adoption of Arm NeoVerse continues to expand. The pace at which Arm is becoming the CPU foundation for AI infrastructure is accelerating. Arm NeoVerse shipments have now surpassed 1.5 billion cores with most recent 500 million shipping in just the last nine months. where the first one billion took six years. The world's leading AI infrastructure providers continue to validate that trend. NVIDIA has now brought VERA into production. Built on ARM, VERA delivers up to 50% higher CPU performance and two times greater energy efficiency than comparable x86 systems and will serve as the CPU foundation for NVIDIA's next generation AI infrastructure. Google has stated that its ARM-based Axion CPU is a core component of its AI infrastructure strategy and the host CPU for its latest TPU AI systems. AWS announced plans to deploy tens of millions of Graviton 5 cores to power authentic AI workloads. Microsoft expanded Azure Cobalt 200 virtual machines built on ARM Neoverse CSS. Additionally, Qualcomm has also announced plans to enter the AI data center CPU market with ARM-based Dragonfly C1000. Each of these companies is approaching AI infrastructure differently, but they're all moving the same direction. ARM-based CPUs are becoming central to next generation AI infrastructure. IDC reported that spending on ARM-based accelerated server platforms has nearly doubled in the past two quarters and has now surpassed x86 platforms. We're witnessing both the rapid expansion of AI infrastructure and ARM's growing role within it. Our opportunity extends well beyond the data center. As AI moves into production, customers are increasingly focused on the economics of deploying AI at scale. Whether AI runs across the cloud, the edge or ultimately the physical world, Efficient compute is becoming just as important as model capability. Bringing AI closer to where data is created improves performance, reduces latency, enhances privacy, and lowers infrastructure costs. This is where ARM has always differentiated itself. The result is a new generation of computing devices spanning into two distinct categories. Efficient AI PCs designed for mobility and more powerful agentic systems capable of running sophisticated models locally. NVIDIA introduced RTX Spark, the first agentic PC built on ARM's compute subsystems, enabling sophisticated AI agents and larger AI models which can run locally. For on-the-go AI PCs, those same OEMs continue expanding the Windows on ARM ecosystem with new Snapdragon-powered AI PCs, While Google's continued investment in AI-enabled Chromebooks is broadening access to on-device AI. As AI drives the transition to the next generation of personal computing, arms opportunity continues to grow across an expanding range of AI-enabled devices. The same economics extends to the physical world. Vehicles, robots, industrial systems, and autonomous machines increasingly rely on efficient, secure, and real-time ARM-based compute to sense, reason and act autonomously. NVIDIA recently expanded its physical AI platform with Cosmos 3 and the Isaac Groot humanoid robotics platform powered by Justin Thor, which combines an ARM-based CPU with NVIDIA Blackwell GPU. ARM's software ecosystem continues to expand and now supports more than 22 million developers worldwide. During the quarter, ARM introduced Performix with support from Microsoft, MongoDB, Redis, and SAP, helping developers and AI agents analyze and optimize workloads running on ARM-based infrastructure. We also expanded our AI developer tools, including the ARM MCP server, which has surpassed 10,000 Docker downloads and integrates ARM's expertise into leading AI developer environments. From cloud infrastructure to PCs and physical AI, developers can build on the same ARM architecture and software ecosystem. Customers can deploy ARM through IP, compute subsystems or silicon, depending on what best fits your business. But in every case, they're building on the same ARM compute platform, software ecosystem and developer community. As AI becomes part of every cloud, every device and every sector, The industry is increasingly converging on a common compute platform. We believe that convergence will define the next decade of computing. AI is changing where and how compute happens, and ARM is at the center of it. With that, I'll turn it over to Jason.

Thank you, Rene. We have started fiscal year 27 with another strong quarter, delivering the highest first quarter revenue in our history. Total revenue grew 22% year-on-year to $1.29 billion. Royalty revenue grew 22% year-on-year to $715 million, also our highest ever figure for Q1. Once again, the largest driver of royalty growth was Cloud AI. Data center royalty revenue continues to more than double year-on-year, reflecting our sustained momentum across the market. This is being driven by the continued ramp of ARM-based server chips at all the major hyperscalers, alongside increasing deployments of data center networking chips, particularly DPUs and SmartNICs where Arm technology is deployed in nearly all leading products. Edge AI royalty revenue continues to grow despite a soft end market in smartphones. We continue to benefit from higher royalty rates as Arm B9 and compute subsystems continue to increase their penetration into smartphones, tablets, and other consumer electronic devices. These drivers more than offset the decline in smartphone sales due to higher memory prices. Physical AI also made a strong contribution to royalty growth, supported by the continued secular expansion of ADAS and autonomous systems built on ARM technology. Turning now to licensing. License and other revenue was $574 million of 23% year on year, also a record for Q1. Growth was driven by strong demand for next-generation architectures and deeper strategic engagements with key customers. This quarter, we signed multiple high-value agreements as existing customers renewed long-term licenses. Some of the world's largest hyperscalers, automotive and robotics companies, and handset OEMs all secured access to Arm's future roadmap for their next generation of products. Of the $574 million of license revenue, Our agreement with SoftBank for technology licensing and design services contributed $193 million. We expect a quarterly run rate for the rest of the year to be around $200 million. As always, licensing revenue varies quarter to quarter due to timing and size of high value deals. So we continue to focus on annualized contract value, or ACV, as a key indicator of the underlying licensing trend. ACV grew 13% year on year, maintaining strong momentum. This continues to be above our long-term expectations for license revenue growth. As Rene mentioned, customer demand for ARM AGI CPU remains very strong. In this quarter, even more customers have wanted to place orders with us. We've secured the manufacturing capacity needed to support the initial $1 billion opportunity, and we have made progress to secure additional supplies, as well as optimizing our customer mix and commercial terms. Our confidence in achieving more than $1 billion has increased in the past 90 days. We will provide an update at our Q3 results, which is when we will have better visibility of Q4 27 and fiscal 28. Turning to operating expenses and profits. Non-GAAP operating expense was $733 million of 18% year on year due to the ongoing R&D investment. This was about $27 million below our guidance due to timing as our spending plan for the year remains largely unchanged. We are expanding our engineering teams to support increasing customer demand while advancing the technologies that will underpin future growth, including next generation architectures, compute subsystems, and the R&D AGICP product family. Non-GAAP operating income was $531 million, resulting in a non-GAAP operating margin of about 41% of 200 basis points year-on-year. Non-GAAP EPS was 45 cents, driven by both higher revenue and slightly lower optics than expected. More importantly, even at these elevated levels of investment, we generated free cash flow of $665 million a quarter and $1.4 billion over the trailing 12 months, giving us the flexibility to continue to invest long-term growth. Turning now to guidance. For Q2, we expect revenue of $1.38 billion, plus or minus $50 million. At the midpoint, this represents revenue growth of about 22% year on year. We expect license and other revenue to be up about 30% year on year, and royalty revenue to be up in the low teens year on year. We expect our non-GAAP operating expense to be approximately $780 million, and our non-GAAP EPS to be $0.47, plus or minus $0.04. Looking ahead, we continue to see strong customer demand across our business. Combined with the expansion of our technology portfolio and deepening strategic customer relationships, this gives us confidence in our long-term growth outlook. With that, I'll turn the call back to the operator for Q&A.