Arm's Data Center Royalties Double, Eyes $2B Chip Revenue

Arm generated $1.44 billion in revenue in the second quarter of fiscal 2027, ending September 30, marking a 27% increase year-over-year and a record for a second quarter, according to results released by the company on November 4. Adjusted earnings per share rose 33% to $0.52. The key factor explaining this number lies in a specific line: data center royalties have doubled over the past year.

Total royalty revenue reached $670 million, an 8% increase, and fell short of analysts' estimates. The licensing revenue held the quarter steady, advancing 50% to $773 million, a record for that category. Shares dropped between 4% and 5% in after-market trading before recovering some losses.

More than Half of Major Hyperscaler Servers

Data center royalties are derived from the adoption of Arm-based CPUs in the clouds' own chips: Graviton at AWS, Axion at Google, Cobalt at Microsoft, in addition to Nvidia's platforms. According to the earnings call, Arm's share in servers among the major hyperscalers has surpassed 50%, with management projecting over 60% by the end of 2026. A year ago, data center royalties accounted for about 20%; the company states that this share will reach around one-third "soon," although likely not by the end of the year.

The concentration is the other side of the same coin. Amazon, Google, Microsoft, and Nvidia account for the majority of data center royalties, leaving Arm's fastest-growing revenue dependent on four purchasing decisions.

The In-House Chip

Rene Haas expressed increased confidence in reaching the target of up to $2 billion in accumulated revenue from the AGI CPU over fiscal years 2027 and 2028. This is Arm's first data center processor sold under its own brand, rather than merely licensing the design. According to the CEO, confidence has increased over the past 90 days, and sales could be larger if there were more supply capability; Arm states it has worked with TSMC and other suppliers to secure components. Purchase orders from various clients extend into late 2027, with the first commercial deliveries planned for the January-March 2027 quarter. Oracle Cloud Infrastructure plans to offer instances with the chip next year.

The target has been increasing. In May, Arm spoke of $2 billion in demand visibility, double the previously stated $1 billion. In March, Haas projected $15 billion in annual revenue from the chip by 2031.

Guidance in Line, Mobile Stalled

For the third fiscal quarter, Arm projected revenue of $1.54 billion, with a margin of $50 million either way, approximately 24% growth at the midpoint. This figure slightly exceeded the analysts' average of $1.53 billion, but fell short of more optimistic projections, close to $1.7 billion.

Royalties from "physical AI," automotive, and robotics grew 50%. Edge AI royalties, which include smartphones, remained stable, pressured by the same factor that affected Qualcomm's mobile guidance the same day: high memory costs reduce device volumes.

Three Markets, One Conflict of Interest

In the UK, where Arm is headquartered in Cambridge, the in-house chip changes the company's nature: from a neutral intellectual property provider to a direct competitor to some of its licensees. In Japan, SoftBank, Arm's parent, views the AGI CPU as a piece of its AI infrastructure thesis, with the chip's revenue entering the group's consolidated balance. In Taiwan, dependency on TSMC for manufacturing capacity mirrors the bottleneck limiting Nvidia, AMD, and the hyperscalers themselves.

This is the point the guidance does not resolve. The four clients who pay the most data center royalties to Arm are the same ones designing their own CPUs based on Arm’s designs, and the AGI CPU competes for space with Graviton, Axion, and Cobalt in the same racks. So far, Arm has managed to grow with both models simultaneously. The real test begins in 2027 when the first commercial deliveries will indicate whether hyperscalers will buy Arm’s chip beyond licensing its designs or treat it as just another supplier to negotiate down.