ARM: Tech giants "pull back", sky-high valuation to "cool down" first?

ARM (ARM.O) released its FY2027 Q1 earnings report (ending June 2026) after the US stock market close on the morning of July 30, 2026, Beijing time. Key highlights are as follows:

1. Key Data: This quarter, ARM reported revenue of $1.29 billion, up 22% year-on-year, meeting market expectations ($1.26 billion), driven by growth in both the license and royalty businesses. The company’s gross margin was 97.2%, maintaining a relatively high level.

2. Detailed Business Overview: License and royalty businesses account for nearly a 1:1 ratio.

a) License revenue this quarter was $570 million, up 23% year-on-year, in line with the company's previous full-year growth guidance (20%).

b) Royalty revenue this quarter was $720 million, up 22% year-on-year, mainly driven by increased demand related to data center and other businesses.

With accelerated ramp-up of ARM architecture server chips among mainstream supercomputing vendors, data center royalty revenue saw more than double year-on-year growth this quarter.

3. Core Indicators: ① Annual Contract Value (ACV), $Arm(ARM.US) reported an ACV of $1.73 billion this quarter, up 4.3% quarter-on-quarter. It's estimated that incremental revenue from new contracts this quarter was about $280 million; ② Remaining Performance Obligations (RPO), the company will no longer disclose this figure starting this quarter.

4. Operating Expenses: This quarter, R&D expenses were $840 million, up 29% year-on-year.The continued increase in R&D expenses is mainly due to the company's increased investment in next-generation architecture, compute subsystems, and AGI CPU product lines to support more complex computing scenarios.

With R&D and SG&A expenses continuing to rise, the company's core operating profit margin fell back to around 7% this quarter.

5. Guidance for Next Quarter: ARM expects FY2027 Q2 revenue of $1.33-1.43 billion, with the midpoint ($1.38 billion) representing 21.6% year-on-year growth, in line with market expectations ($1.35 billion); The company's Non-GAAP EPS guidance is $0.43-0.51, consistent with the market expectation ($0.45).

Overall View by Dolphin: “Mediocre” Results, Unable to Sustain “High Valuation” Expectations

ARM's results this quarter were not great. Compared to its long-term high gross margin (over 97%), the company's revenue growth and expense trends are more significant.

The company reported 22% growth this quarter, which is pretty lackluster, basically meeting market expectations. Notably, this quarter saw substantial increases in both R&D and SG&A expenses; the operating expense ratio reached about 90%. In short, even with a current gross margin of 97.2%, the core operating profit margin sits at just around 7%.

Compared to current performance, the market is more focused on the company’s guidance, ACV, and RPO:

1) Management Guidance: The company expects Q2 revenue of $1.33–1.43 billion, in line with market expectations ($1.35 billion). Among this, license business (License) is guiding for about 30% y/y growth while royalty growth will fall back to around 13%.

Due to rising storage prices in the smartphone segment, the company has lowered full-year royalty (Royalty) growth guidance to about 18% (previously 20%); the upside in the license business offsets the decline in royalty revenues so full-year growth does not slow.

2) ACV: a leading indicator for next quarter’s revenue. This quarter, the company’s ACV reached $1.73 billion, a small increase of 4.3% q/q. Based on current revenue conditions, Dolphin estimates that revenue recognized from old contracts this quarter was about $415 million, while “revenue from new contracts recognized + Royalty revenue” in this quarter totaled about $870 million.

As for RPO, the company will no longer disclose this starting this quarter.

Within ARM’s legacy business, the ongoing AI boom has brought both positives and negatives.

On one hand, ARM architecture adoption in the computing power market has greatly improved, allowing the company to directly benefit from this round of AI growth; on the other, the AI boom has driven up storage prices significantly, putting pressure on traditional phone and PC makers, leading the company to lower its full-year royalty guidance.

Beyond existing businesses, the company also aims to directly enter the data center CPU market, creating more room for growth. Its first product was launched in March and has already shipped to multiple customers; a second-generation ARM AGI CPU is planned for FY2027. The company has announced demand exceeding $2 billion (no increase), and has locked in $1 billion in manufacturing capacity for FY2027–FY2028..

With growth just over 20%, the market is willing to assign a PE ratio over 100 mainly because of faith in ARM’s growth potential—i.e., consistently high growth to absorb the valuation. However, against the backdrop of a fragile AI supply chain, the market has doubts about future high growth, especially as ARM has cut full-year guidance for its royalty business.

As for ARM’s CPU business, it has yet to contribute revenue, and isn’t expected to make a significant impact until FY2027 Q3. The company estimates the gross margin for the first product will be only 35%–45% (with an operating expense ratio as high as 90%), meaning the CPU business “won’t be making money” at the start.

Overall, amid a volatile market, ARM’s “high valuation” requires “extra-strong performance” to sustain. This report merely meets expectations, and, with downward revision of certain annual guidance and no upward revision in new CPU business demand outlook, it will inevitably “disappoint” the market..

Microsoft no longer raised capital expenditures and received a “reward” from the market. This is like a “domino effect.” If more major firms also turn cautious on investment, it would directly impact growth opportunities across the AI industry chain. As focus shifts from “growth” to “certainty,” high-valuation ARM would struggle to gain market favor.

Following are ARM’s earnings and related data charts from Dolphin:

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