ARM: Major players "hold back", and the sky-high valuation cools down first?

ARM (ARM.O) released its Q1 FY2027 financial results (ended June 2026) in the US after-hours trading on the morning of July 30, 2026 Beijing time, with the key points as follows:

1. Key Metrics: ARM posted revenue of USD 1.29 billion this quarter, up 22% year-on-year, reaching the market expectation of USD 1.26 billion, driven by the simultaneous growth of both the licensing business and royalty business. The company's gross margin stood at 97.2%, remaining at a relatively high level.

2. Specific Business Performance: The revenue proportion of License and Royalty is close to 1:1.

a) License business revenue hit USD 570 million this quarter, up 23% year-on-year, which is close to the full-year growth guidance (20%) previously given by the company.

b) Royalty business revenue reached USD 720 million this quarter, up 22% year-on-year, mainly driven by the growing demand from data center and other related businesses.

Driven by the accelerated volume release of ARM architecture server chips from mainstream supercomputing manufacturers, the royalty revenue of the data center segment maintained a year-on-year growth of more than 100% this quarter.

3. Core Indicators: ① Annual Contract Value (ACV), $Arm(ARM.US) posted an ACV of USD 1.73 billion this quarter, up 4.3% quarter-on-quarter, and the estimated incremental revenue brought by new contracts in this quarter is about USD 280 million; ② Remaining Performance Obligations (RPO), the company will no longer disclose this indicator starting from this quarter.

4. Operating Expenses: The company's R&D expenses for this quarter were USD 840 million, up 29% year-on-year. The continuous increase in R&D expenses is mainly due to the company's increased investment in R&D of next-generation architectures, computing subsystems and AGI CPU product lines to cover more complex computing scenarios.

With the continuous rise of R&D expenses, sales and administrative expenses, the company's core operating margin dropped to around 7% this quarter.

5. Next Quarter Guidance: ARM expects revenue for the second quarter of FY2027 to be between USD 1.33 billion and USD 1.43 billion, with the midpoint of the range (USD 1.38 billion) up 21.6% year-on-year, in line with market expectations (USD 1.35 billion); the company expects Non-GAAP EPS to be between USD 0.43 and USD 0.51, consistent with market expectations (USD 0.45).

Dolphin Research's Overall View: The results are "unremarkable" and cannot support the "high valuation" belief

ARM's performance this quarter is not outstanding. Compared with the gross margin that has remained at a high level (97%+) for a long time, the company's performance on the revenue side and expense side is more important.

The company delivered a 22% growth this quarter, which is quite unremarkable, basically in line with market expectations. It is worth noting that the company's R&D expenses, sales and administrative expenses increased significantly this quarter, pushing the operating expense ratio to around 90%. In short, even though the company's current gross margin reaches 97.2%, its core operating margin is only about 7%.

Compared with the current performance, the market pays more attention to three core indicators: the company's guidance, Annual Contract Value and Remaining Performance Obligations:

1) Management Guidance: The company expects next quarter's revenue to be USD 1.33-1.43 billion, in line with market expectations (USD 1.35 billion). Among them, the License business will grow by around 30% year-on-year, and the Royalty growth rate will drop to around 13%.

Dragged down by the rising storage prices in the mobile phone sector, the company lowered the full-year Royalty growth rate for FY2027 to around 18% (previous guidance was 20%); the growth of the License business offset the decline in royalty revenue, so the full-year growth rate will not slow down.

2) Annual Contract Value (ACV): It is a forward-looking indicator for next quarter's revenue. The company's ACV this quarter is USD 1.73 billion, a slight 4.3% increase quarter-on-quarter. Combined with the company's revenue performance this quarter, Dolphin Research estimates that the amount of revenue converted from old contracts into this quarter's revenue is about USD 415 million, and the total of "new contracts recognized in this quarter's revenue + this quarter's Royalty revenue" is about USD 870 million.

As for the Remaining Performance Obligations (RPO), the company will no longer disclose this indicator starting from this quarter.

Among ARM's existing businesses, the company has both benefited and suffered losses in this round of AI boom.

On the one hand, the adoption rate of ARM architecture in the computing power market has increased significantly, which allows the company to directly enjoy the dividends of this round of AI development; on the other hand, the AI boom has pushed storage prices up sharply, bringing obvious pressure to traditional mobile phone, PC and other manufacturers, which eventually led the company to lower its full-year Royalty guidance this time.

Apart from its existing businesses, the company also hopes to directly enter the data center CPU market to create greater growth space for itself. The company's first product was launched in March and has been delivered to multiple customers, and the company also plans to launch the second-generation ARM AGI CPU in 2027. At present, the company announced that the related demand has exceeded USD 2 billion (maintained, no upward adjustment), and the company has locked in USD 1 billion of manufacturing capacity (FY2027 - FY2028).

With a growth rate of only over 20%, the market is willing to give ARM a PE ratio of more than 100 times, which mainly values the company's future growth potential, that is, sustained high growth to digest its valuation. Against the backdrop of the fragile AI industry chain, the market will also have concerns about the company's subsequent high growth, not to mention that the company has lowered its full-year guidance for Royalty revenue. 

As for ARM's CPU business, it has not yet generated revenue, and it is expected to start contributing significant revenue in the third quarter of FY2027. The company expects the gross margin of its first product to be only 35%-45% (the company's operating expense ratio has reached 90%), which means that the CPU business will not be "profitable" at the initial stage.

Overall, in the current volatile market environment, ARM's "high valuation" needs "super strong performance" to support it. However, the company's financial report this time only delivered "in-line with expectations" performance, lowered the full-year guidance for some businesses, and did not raise the demand outlook for its new CPU business, which will definitely make the market "disappointed".

Microsoft no longer raises its capital expenditure and gets a "reward" from the market. This is like a "domino effect". If more large manufacturers choose to adopt "prudent investment", it will undoubtedly directly affect the "growth potential" of the AI industry chain. When the market shifts its focus from "growth" to "certainty", ARM with a "high valuation" will hardly be favored by the market.

The following are the financial results of ARM and related data charts from Dolphin Research:

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