AMD's earnings beat expectations and surged, while Arm's earnings also beat expectations but plunged after hours—why? Upon closer inspection, it comes down to strong demand, weak supply, and slow execution. 1. In the latest quarter, revenue grew 20.2% year-over-year to $1.49 billion, and adjusted EPS came in at $0.60—both exceeding expectations. For the next quarter, revenue is forecast at approximately $1.29 billion, with adjusted EPS between $0.36 and $0.44—all also above prior estimates. Revenue and profitability appear solid. 2. Examining the business segments: - Licensing revenue significantly exceeded expectations at $819 million, up 29% year-over-year, far surpassing analyst estimates of $781 million. The company attributed this to strong demand for next-generation chip architectures and deep strategic partnerships with customers. - In contrast, royalty revenue was slightly weak: $671 million, up 11% year-over-year, but below market expectations of approximately $690–693 million. Weak royalty performance typically indicates sluggish shipments in certain end markets; the company cited smartphones as the primary drag. 3. To understand Arm’s business model: - Licensing revenue consists of upfront or installment fees paid by customers (e.g., Qualcomm, Apple, NVIDIA) ranging from millions to tens of millions of dollars to obtain Arm IP design files, usage rights, and technical support. This money is collected immediately and reflects customers’ current commitment to Arm architectures and their future product roadmaps. Only after paying the licensing fee can customers begin designing their own chips based on Arm IP. - Royalty revenue is a recurring fee collected per chip shipped—typically 1–2% of the chip’s average selling price (ASP), or a fixed per-unit fee (higher for advanced architectures like Armv9 or CSS). There is typically a 2–3 year (or longer) lag between chip design completion, tape-out, mass production, and actual shipment. This revenue is collected continuously as long as chips are sold. - These are two entirely separate charges: licensing is “buying the blueprint or entry rights”; royalties are “revenue sharing based on volume.” A customer must pay both to legally produce and sell chips using Arm IP. Therefore, the relationship is: Large licensing deals → indicate customers are committed to mass-producing Arm-based chips over the next few years → royalties will scale significantly only 2–3 years later. Thus, strong licensing growth signals that major clients are still expanding their investment in the Arm ecosystem. 4. This earnings report reveals a shift in business mix: Previously, royalties accounted for 50–60% of revenue, while licensing made up 30–40%. Now, licensing revenue has surpassed royalties. What does this shift mean? It reflects that smartphone-related royalty revenue has been depressed—but over the past quarter, demand for new Arm IP licenses surged dramatically. This surge is almost certainly driven by demand for AI CPUs. As these customers begin shipping chips in the future, Arm’s royalty revenue will rise accordingly. Strong licensing growth confirms that major clients continue to expand their investment in the Arm ecosystem. 5. Regarding Arm’s most anticipated product—its self-developed AGI CPU: Management noted that demand for energy-efficient CPUs in AI data centers continues to grow, effectively offsetting short-term pressure from smartphones. The company also disclosed that customer demand for its AGI CPU for fiscal years 2027–2028 has already exceeded $2 billion. Recall that in March, when Arm first announced its AGI CPU, it projected only $1 billion in revenue for FY2027–2028. This means demand has doubled—clearly a positive signal. But here’s the issue: Despite this surge in demand, Arm did not raise its overall revenue guidance—citing uncertainty over whether supply chains can meet demand. The core problem remains supply constraints, which are limiting near-term shipment volumes. In short: AGI CPU demand is extremely strong—but supply limitations mean the translation of this robust demand into actual revenue may lag behind market expectations. This may explain the post-earnings sell-off. Overall, Arm’s earnings reveal strong downstream demand for IP licensing and robust market appetite for its AGI CPU. However, short-term supply constraints have created a situation of strong demand but slow execution. Coupled with recent price appreciation and a significantly elevated P/E ratio, investor concerns are understandable. Yet the core business growth remains intact. After this correction, it may present a compelling opportunity.