ARM Holdings reported strong quarterly results after Wednesday's market close, driven by surging demand for AI data center chip designs. Both Q2 earnings and Q3 guidance surpassed analyst expectations, sending shares up 5% in after-hours trading.

**Key Financial Highlights for Q2:** - **Revenue:** $1.14 billion, up 34% YoY, beating estimates of $1.06 billion. - **Operating Profit:** Adjusted operating profit reached $467 million, above the $385.5 million forecast. - **Gross Margin:** Adjusted gross margin stood at 98.2%, slightly higher than the expected 97.9%. - **Net Income:** GAAP net income surged 122% YoY to $238 million, while non-GAAP net income rose 32% to $417 million. - **EPS:** GAAP EPS was $0.22, up from $0.10 a year ago. Non-GAAP EPS of $0.39 topped estimates of $0.33.

**Segment Breakdown:** - **Licensing Revenue:** $515 million, up 56% YoY, exceeding the $472 million consensus. - **Royalty Revenue:** $620 million, up 21% YoY, ahead of the $586 million estimate.

**Q3 Guidance:** - **Revenue:** Expected between $1.18 billion and $1.28 billion, above the $1.11 billion forecast. - **EPS:** Adjusted EPS projected at $0.41, higher than the $0.35 estimate.

ARM Holdings closed Wednesday at $160.19, with shares rising 5% post-earnings before paring gains. Despite a 30% year-to-date rally, the stock has lagged behind other AI-driven chipmakers.

**AI Transformation Underway** ARM's outperformance reflects early returns from its strategic shift toward AI data center solutions. Last quarter, the company announced plans to invest in developing full-fledged chips, signaling a pivot from its traditional IP-licensing model to direct competition with clients like NVIDIA and Amazon.

CEO Rene Haas emphasized strong demand across sectors, particularly data centers: *"The bottleneck in AI computing is power efficiency—and that’s where we excel."*

ARM’s **Compute Subsystems (CSS)**—more complete chip designs—are driving higher royalties, with adoption growth and broader AI spending underpinning optimistic forecasts. The company also noted its **Neoverse** data center line has doubled revenue.

**Data Center Momentum** ARM earns revenue from licensing its energy-efficient semiconductor designs and royalties per chip sold. Q2 royalty growth (21%) spanned smartphones, data centers, and automotive markets, while licensing revenue jumped 56% on high-value contracts.

ARM designs power nearly all smartphones globally and are gaining traction in data centers. TD Cowen estimates ARM-based chips generate $200 billion annually for manufacturers. The company projects ARM architecture will account for nearly 50% of hyperscaler CPUs by 2025.

Google’s **Axion** processor, using ARM designs, delivers 60% better performance than x86 alternatives at the same power.

**OpenAI’s Stargate Involvement** ARM’s earnings coincide with heightened investor focus on AI ROI. Majority owner SoftBank is deepening its AI bets, including participation in OpenAI’s **Stargate** project. Haas confirmed ARM’s role but withheld specifics on chip contributions.

Originally dominant in mobile, ARM’s power-efficient architecture is now pivotal as data centers prioritize energy constraints. The company is expanding design services for clients like Amazon and Google.