ARM just quietly crossed 50% CPU share at the hyperscalers and is doubling data center royalties, yet everyone's still treating it like a phone chip company. Are investors sleepwalking through the biggest architecture shift of the AI era that you posted, and would it have been slightly better if the situation were different?
Good morning, Ed. First off, the quarter was amazing for us. We had not only record revenue but record royalties: $1.224 billion in revenue, nearly $740 million in royalties. If you just stack that up, that's 27% year-on-year. Our data center business is exploding. We're up 100% year-on-year, probably north of 100% year-on-year. So to your question, no, the memory situation isn't really impacting ARM so directly. You might ask, why is that? Well, number one, we are spread across a lot of different businesses. As I said, the data center business is increasingly growing for us, and we think in a few years it'll be our largest business. Secondly, our products are used across the board. What we tend to see in memory shortages is the bottom end of the stack starts to get impacted, and that's actually lower royalty rates for us. So as a result, we don't get impacted very much. Short answer is no impact this quarter, and we raised our guidance for the next quarter because, as I said, we're just not seeing that kind of impact. I'm not denying that it's there, but for the ARM business, the impact is quite minimal.
Rene, thank you for that. Data center royalty revenue grown 100% year-on-year as you outlined. I get the same question for you from everyone, sell-side through the buy-side, which is: give me a specific year mark on the calendar when ARM goes from being handset to data center and it accounts for more of your business. Is that inflection point clear on your calendar at least?
It's very clear, and that's why in the earnings call I said in a few years. As you know, we don't typically provide forward guidance on an annual basis, but we have a line of sight that says we see it coming. And it's probably coming sooner than we had thought. The reason for that is the data center growth. But if you click below that, why is data center growing so rapidly? It is the presence of ARM CPUs in the data center. We're now over 50% market share at the hyperscalers. Secondly, the CPUs that are being used are using more ARM CPUs inside the chip. 192 cores, for example, inside a Graviton chip, going from 96. Nvidia Vera going from 72 cores on Grace now to 88. So what does that mean? That means more cores means more royalties and high growth rate. Why are there more cores? When you think about agentic AI and everything associated with agents moving workloads across systems, managing workflows, etc., that's the kind of work only CPUs can do. So to your question, while we're not giving a date, we can see it and it's coming sooner than we had thought even probably 6 to 9 months ago.
And probably on the back of when you look at Alphabet increasing its capital expenditure by another, well, potentially $185 billion. Rene, is the AI bubble, this worry about AI infrastructure buildout, a thing of the past to you, or are there still somewhat bottleneck issues that you're concerned about?
Yeah. So, it's a great observation, Caroline, and yes, there's huge growth in Google's capex. Not all of that $180 billion is coming to us, of course. But what does that say? We continue to see investments in the data center, whether it's what Meta had announced, or Microsoft announced, and now Google, Alphabet, that exceed what people had originally thought was even possible even a couple years ago. If you go back to when we announced the Stargate initiative in January of 2024, $500 billion over a number of years, people looked at those numbers and said, 'How is that even possible?' Now, 18 months later, it looks quite credible. So bottom line is we are seeing such an investment because the AI opportunity, the way I like to think about it, is kind of the final frontier relative to technology. When you think about what could be beyond AI, it's really hard to imagine. Also, the fact that AI has really had very little penetration, let's say, into large enterprise or into our health systems or things around drug discovery. So there's a long, long runway. I think people are a little nervous about it, decidedly so, because we've just not seen it before, right? We've not seen the order of magnitude we're talking about. So it's somewhat natural for people to look at it and say, 'Well, gravity's got to hit it sometime.' But then if you intellectually look at it and say, 'My gosh, is AI going to be something that will change and transform how everything is done?' Well, of course. And then there's going to be investment to support that. And that's what we're seeing.
