On July 31, according to Reuters, semiconductor IP giant Arm announced its second-quarter financial forecast, which fell short of market expectations. This disappointment was partly due to Arm’s plan to invest some profits into manufacturing its own chips and other components, leading to an 8.65% drop in Arm’s stock price in after-hours trading.
Arm’s CEO, Rene Haas, stated that the company is investing in the development of its own chips, marking a significant shift from its model of licensing design blueprints to other companies.
This plan to increase investment in developing its own chips will steer Arm away from its long-standing business of providing intellectual property to companies like Nvidia and Amazon, and begin designing its own chips to compete with customers. CEO Rene Haas mentioned that the finished chips are the “physical embodiment” of a product called Compute Sub Systems (CSS) that Arm is already selling. “We are consciously deciding to increase investment—beyond (designing) and building something, to manufacturing chips, and possibly even solutions.”
A chiplet is a smaller, function-specific version of a larger chip, which designers can use as building blocks to form complete processors. This solution integrates both hardware and software.
Arm stated that if the company decides to halt or pause various projects, the decision to increase investment in potential chips, small chips, and solutions may not yield products. If the company chooses to manufacture complete chips, it will eat into the company’s profits and does not guarantee success. The cost of manufacturing advanced AI chips alone can reach $500 million, and the cost of the supporting server hardware and software may be even higher.
To build the team needed for manufacturing chiplets and other finished chips, Arm has been recruiting talent from its customers and competing for deals with them.
Rene Haas declined to provide a timeline for when Arm’s investment in the new strategy would translate into profits, nor did he disclose specific details about potential new products in the plan. However, he stated that Arm will explore chiplets, “a physical chip, a motherboard, a system, all of these.”
In recent years, Arm has been striving to develop semi-customized IP integration package services tailored to customer needs, namely providing the Arm Compute Sub Systems (CSS) platform. By combining CSS technology and other higher-margin new products, it aims to expand revenue and increase profits by raising the royalties charged on each chip. Of course, Arm also hopes to even plan to develop chips for direct sales to customers.
In December 2024, during the court hearing regarding the technology licensing issue between Arm and Qualcomm, Qualcomm accused Arm of providing the Arm Compute Sub Systems (CSS) for client and data center processors and other use cases, raising suspicions of competing with customers.
At the same time, Qualcomm’s legal team presented a document prepared by Arm CEO René Haas for the Arm board, indicating that Arm is also considering designing its own chips to provide directly to customers, which would make it a major competitor to its clients, including Qualcomm.
René Haas refuted these claims at the time, stating that while Arm is exploring various business opportunities, Arm does not manufacture chips and has never ventured into this industry.
However, in February of this year, the Financial Times reported that Arm is developing its own chips, with the first self-developed chip expected to launch as early as this summer, to be manufactured by TSMC, with Meta potentially being one of the first customers.
Clearly, Arm aims to integrate its CPU/GPU IP and CSS solutions into a system platform and create a physical chip that can be sold externally. While this may compete with customers, it is likely to primarily impact the more profitable data center market, as this is Arm’s preferred target market.
In terms of financial results, Arm reported first-quarter sales of $1.05 billion, slightly below the expected $1.06 billion. Adjusted earnings per share were 35 cents, in line with expectations.
Arm predicts that its adjusted earnings per share for the second quarter will be between 29 cents and 37 cents, with the median of this forecast being below the average analyst expectation of 36 cents. Arm expects second-quarter revenue to be between $1.01 billion and $1.11 billion, consistent with the expected $1.06 billion.
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