How ARM (Arm Holdings) Makes Money in 2025: A Deep-Dive With Income Statement

Welcome to the Value Sense Blog, your resource for insights on the stock market! At Value Sense, we focus on intrinsic value tools and offer stock ideas with undervalued companies. Dive into our research products and learn more about our unique approach at valuesense.io

Explore diverse stock ideas covering technology, healthcare, and commodities sectors. Our insights are crafted to help investors spot opportunities in undervalued growth stocks, enhancing potential returns. Visit us to see evaluations and in-depth market research.

Understanding how a semiconductor IP leader like ARM makes money is essential for investors and anyone interested in the business of chip design and licensing. In this post, we break down ARM's quarterly income statement (Q2 2025) using a Sankey chart to visualize the financial flows — what comes in, where it goes, and what's left as profit.

Quick ARM Overview

ARM operates a licensing-based business model focused on designing advanced semiconductor architectures. Its main products are intellectual property (IP) cores for CPUs, GPUs, and related technologies, which it licenses to chipmakers and device manufacturers worldwide.
Revenue comes from two primary streams: royalty revenue (earned when partners ship chips using ARM designs) and license and other revenue (upfront payments for technology access and custom solutions). ARM’s business segments reflect its dominance in mobile, embedded, and increasingly data center markets.

Revenue Breakdown

• Total Revenue (Q2 2025): $1.053B (+12.1% YoY)
  • Royalty Revenue: $585M (55.6% of total, +25.3% YoY)
  • License and Other Revenue: $468M (44.4% of total, -0.8% YoY)
  • Growth is powered by expanding chip shipments in mobile and automotive, as well as increased adoption of ARM IP in cloud/data center applications.

Gross Profit and Margins

• Gross Profit: $993M (94.3% gross margin)
  • Cost of Revenue: $60M (-21.1% YoY)
  • ARM maintains robust margins due to its scalable digital business model—once IP is developed, incremental costs per chip shipped are minimal.
• Most costs come from R&D investments and operational support for licensees.

Operating Income and Expenses

• Operating Income: $107M (-41.2% YoY, 10.2% margin)
• Operating Expenses: $886M (+30.1% YoY)
  • R&D: $654M (+34.8% YoY, 62.1% of revenue) — focused on next-generation CPU, GPU, and AI architectures to maintain technological leadership.
  • SG&A: $232M (+18.4% YoY, 22.0% of revenue) — includes sales, marketing, and administrative functions supporting global operations.
  • ARM continues to prioritize innovation with heavy R&D investment while expanding operations to capture new markets.

Net Income

• Pre-Tax Income: $146M (-40.2% YoY, 13.9% margin)
• Income Tax: $16M (11.0% effective tax rate)
• Net Income: $130M (-41.7% YoY, 12.3% net margin)
• ARM converts a moderate portion of sales into profit due to its high scalability and pricing power, though margins are impacted by surging R&D spend.

What Drives ARM's Money Machine?

• Royalty Revenue: 55.6% of revenue—driven by billions of chips shipped using ARM designs, especially in smartphones and embedded devices.
• R&D Intensity: $654M invested in Q2 2025, representing 62.1% of revenue—underscoring ARM’s commitment to staying ahead in CPU, GPU, and AI innovation.
• Strategic Investments: Focused on AI, automotive, and data center IP, positioning ARM for future growth in high-value segments.
• Future Growth Areas: AI and automotive chip IP—these segments are expanding rapidly, though not yet major profit contributors.

Visualizing ARM's Financial Flows

The Sankey chart below visualizes how each dollar flows from gross revenue, through costs and expenses, down to net income. This helps investors spot where value is created, what areas weigh on profits, and how efficiently the company operates.

• Most revenue flows into gross profit, with operating expenses (especially R&D) taking the largest chunk.
• Even after large investments in innovation, 12.3% of revenue drops to the bottom line.

Key Takeaways

• ARM's money comes overwhelmingly from royalty revenue on chip shipments
• High gross margins illustrate the power of ARM's IP licensing model
• Heavy investment in R&D, balanced by efficiency in operating costs
• Ongoing growth is driven by mobile, automotive, and cloud/data center adoption

Explore More Investment Opportunities

For investors seeking undervalued companies with high fundamental quality, our analytics team provides curated stock lists:

📌 50 Undervalued Stocks (Best) overall value plays for 2025
📌 50 Undervalued Dividend Stocks (For income-focused investors)
📌 50 Undervalued Growth Stocks (High-growth potential with strong fundamentals)

🔍 Check out these stocks on the Value Sense platform for free!

FAQ About ARM's Income Statement

1. What is the main source of ARM's revenue in 2025?

ARM generates over 55% of its revenue from royalty payments on chips shipped by partners using ARM designs. The remainder comes from license and other revenue, including upfront payments for technology access.

2. How profitable is ARM in Q2 2025?

ARM reported net income of $130M in Q2 2025, with a net margin of approximately 12.3%, reflecting moderate profitability driven by high gross margins but offset by significant R&D investment.

3. What are the largest expense categories for ARM?

The biggest expenses on ARM's income statement are operating expenses, particularly Research & Development (R&D) at $654M in Q2 2025 (62.1% of revenue), as ARM prioritizes innovation in CPU, GPU, and AI architectures. SG&A costs were $232M (22.0% of revenue).

4. Why does the AI segment operate at a loss?

The AI segment, despite generating growing revenue, posted an operating loss in Q2 2025 because ARM aggressively invests in next-generation AI architectures and software, believing these will drive long-term growth—even if the division is unprofitable today.

5. How does ARM's effective tax rate compare to previous years?

ARM's effective tax rate in Q2 2025 was 11.0%, lower than previous years. This low rate is primarily due to tax benefits from share-based compensation and international structuring.