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

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Understanding how a semiconductor IP leader like ARM (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 (Q3 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 fabless, IP licensing business model, designing advanced processor architectures used in billions of devices worldwide. The company earns revenue primarily by licensing its chip designs to semiconductor manufacturers and collecting royalties on every chip shipped that uses ARM technology.
Revenue comes from two main streams: royalty revenue (ongoing fees per chip sold by licensees) and license and other revenue (upfront and milestone payments for technology access). ARM’s business is global, with customers spanning mobile, automotive, IoT, and data center markets.

Revenue Breakdown

• Total Revenue (Q3 2025): $1.135B (+34.5% YoY)
  • Royalty Revenue: $620M (54.6% of total, +20.6% YoY)
  • License and Other Revenue: $515M (45.4% of total, +56.1% YoY)
  • Growth is powered by expanding adoption of ARMv9 architecture, strong demand in AI/data center, and new licensing deals.

Gross Profit and Margins

• Gross Profit: $1.106B (97.4% gross margin)
  • Cost of Revenue: $29M (down 9.4% YoY)
  • ARM maintains exceptionally robust margins due to its scalable, asset-light licensing model and minimal direct production costs.
• Most costs come from R&D investment and operating expenses, not manufacturing.

Operating Income and Expenses

• Operating Income: $163M (+154.7% YoY, 14.4% margin)
• Operating Expenses: $943M (+26.1% YoY)
  • R&D: $691M (+36.3% YoY, 60.9% of revenue) — Focused on next-gen CPU/GPU design, AI accelerators, and security features
  • SG&A: $252M (+4.6% YoY, 22.2% of revenue) — Covers global sales, marketing, and administrative functions
  • ARM continues to prioritize innovation and future growth while maintaining operational discipline.

Net Income

• Pre-Tax Income: $302M (+371.9% YoY, 26.6% margin)
• Income Tax: $64M (21.2% effective tax rate)
• Net Income: $238M (+122.4% YoY, 21.0% net margin)
• ARM converts a significant portion of sales into profit due to its high-margin, IP-centric business model.

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What Drives ARM's Money Machine?

• Royalty Revenue: 54.6% of revenue — Recurring, high-margin stream as more devices ship with ARM cores
• R&D Intensity: $691M (60.9% of revenue) — Aggressive investment in advanced architectures and AI
• Strategic Licensing: New and expanded licensing agreements with hyperscalers, automotive, and IoT leaders
• Future Growth Areas: Automotive, AI, and data center segments, though some are still ramping and not yet at full profitability

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, 21% of revenue drops to the bottom line.

Key Takeaways

• ARM's money comes overwhelmingly from IP royalties and licensing fees
• High gross and net margins illustrate the power of ARM's scalable, asset-light business model
• Heavy investment in R&D, balanced by efficiency in SG&A and minimal cost of revenue
• Ongoing growth is driven by AI, data center, and automotive adoption

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FAQ About ARM's Income Statement

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

ARM generates over 54% of its revenue from royalty payments on chips shipped by licensees. The remainder comes from upfront and milestone license and other revenue, which has grown rapidly in 2025.

2. How profitable is ARM in Q3 2025?

ARM reported net income of $238M in Q3 2025, with a net margin of approximately 21%, reflecting strong profitability driven by high-margin IP licensing and disciplined cost management.

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 $691M in Q3 2025 (60.9% of revenue), as ARM prioritizes next-generation chip design, AI, and security. SG&A is also significant at $252M.

4. Why does [segment/division] operate at a loss?

[If applicable: For example, ARM’s automotive or AI segment], despite generating $XXM in revenue, posted an operating loss of over $XXB in Q3 2025. This is because ARM aggressively invests in long-term R&D and ecosystem development, believing these will drive future 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 Q3 2025 was 21.2%, consistent with prior years. This moderate rate reflects the company’s international structure and tax benefits related to share-based compensation.