Arm Holdings Q2: Server Chip Royalties Surge 38% as Cloud Giants Phase Out x86

Key Takeaways

• ARM server royalty revenue grew 65% YoY as hyperscalers shift to custom silicon.
• Amazon Graviton, Microsoft Cobalt, and Google Axion are all ARM-based and in production.
• ARM earns 2–3x higher royalty rates on AI inference chips than on traditional server CPUs.
• The royalty model means ARM benefits from every chip sold without any capital expenditure.

Arm Holdings reported that server chip royalties grew 38% year-over-year in its fiscal Q1, as Google Axion, Amazon Graviton 4, and Microsoft Cobalt processors entered broad production deployment. Server royalties now represent 19% of Arm’s total royalty revenue up from 11% two years ago and the trajectory is accelerating.

The key driver is total cost of ownership. Arm-based server chips consistently deliver 30-40% better performance-per-watt than comparable x86 designs, translating directly to lower electricity bills at hyperscale. With data centre power consumption becoming a boardroom issue, the economic case for Arm silicon has never been stronger.

Intel’s data centre business is the most direct casualty. Intel’s server CPU market share has declined from 93% in 2020 to an estimated 67% in 2026, and the trajectory suggests further erosion. Intel’s response its in-house Xeon 6 and the Gaudi AI accelerator has been slower to ramp than management projected.

For Canadian investors, the Arm royalty surge validates the thesis that semiconductor IP licensing is a high-margin, asset-light model with durable competitive advantages. Alphawave Semi, which licenses SerDes IP for high-speed data links used in Arm-based data centre chips, is a Canadian beneficiary worth monitoring.

Royalty Economics and the Cloud CPU Shift

ARM’s royalty model is a leveraged play on the silicon cycle. The company earns a percentage of the chip selling price typically 1–2% for consumer chips, but 2–5% for high-performance server and AI inference chips. As cloud providers migrate more workloads from x86 to ARM-based silicon, ARM’s effective royalty per server chip is rising even faster than unit volumes, creating an exponential revenue dynamic.

Canadian investors can access the ARM theme indirectly through Canadian pension funds, many of which hold ARM Holdings (NASDAQ: ARM) in their U.S. equity allocations. The Ontario Teachers’ Pension Plan disclosed a position in ARM in its most recent 13-F filing. Domestically, the shift toward ARM server CPUs is relevant to companies like Ericsson Canada and Nokia Canada, which design networking gear that increasingly runs on ARM cores.