AI computing demand is booming! Is Neocloud positioned to ride the wave?
ARM 2027财年Q1业绩直播
Key Takeaways (AI-Generated)
Financial Performance
- Record Q1 revenue of $1.29 billion, up 22% year-over-year
- Royalty revenue grew 22% to $715 million, licensing revenue increased 23% to $574 million
- Non-GAAP EPS of $0.45, up 29% and above guidance high end
- Non-GAAP operating margin of 41%, up 200 basis points year-over-year
Business Highlights
- ARM Neoverse shipments surpassed 1.5 billion cores, with 500 million shipped in last 9 months
- Data center royalties more than doubled year-over-year for second consecutive quarter
- ARM AGICPU initial product delivered to multiple customers with secured manufacturing capacity
- Major customer wins including NVIDIA Vera, Google Axion, AWS Graviton 5, Microsoft Azure Cobalt 200
Financial Guidance
- Q2 revenue guidance of $1.38 billion ± $50 million (22% year-over-year growth)
- Q2 licensing revenue expected up ~30% year-over-year, royalty revenue up low teens
- Full year royalty growth revised to high teens from previous ~20% expectation
- ARM AGICPU demand pipeline now exceeds $2 billion across fiscal 2027-2028
Opportunities
- AI infrastructure transition accelerating ARM adoption in data center with CPU TAM potentially reaching $220 billion
- ARM AGICPU addressing agentic AI workloads with potential for higher core count future generations
- Deepening relationships with hyperscalers and expanding into physical AI applications
- Secured manufacturing capacity supporting $1 billion opportunity with $2 billion demand pipeline
Risks
- Supply chain constraints across wafers, substrates, test capacity, and memory affecting ARM AGICPU scaling
- Smartphone market weakness due to higher memory prices impacting unit demand
- Very tight market conditions across memory, test equipment, substrates, and TSMC wafers
- Economic fluctuations affecting handset OEM costs and smartphone royalty growth
Full Transcript (AI-Generated)
Operator
Good day and thank you for standing by. Welcome to the first quarter fiscal year 2027 webcast and conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you will need to press *1 and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press *1 and one again. Please be advised that today's conference is being recorded.
I would now like to turn the conference to your first speaker today, Ian Thornton, Vice President of Investor Relations. Please go ahead.
Ian Thornton
Thank you and welcome to our first quarter fiscal 27 earnings call. On the call are Rennie Haas, Arms, Chief Executive Officer and Jason Child, Arms Chief Financial Officer. Today's call contains forward-looking information about the company and its financial results. While these statements represent our best current judgment, our business is subjected to many risks and uncertainties that could cause actual results to differ materially. Important risk factors that may affect our business and future financial results are described in our annual report on Form 20F filed with the SEC.
AL assumes no obligation to update any forward-looking statements. We will also refer to non GAAP financial measures. Reconciliations of these non GAAP financial measures to the most directly comparable GAAP measures can be found in our shareholder letter as can a discussion of certain projected non GAAP financial measures that we are not able to reconcile without unreasonable efforts and supplemental financial information. Our earnings material are available at investors.arm.com. And with that, I'll turn the call over to Remi.
Rennie Haas
Thank you, Ian, and welcome everyone. ARM delivered a record first quarter and a strong start to fiscal 2027. Our results reflect growing demand for the ARM Compute platform as AI expands across cloud infrastructure, edge devices and the physical world. Revenue reached $1.29 billion, up 22% year over year, driven by record first quarter licensing and royalty revenue. Royalty revenue grew 22% to $715 million. Licensing revenue grew 23% to $574,000,000 and non GAAP EPS increased 29% to $0.45, above the high end of our guidance.
AI is changing where and how compute happens. We're seeing that in the data center where the transition to ARM continues to accelerate, and we're seeing it beyond the data center as AI expands into PCs, smartphones and physical AI applications. Across each of these markets, customers are increasingly standardizing on the ARM Compute platform. These trends are the driving demand for the ARM AGICPU. We introduced the ARM AGICPU in March to give customers another way to deploy the ARM Compute Platform.
Since that time, we've made significant progress. Initial product has now been delivered to multiple customers and we have secured the manufacturing capacity needed to support the $1 billion opportunity we outlined last quarter. Across fiscal 2027 and fiscal 2028, demand now exceeds $2 billion as we continue to add new customers, including multiple customers in the US and China. While the overall value of our pipeline has continued to strengthen, we're also working closely with our manufacturing and supply chain partners to expand capacity.
Our confidence in achieving upside to our $1 billion opportunity for the ARM AGICPU business has increased in the past 90 days. This momentum is part of a much broader shift already taking place across their Neoverse business. Data center royalties more than doubled year over year once again as adoption of Arm Neoverse continues to expand. The pace at which ARM is becoming the CPU foundation for AI infrastructure is accelerating. ARM knee over shipments have now surpassed 1.5 billion cores, with most recent 500 million shipping in just the last nine months, where the 1st 1 billion took six years.
The world's leading AI infrastructure providers continue to validate that trend. NVIDIA has now brought Vera into production. Built on ARM, Vera delivers up to 50% higher CPU performance and two times greater energy efficiency than comparable X86 systems and will serve as ACPU foundation for Nvidia's next generation AI infrastructure. Google has stated that it's ARM based Axion CPU is a core component of its AI infrastructure strategy and the host CPU for its latest TPUAI systems.
AWS announced plans to deploy 10s of millions of Graviton 5 cores to power Agentic AI workloads. Microsoft expanded Azure Cobalt 200 virtual machines built on ARM Neoverse CSS. Additionally, Qualcomm has also announced plans to enter the AI data center CPU market with ARM based Dragonfly C1000. Each of these companies is approaching AI infrastructure differently, but they're all moving the same direction. ARM based CPUs are becoming central to next generation AI infrastructure.
IDC reported that spending on ARM based accelerated server platforms has nearly doubled in the past two quarters and has now surpassed X86 platforms. We're witnessing both the rapid expansion of AI infrastructure and Arms growing role within it. Our opportunity extends well beyond the data center. As AI moves into production, customers are increasingly focused on the economics of deploying AI at scale. Whether AI runs across the cloud, the edge, or ultimately the physical world, efficient compute is becoming just as important as model capability.
Bringing AI closer to where data is created improves performance, reduces latency, enhances privacy, and lowers infrastructure costs. This is where ARM has always differentiated itself. The result is a new generation of computing devices spanning into two distinct categories, efficient Aipcs designed for mobility and more powerful agentic systems capable of running sophisticated models locally. NVIDIA introduced RTX Spark, the first agentic PC built on ARMS compute subsystems, enabling sophisticated AI agents and larger AI models which can run locally for on the go Aipcs.
Those same OEMs continues expanding the Windows unarmed ecosystem with new Snapdragon powered Aipcs, while Google's continued investment in AI enabled Chromebooks is broadening access to on device AI. As AI grow drives a transition to the next generation of personal computing ARMS, opportunity continues to grow across an expanding range of AI enabled devices. The same economics extend into the physical world. Vehicles, robots, industrial systems and autonomous machines increasingly rely on efficient, secure and real time ARM based compute to sense, reason and act autonomously.
NVIDIA recently expanded its physical AI platform with Cosmos 3 and the Isaac Grut humanoid robotics platform powered by Jetson Thor, which combines an ARM based CPU with NVIDIA Blackwell GPU. ARMS software ecosystem continues to expand and now supports more than 22 million developers worldwide. During the quarter, ARM introduced performics with support from Microsoft, Mongo DB, Redis and SAP helping developers and AI agents analyze and optimize workloads running on ARM based infrastructure.
We also expanded our AI developer tools, including the ARM MCP server, which has surpassed 10,000 Docker downloads and integrates Arms expertise into leading AI developer environments. From cloud infrastructure to PC's and physical AI developers can build on the same ARM architecture and software ecosystem. Customers can deploy ARM through IP compute subsystems or silicon, depending on what best fits your business. But in every case, they're building on the same ARM compute platform, software ecosystem and developer community.
As AI becomes part of every cloud, every device and every sector, the industry is increasingly converging on a common compute platform. We believe that convergence will define the next decade of computing. AI is changing where and how compute happens, and ARM is at the center of it. With that, I'll turn it over to Jason.
Jason Child
Thank you, Renee. We have started fiscal year 27 with another strong quarter, delivering the highest first quarter of revenue in our history. Total revenue grew 22% year on year to $1.29 billion. Royalty revenue grew 22% year on year to 100 to $715 million, also our highest ever figure for Q1. Once again, the largest driver of royalty growth was cloud AI. Data center royalty revenue continues to more than double year on year reflecting our sustained momentum across the market.
This is being driven by the continued ramp of ARM based server chips at all the major hyperscalers, alongside increasing deployments of. Data center networking chips, particularly Dpus and Smartnix, where ARM technology is deployed in nearly all leading products. Edge AI royalty revenue continued to grow despite a soft end market. In smartphones, we continue to benefit from higher royalty rates as RMB 9 and compute subsystems continue to increase their penetration into smartphones, tablets and other consumer electronic devices.
These drivers more than offset the decline in smartphone sales due to higher memory prices. Physical AI also made a strong contribution to royalty growth, supported by the continued secular expansion of ADAS and autonomous systems built on our own technology. Turning now to licensing, license and other revenue was $574 million of 23% year on year, also a record for Q1. Growth was driven by strong demand for next generation architectures and deeper strategic engagements with key customers.
This quarter we signed multiple high value agreements as existing customers renewed long term licenses. Some of the world's largest hyperscalers, automotive and robotics companies and handset OEMs also cared access to Arm's future road map for their next generation of products. Of the $574 million of license revenue, our agreement with SoftBank for technology licensing and design services contributed $193,000,000. We expect a quarterly run rate for the rest of the year to be around $200 million.
As always, licensing revenue varies quarter to quarter due to timing and size of high value deals. So we continue to focus on annualized contract value or ACV as a key indicator of the underlying licensing trend. ACV grew 13% year on year maintaining strong momentum. This continues to be above our long term expectation for license revenue growth. As Renee mentioned, customer demand for ARM AGICPU remains very strong in this quarter.
Even more customers have wanted to place orders with us. We've secured the manufacturing capacity needed to support the initial $1 billion opportunity and we have made progress to securely additional supply to secure additional supply as well as optimizing our customer mix and commercial terms. Our confidence in achieving more than $1 billion has increased in the past 90 days. We will provide an update at our Q3 results, which is when we will have better visibility of Q427 and fiscal 28.
Turning to operating expenses and profits, Non GAAP operating expense was $733 million, up 18% year on year due to the ongoing R&D investment. This was about $27 million below our guidance due to timing as our spending plan for the year remains largely unchanged. We are expanding our engineering teams to support increasing customer demand while advancing the technologies that will underpin future growth including next generation architectures, compute subsystems and the ARM AGICP product family.
Non GAAP operating income was $531 million resulting in a non GAAP operating margin of about 41% of 200 basis points. Year on year. Non GAAP EPS was $0.45 driven with both higher revenue and slightly lower OpEx than expected. More importantly, even at these elevated levels of investment, we generated free cash flow of $665 million in the quarter and $1.4 billion over the trailing 12 months, giving us the flexibility to continue to invest long term growth.
Turning now to guidance. For Q2, we expect revenue of $1.38 billion ± 50 million dollars at the midpoint. This represents revenue growth of about 22% year on year. We expect license and other revenue to be up about 30% year on year and royalty revenue to be up in the low teens year on year. We expect our non GAAP operating expense to be approximately $780 million in our non GAAP EPS to be $0.47 ± 4 cents.
Looking ahead, we continue to see strong customer demand across our business combined with the expansion of our technology portfolio and deepening strategic customer relationships, this gives us confidence in our long term growth outlook. With that, I will turn the call back to the operator for Q&A.
Operator
Thank you. To ask a question, you will need to press *1 and one on your telephone and wait for your name to be announced. To withdraw your question, please press *1 and one again. We will now go to our first question. One moment, please. And our first question today comes from the line of Joe Kotaki from Wells Fargo. Please go ahead.
Joe Kotaki
Yeah, thanks for taking the questions. Maybe just first, can you give us a little bit more detail on just the confidence that's? Increased in terms of the upside to the 1 billion for for AGI revenue. Is there any clarity you can provide just on is it better way for supply you know customers getting access to memory any any help there?
Rennie Haas
Yeah, I'll take that question. I think in general it's all of the above. If we if I look back to the call we had 90 days ago, we had committed to the supply of a billion dollars. We talked about demand pipeline of $2 billion and we were working to secure supply for that delta. Between 1 and 290 days later, the demand picture has even gotten better as Jason mentioned, north of $2 billion, but our ability to secure that supply for the north of $1 billion, our confidence has increased in the last 90 days.
And I would say it's across all of those areas. Making a chip is complex relative to supply chain. You have wafers, you have substrates, you have test capacity, you have memory and all of those areas. Our confidence level and being able to secure the supply necessary has gotten has gotten better and that's the commentary we're stating at this time.
Joe Kotaki
Maybe just as a follow up to that, I mean you know on top of the the extra above billion dollars of AGI revenue that you now think you can do, how do we think about the gross margin structure relative to kind of what you were thinking about for the original billion dollars?
Jason Child
Yeah, I no change at this time. We said that. I think last quarter we said there was probably going to be somewhere in the high 30% range, maybe low 40s for for the the first generation for really in the Q4 of this year as well As for next year as it's over the next couple of years. We do expect to get to 50%. But that's going to, you know, basically just entail us actually bringing more of some of the work that maybe an ASIC has helped us with the past and breaks it without work in house.
So that'll probably take a couple years. Those are our initial expectations of no real change from last quarter. Obviously, you know, with some of the price increases and things that have happened, we're just kind of working through how to digest those and what needs to be, you know, kind of what what needs to affect our pricing. So those are some of the things that we're going to work through. And, and as I said in in my prepared remarks, we'll we'll provide a much more detailed update for both the revenue and margin profile before we go into Q4. So we'll do that at the end of the end of Q3.
Joe Kotaki
Thank you.
Operator
Thank you. We will now take the next question and the question comes from the line of Sebastian Naji from William Blair. Please go ahead.
Sebastian Naji
Thank you and good afternoon. My my question is on the smartphone market, because of the much higher memory handset cost, handset OEMs are absorbing meaningfully more BOM inflation. They're starting to raise prices. I think, you know, given the smartphone royalties remain a significant portion of your overall royalty base, Can you maybe just talk a little bit about what you're seeing in terms of unit demand and mix and how this impacts your royalty revenue outlook for the fiscal year?
Rennie Haas
Yeah, So I'll take the first part of the question. Let Jason and talk about some of the details around the numbers. Generally speaking, we have been somewhat isolated from the negative growth of the smartphone market because of the fact that we have moved the vast majority of customers to V9, in some cases CSS and in some cases the second version of CSS. And what that's all contributed to has been an increase in royalty growth.
So whereas the smartphone market has been going projected to be down by by some level of double digits, we are projecting double digit growth in in royalty smartphone market vis A vis exactly how that translates to the forward guidance and forecast. I'll let Jason go in some more color.
Jason Child
Yeah, I think, you know, there's obviously others that are reporting this week and, and, and key partners that we'll learn more from. But when we look at our forecast, we, we mostly try to look at the industry protections across all, you know, the entire industry. You know, IDC is of course one of the things that we look at. And then and then of course we update for partner mix where we have you know, slightly different royalties based on whether it's CSS or V9 or V8 or etcetera.
So, so when we Add all that together, you know we have seen you know some some incremental slowdown versus what was expected at the beginning of the year. And you know, I think the the new piece was initially the expectation was just going to affect the lower end of the. The market and now we are seeing you know all parts of the market even some upper and mid tier being affected. And so that's that's going to be an incremental incremental for us.
And so as a result, I would say, I think going into the year, we probably thought we were, I think we said last quarter that we're expecting some around 20% year on year for the next few years in royalties including this year. Right now, if I had to guess that's, that's probably somewhere closer to the high teens right now. But hard to say until we learn more about the next couple quarters say right now the you know, we do, we do think royalties will come down a bit in this next quarter.
We got into kind of the, the low to mid teens for Q2 and we'll, we'll give you a better update next quarter. But I, I think the one thing I would make sure you don't decide if is the good news is the over performance that we've been seeing in cloud AI continues to help offset that. And so while there is weakness on the. Smartphone side the overperformance on the cloud AI business. Business continues to accelerate and that that's the piece that gives us confidence in in full year and next year's numbers. But again, we'll give you more updates over the next couple quarters.
Sebastian Naji
Great. OK, that's very helpful. I appreciate all the color. Thank you.
Operator
As a reminder, if you would like to ask a question, please press *1 and one on your telephone. In the interest of time, please limit yourself to one question only and we join the queue for any follow-ups. Thank you. We will now go to the next question. And the next question today comes from the line of Gary Mobley from Stone X Group. Please go ahead.
Gary Mobley
Hi, everybody. Thanks for taking my question. You highlighted maybe a little bit of upside to the demand profile for the next two years, 2 billion plus I think to paraphrase correctly, but what about the demand pipeline for the out years, fiscal year 29 through 31 and I assume you know the 15 billion in projected AGI revenue expected for 31 contemplates all the supply chain related headwinds. That's a, that's a supply served revenue, correct?
Rennie Haas
Yeah. I'll let Jason comment further in terms of any forward-looking comments he wants to make. But I'll I'll say what is what has changed since March is that to your point, you know clearly supply is an issue across a number of different factors. The outlook that we gave at that time was based upon our view of the supply picture. On the flip side, we did say at that event that the the CPU Tam we thought was about $100 billion in those outer years and going back you may recall that and prior to that most folks were talking about a number of around 50 to 60.
So when we talked about the $100 billion billion dollar number in March, there was some surprise around it and there was a lot of back and forth in terms of justifying that number. Since that time a number of my peers have talked about numbers quite a bit bigger than that, in some cases up to $200 billion. I think all of that is really being driven by the increase of overall compute capacity which will be inference based. And all of that inference based compute is going to largely be running agentic workloads and the agentic workloads are essentially capacity constrained in terms of throughput by the number of CP us you have.
So as inference demand goes up, which is clearly is, and as agentic demand goes up as it clearly is, that means an increase in CPU demand. So we're not changing numbers at all. But there are a lot of indicators that the numbers that we talked about back in March relative to our view of the Tam may have been conservative. Jason, if you want to add anything to that.
Jason Child
Yeah, yeah, I think you know, in general, as Renee said, yeah, the the Tam at the back when we did the event it when we took it up to 100 billion, we said 100 billion plus. Obviously it's gone up to I think now the most recent estimate is 220 billion set in on you know what, what from a variety of sources. So, so I think, you know, our expectation is if you, if you flow through, you know, the, the, the same kind of market share that we were expecting at 100, you know, could it be much higher if in fact the market's at 200 plus? Well, so certainly it could be the constraints over the next couple years.
So let's say that for us FY20 7 or calendar 26 or FY20 8, which is calendar 27, supply chain is pretty tight. And so you know, we're, you know, maybe there's upside to get to this 2 billion or 2 billion plus and we'll provide updates on that and over the next couple quarters. But to go beyond that, the supply chain is going to loosen or at least expand quite a bit as we get it into calendar 28 and 29 or for us FY20 9 and 30.
Right now if you look at wafer capacity and memory capacity, you know, you probably know as well as I do, I think there's estimates that the capacity is going up somewhere between 70 to 100% depending on your assumptions on wafer and some of the different, some of the different partners that can help there and and even more so on the memory side. So, so our expectations are, you know, there's certainly is potential to to to beat the number that we give it externally, certainly internally we do have higher targets.
But but until we start to see the supply chain capacity come online, we're mostly focused on just trying to get to the $2 billion number next year. And we'll provide updates of course later as we. More.
Gary Mobley
Thank you.
Operator
Your next question today comes from the line of Tom O'Malley from Barclays. Please go ahead.
Tom O'Malley
Hey guys, thanks for taking my question. Last week, AMD hosted an Analyst Day and talked about a $220 billion TAN by the end of the decade. And kind of underneath that though, the largest contributor was agentic AI that kind of laid out traditional CPU. They let out headnotes and then agenticate, you know, agentic applications. So I was curious, when you look at your silicon business longer term, where do you see that fitting in? Is that going to cover all three of those sub buckets in your early wins and your early pipeline? Is there one way that that's leaning or another? Just would like to get a flavor of what you foresee for that silicon business.
Rennie Haas
Yeah, and I'm sorry, could you, could you repeat those 3 categories so I make sure I've got the definitions right?
Tom O'Malley
Yeah, traditional server and then you have head nodes and then you have a Gen. tech applications.
Rennie Haas
Got it. Yeah, our ARM AGICPU is going to play in all three. When we talked about the customers that we had signed up back at the ARM, every event we had folks like Cerebrous and Open AI, which were largely around head node type applications. We also talked about Meta and Cloudflare, which are around agentic applications, but also general purpose server. We've also just talked about OCI Oracle. So the ARM AGICPU is a very good fit for all of those to be quite candid, which is why we are very, very optimistic about the demand.
And we did talk about quite a number of customers that day, and we were very specific about inside the cloud, the agentic workloads. It's a pretty broad term because the agents are running through the head node, but they're also running through the general purpose racks that sit inside the data center. So short answer is those 3 categories that you defined as described earlier, the RMAGICP use is a great fit for all three, and we have customers in all three.
Tom O'Malley
Thank you.
Operator
Your next question comes from the line of Vivek Aya from Bank of America. Please go ahead.
Vivek Aya
Thanks for taking my question. I had a near and a long term question on your AGICPU. Near term, I'm, I'm very curious what is preventing ARM from securing supply for just one more billion? I mean it's a $50 billion market, right And there are a number of foundries who can make it. So I'm, I'm just curious what is preventing ARM from getting that extra billion a year from now? And then longer term, Renee, when I look at the three players that have ARM based CPUs in AI, whether it's NVIDIA or Amazon or Google, they each have their proprietary accelerators also which are often Co designed with the CPU.
So don't you think that restricts Arms opportunity given that you have ACPU only offering or or is your intention to add other things to that CPU only offering over time? Thank you.
Rennie Haas
Yeah. So let's take both parts of that question. Jason, you can add on. I'm glad you think a billion dollars is not a big number. There are, there are a lot of folks just trying to secure extra supply up to up to $50 million. It is a very, very tight market across everything, whether it's memory, whether it's test equipment, whether it's substrates, whether it's TSMC wafers, It is it's a very, very, very tight world. I think even my compatriots who are in the CPU business for a living and and have their own fabs that have not been able to, to, to supply the demand.
So we're, we are more optimistic than we, we were 90 days ago, which is great. Demand is increased, but we feel better about the about the supply side on the on the proprietary accelerators. If I understood your question correctly, you know, a couple of couple of proof points that that is an area that we can certainly play in. You know, First off at Google, they have used Axion as a, as an interface into their Tpus away from X86. So clearly there's a space for for ARM to exist with with custom accelerators.
If your question was around the ARM AGICPU specifically, there has been some announcements made by Envy by NVIDIA about Envy Link Fusion. And it's a very interesting platform approach where they're offering a mix and match where you could take a Vera CPU and plug it into a proprietary accelerator or you could take a a CPU made by someone else in the ARM family. And connected into a Ruben accelerator. So we don't have anything to announce around that today. But there are absolutely paths for ARM to connect to custom accelerators, whether it's through a self hosted design done internally and or connecting to something through something like ambient like Fusion.
Vivek Aya
Thank you.
Operator
Your next question today comes from the line of BJ Rakesh from Mizuho. Please go ahead.
BJ Rakesh
Yeah, Hey, Renee and Jason, good to hear you guys got some capacity on the agent AI CPU side. I was wondering when you look at your agent AI CPU, I think mostly in the 128 core. I know core count is important. So are you looking at when do you expect the next the 192 or 256 core CPUs coming out and if any color on the ASIC side as well? And for Jason, we expect to like start breaking out the silicon side of revenues, the aging CPU side. Because that seems to be becoming bigger and bigger I guess. Thanks.
Rennie Haas
Yeah. So thank you for the question. On the on the product side, nothing to tell you specifically today about about the road map and where we're going with that. So the ARM ATICPU today is a is 128 core based design. There are instances in the market using ARM that are better or actually greater number of cores and that's Graviton 5 which is 192 cores. Certainly the direction to travel is more cores and and the reason for that is for running agentic workloads, more cores is a better outcome because the software overhead is simpler.
You can run virtual machines or virtual jobs on single cores and they're going to be much more efficient in terms of throughput. So while I don't have anything to talk about today in terms of the road map of the core count, it's not a stretch to think that the next generation designs you're going to have more and more course because that's clearly the direction to travel. I'll let Jason comment on the second part of the question.
Jason Child
Yeah. On the revenue breakout, Well, first as soon as we start shipping, which will be at the end of this year, that's the first milestone. And then once it becomes at least 10% of revenue, we'll break it out separately as a as a third line. So separate from license, separate from royalties. Lastly, there will be still some revenue. So I would expect that based on our forecast that that should be broken out then in FYE 28.
BJ Rakesh
Thank you.
Operator
Your next question today comes from the line of Charles Hui from Needham and Company. Please go ahead.
Charles Hui
Hi, thanks for taking my question. Jason, I think if I hear correctly, you are talking about maybe royalty revenue growth this year instead of 20%, probably going to be high teens because of all the things happening in the smartphone, incremental weakness etcetera. Anything we should be looking at at the moment, let's say on the licensing side that can can show up, show up with a little bit upside to offset the incremental weakness on the royalty side? Yeah. And maybe on that topic, what's the early view on maybe? The FYE 29 which is largely Cy 28 and do you think? The 20% royalty is still a good number and wanna. Want to get some thoughts there. Thank you.
Jason Child
Yeah. In terms of guidance for Q2, we you know, we did lower, I think maybe what we what our expectations were a couple of quarters ago, we didn't guide to it, but I think our expectations were there going to be a little higher. And so we're now guiding to 13% royalty growth in Q2, but then we also increased our license growth. So overall on a combined basis we're actually ahead of where we'd expected to be. I would expect similar trends for the rest of the year and that is any softness or weakness that that we experience in royalties will be at, I would say at least as much license revenue to overcome that.
So I, I don't really expect overall to be any sort of a slowdown. Now the thing that could change is, you know, we continue to see the, the cloud AI business overperform. And in particular, you know, we're really seeing strong deployments from, you know, some of our partners like Google with their Axiom as its bearing with all the, the new TPU deployments, certainly Amazon and then certainly with Vera and NVIDIA, Amazon with Graviton. And then, you know, we've hyperscalers are also exceeding their, their plans so and, and increase in their, their trajectory and their velocity.
So, so there is certainly some, some possible upsides on on, on royalties throughout the year. But if I had to say right now, I, I would not expect there to be weakness across the overall business. It just might be some weakness in the smartphone side of the business. And we'll just have to wait and see how the cloud AI business, you know, if it's able to overcome all of it or, or just some of it. We'll we'll have to update you as we go later into the year.
And then in terms of 29, right, 28 and 29, yeah, I think the 20% plus royalty growth that we provided, I think that's very much still intact the the things that are happening right now. You know, the, the only real weakness in royalties is really on the smartphone side, in particular to some of the memory issues there. And while you know, they're, they're certainly having a tough year this year, I think most of the partners that we talked to seem to think that, you know, the, there's going to be stronger recovery in the back half of the year.
And so I would expect that the year on year growth rates by next year should be kind of back in line as we start to lapse some of these challenges. And then of course, as we continue to see the AI deployments continue to to to grow at the level they have been that we should be able to again be in that 20% range next year and beyond.
Charles Hui
Thank you.
Operator
Your next question today comes from the line of Chris Sankar from TD Cowen. Please go ahead.
Stephen
Hi, thanks for taking my question. This is Stephen calling on behalf of Krish. Renee, I had a question on low cost AI models. Just with the recent cycle of headlines around low cost AI, whether from China or elsewhere, do you see the proliferation of low cost AI being a net positive or negative for your AGICP franchise given your market positioning? And also, if you could also walk us through how low cost AI might be a pro or con for your IP business, like for both data center and the edge side of things? Thank you.
Rennie Haas
Yeah, thank you for the question. I'm I'm going to, I'm going to presume that when you say low cost AI, you're referring to open source models, open weights, etcetera. If the, if the world moves to something that's more open source based, AKA open weights for us, I think it's somewhere between a net neutral to a net positive and I, I start with net neutral from the perspective of we're somewhat agnostic relative to whether it's a closed frontier model or an open source model. Those models all require CP us, they all require the VIP that we deliver for people to build custom chips.
So whether it's an opportunity for RMAGICPU or the IP or compute subsystems, we're going to be required independent of what those models are just frankly just given that given the nature of the workloads that need to get run, they're they're kind of independent of the hardware underneath that you you need CPUs to run agents, whether that's open source or closed source. There's a very interesting argument about to be made relative to the potential of those open source models being much more differentiated, smaller, more efficient that could run and different edge footprints, if that were to happen, would be a great thing for ARM just given the footprint.
That we have in smaller edge devices right now, the most sophisticated models that are the closed models, all are literally 100% cloud based. The RTX Spark that was announced is a very interesting product where you can potentially run some smaller models locally. I think open source has traditionally shown that whether it's in this area or, or any other software domain widely frightens the choice relative to how you run different things. In other words, open source leads to, to higher innovation and differentiation.
So I think it's, it's either neutral to a positive depending on where it goes at the edges. But probably the most important thing to remember about ARM, and it applies here as well as we're pretty agnostic to the top layer. All of that will need to run on our on our CPUs and our IP.
Stephen
Thank you.
Operator
We will now take our final question for today. And our final question comes from the line of Tim Schultz Melanda from Rothschild Co. Please go ahead.
Tim Schultz Melanda
Yeah, great. Thanks for taking my questions. I, I had to 1 was a more kind of operational question maybe maybe for Jason, just talking about the, the timing and the sequential quarter to quarter cadence of, of R&D. You talked about how it had come in, you know, below your, your expectations. And I just wondered maybe if you could talk about how that kind of comes to pass. Is it kind of a milestone based thing and that maybe they're not met and so that the cost slips 1/4 or two? Is it a capitalization issue? Just how, how does what, what are the things that dictate the timing of R&D cost in the, in the PNL? And then I had a quick follow up on the CPU.
Jason Child
Sure. So with OpEx, you know, we, we did come in a little bit lower when it comes to OpEx. You have to break out on R&D. You have to break it down into really two buckets. So you have the the people or developer costs and then you have the tools that they're using, which is typically, you know, emulation, cloud spend, etcetera. And so in this last quarter, you know, we we did come in a little bit below and that would be more not on the on the people side because that was pretty much right in line.
I would say it was really more on kind of the the tools that were utilized and and necessary versus what our forecast was. So I think for the most part you should think about kind of banking that savings that we delivered in Q1 and then going forward our estimates I think are pretty similar, maybe a little bit lower. So overall, you know, again, you can bank the statements from Q1 and then assume that for us they are just at a high level. It's going to grow by kind of mid single digit percentage or on quarter.
The the overall OpEx and and the the things that can move, it's less around the total number of engineers because that number is, is one that we're we're we can forecast and we're pretty consistent with. It's really just about what is the tool utilization that's necessary. And and so certainly with things like innovation and cloud spend that's going to flex a little bit based on what are we learning on the latest developments and do we need to, you know, do we need to increase some of our testing or or are we, are we kind of done?
And so, so as a result, we're getting better and better at forecasting this, but but it does move around a little bit because you know, we really only been doing this now for the last year or two. And so I would expect our variants probably to get smaller going forward.
Tim Schultz Melanda
Got it, got it. And then just just to circle back on the, the AGI CPU conversion of customer engagement and interest and and as you've described being able to kind of bring that across the Rubicon and and book it as a as a firm order. Just wanted to understand and just kind of circle back to confirm what we're talking about here. So we're talking about maybe early calendar 27 as you as you come into the December court report that you should have more visibility.
And I, and I guess one of the things I'm just thinking about is, is, is, is there a concern or is it possible or probable that you get into a kind of a golden screw type situation that you've got 99% covered, but because there's tightness, you, you, you're missing one small component that could kind of stymie that? Or is it really, you know, not quite that vulnerable to, to one single sort of small component to be, to be missing? Thank you.
Rennie Haas
If I make sure I ask you, your question is as we get closer to fulfilling the the demand for the product, is there still some risk at the 11th hour that one critical component that we haven't secured could could tip the whole thing over? No, there's not a concern of that. We're we are very confident in terms of partners we're working with. We have a very good understanding of their capabilities and their upside capabilities. So there isn't there isn't one single point of failure that to your point of the the 1% that could that could cause an issue.
Tim Schultz Melanda
Thank you.
Operator
This concludes today's Q and AI will now hand back to Renee for closing remarks.
Rennie Haas
Thank you. The the quarter for us was, is is really a tale of of two stories. One is the core business itself. The IP business continues to perform extremely well a record first quarter and we are guiding ahead of expectations as as Jason had mentioned and and our results were beyond expectations. The growth is really being driven by the data center. ARM continues to increase its market share and we have many key customers now shipping Neoverse cores, which as I mentioned before have now surpassed 1.5 billion.
But we also now have our new business, their ARM AGICPU business, which we just announced back in March. The confidence level we have in the success of that product only continues to increase. And as we talked about, the demand is greater than what we shared 90 days ago. And at the same time, our confidence to fulfill that demand has also increased. So All in all, very proud of the results that we've achieved. A great quarter for the company. And thank you all for your interesting questions.
Operator
Thank you. This concludes today's conference call. Thanks for participating. You may now disconnect.
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