The recent earnings call for Arm Holdings Plc painted a picture of a company riding a wave of success, smashing revenue records and confidently projecting growth exceeding 20% for the next few years. Analysts focused on the obvious drivers: the accelerated adoption of the more lucrative Armv9 architecture, the recovering smartphone market, and the seemingly insatiable hunger for AI compute power.

But buried beneath the headline numbers lies a hidden story, a seismic shift in Arm's business that has the potential to reshape the entire technology landscape. It's a story not of units shipped, but of blueprints sold, a tale told not in chips but in contracts.

Arm's backlog, that quiet reservoir of future revenue, has exploded. It grew a staggering 45% year-on-year, reaching nearly $2.5 billion. This isn't just a function of a few large renewals; it represents a fundamental shift in how customers across diverse markets are approaching their future chip designs.

While the industry grapples with short-term inventory corrections and cautious outlooks, Arm is quietly amassing a future built on AI-infused compute. Customers are snapping up Arm Total Access (ATA) licenses at an unprecedented rate, driven by the realization that the future belongs to those who can harness the power of AI.

And here's the twist: this AI-powered revolution is happening not just in the obvious places like data centers and smartphones, but across the entire spectrum of Arm's reach. Automotive giants, industrial behemoths, and even nascent startups are recognizing that AI will be the defining technology of their future, and they are placing their bets on Arm.

This silent revolution is about to unleash an AI tsunami, and the waves are already building. While royalty revenue is expected to grow at a healthy clip of mid-20% in fiscal 2025, driven by Armv9 adoption and market share gains, the real story lies in what's coming next.

Arm's Royalty Revenue Growth Projection

The following chart shows a hypothetical projection of Arm's royalty revenue, taking into account the potential impact of the AI-infused chip backlog.

Here's a hypothesis: As these backlogged licenses translate into real-world chips, Arm's royalty revenue could see an even more dramatic surge in the years beyond 2025, potentially exceeding the 20% growth projections provided by the company.

Let's look at the numbers. Arm shipped roughly 8 billion chips per quarter in fiscal 2024. Assuming a conservative estimate that each new ATA license translates into an average of 10 million chips shipped annually, and a further conservative assumption that only half of the current backlog translates into shipments over the next two years, this translates into an additional 125 million chips per quarter entering the market.

This represents a potential 1.5% bump in unit volume, which might seem insignificant. But remember, these are not your average chips. These are chips born from the AI gold rush, chips commanding significantly higher royalty rates.

Factoring in the doubling of royalty rates for Armv9 and the even higher rates associated with specialized compute subsystems, the revenue impact of these AI-infused chips could be multiples of the unit growth.

Here's where it gets really interesting. This is just a back-of-the-envelope calculation based on current backlog. Remember, Arm is continuing to add new ATA partners every quarter, with a target of converting 80% of their customer base to this model. As the AI wave gathers momentum, the potential for further backlog expansion is enormous.

Arm, the quiet giant of the compute world, is about to roar. And the roar will be heard in every corner of the tech landscape. From self-driving cars to smart factories, from personalized medicine to intelligent homes, the world is about to be reshaped by an AI-powered revolution, and Arm is holding the blueprint.

"Fun Fact: Did you know that Arm's technology powers over 95% of the world's smartphones? That's more than just iPhones and Androids. Think about all the feature phones, the emerging markets, the connected devices we haven't even imagined yet. Arm's reach is truly staggering. And with the AI tsunami about to break, that reach is about to become even more powerful."