I think it did. Animal Crossing sold roughly the same as ARMS in its first game, but it eventually blossomed into one of Nintendo's biggest IPs with later games.

Probably made more money for Nintendo then what some 5-8 million copies did for 2nd-3rd party games.

Let me put it this way. Is Fire Emblem a failure because it doesn't sell as much as Zelda? Is Tomodachi Life a failure because it didn't sell as much as Animal Crossing? Are any of those 4 franchises I just named failures because none of them sell as much as Mario or Pokemon?
If ARMS was profitable for Nintendo and it's a concept they want to explore further and believe has enough potential to be its own, long-running franchise, then that's all it needs to be classified as a success. So, if in ARMS 2 is ever announced, there's your answer.

Why do people keep bringing up whether Arms failed or not?? It this some weird meme?

That's fair enough. But as I said, Animal Crossing only started off with 2 million copies, but it gradually grew in popularity and sales with each entry. While it's not a sure thing ARMS will get a sequel, I do think it's on the table for Nintendo, as it has the potential to become another staple series.

Of course, they do hope that many of their IP can turn into a steady stream of new games. But as you mentioned, they know its not possible for every game. Either due to lack of developer interest, or diminishing returns for a series (F-Zero is an example for both).

This is also true, but Nintendo knows that different games have different longevity. Some games last the entire generation, while others only a few years, and then there's games that are anywhere in between. ARMS still sold well even all the way through 2018, so there was still enough interest in the game left a year after release. It's sales have kind of maxed out at this point, so we'll likely get a sequel either sometime during the Switch, or for a successor.

The point I want to make is that Nintendo doesn't care if a New IP doesn't do Mario or Splatoon numbers on its first game. Sure, they'd be happy if a game can do that, but if it sells well for a good few months or even a year or two after release, then it's worth keeping around to grow. People forget that much of Splatoon's success was down to luck. It was a rare instance that a new IP that became a breakout hit on its first try, and that was on an unpopular console. But Rhythm Heaven, another Nintendo IP for example, only ever sold a few million copies with each entry, yet it's already got 4 games under its belt. Success should be measured on a game-by-game basis, as not all games are made equally.

For a new IP released on a recently released console with a small user-base at the time, I'd say it is good. Wild World was also released during the DS' peak in sales and popularity, so most of its success came from the DS' best years. A console's user-base and age are an important variable in a game's sales.

Splatoon also was released towards the end of the Wii U's life as well, so the fact that it did that well on a failed console on its way out was a rare feat of accomplishment. While ARMS was released quite early in the Switch's life, so it benefited from a smaller lineup and less competitive environment since there weren't a lot of fighters on the Switch yet.

I wouldn't say Skyward Sword was a failure necessarily, Majora's Mask sold roughly the same (granted, Majora's Mask was more of an experiment than the next big Zelda game). But its sales were disappointing by the standards of the Zelda series. But again, we have to remember the timeframe. It came out at the end of the Wii's life, required a peripheral not everybody had or wanted, and was going up against Skyrim, which released around the same time. On top of that, Skyward Sword was following a formula that at that point, was starting to wear thin for a lot of people, on top of heavy tutorializaion and slow pace. All of these factors contributed to its under-performance. You're right that Nintendo took the feedback from the game into strong consideration when making Breath of the Wild, which was designed to re-invent Zelda for a modern audience.

And that's why I think ARMS will continue. It did well, but it's not quite at the level where it can be a long-running series just yet. I do think the team will take the complaints of the first game into account when making the sequel, that way it can potentially do even better than the original.

Rhythm Heaven is cheap to make, true. But the development costs for ARMS, or even Splatoon weren't that high either (though they were higher than Rhythm Heaven obviously). Plus, didn't Nintendo say that BotW only needed to sell 2 million to break even? Even their most expensive game, only needed a few million copies to turn a profit.

I do think ARMS has the potential to be another reliable series for Nintendo in the future. That's why I think a sequel is likely, to build on the IP and eventually get it to the levels of Splatoon or Mario, or Animal Crossing. With Splatoon, it was clear from the first game's sales that it was going to be Nintendo's next big franchise. With ARMS, the potential is there, but it needs more time and games under its belt to get to that point. 

Why is this a question?

Compared to what?

It's a non-Smash fighting game. It's doing fine for a standalone sequel to Wii Boxing.

2 million + for a new IP is absolutely not a failure. We don't know if Nintendo could have had different projections/hopes for it internally or anything, but on paper in its own right there is no way that can be called a failure. Anyone trying to say it's a failure are the same type of people who like to try to act like they know more about the inner workings of Nintendo and how Nintendo think than Nintendo do themselves. Literally how would they know if Nintendo considered that a failure or not outside of broad assumptions/guessing? They don't work at Nintendo nor do they work in the industry. It's just people wanting to pretend they know stuff.

Comparing it to Splatoon isn't really fair either because, like you said, Splatoon was a breakout success from the start, on a dead console at the time nontheless, something not many new IP's get to be lucky enough to experience right at the beginning. If we use that as a basis from now on then majority of new IP's would be failures apparently.

I do think we'll see a Arms 2 at some point, idk about on the Switch tho (cause do we even know what that team is working on atm?), but eventually. 

Not the first thread he's made addressing an imaginary group of people. If he really heard people saying that, then discuss it with them, talking about them behind their backs is cowardly.