Arm Holdings plc (ARM) Q3 2026 Earnings Call Transcript
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Overview
The earnings call reveals strong financial performance with a 25% revenue growth, robust ACV growth, and a positive outlook on AI trends. Although there are concerns about royalty revenue deceleration and smartphone volume impacts, these are offset by growth in Cloud AI and infrastructure. Management's commitment to R&D and strategic partnerships further enhance the positive sentiment. The Q&A reassures investors about potential risks, and guidance on non-GAAP EPS aligns with expectations. The overall sentiment is positive, likely leading to a stock price increase of 2% to 8% over the next two weeks.
Key Financial Performance
Revenue Revenue grew 26% year-on-year to $1.24 billion. This marks the fourth consecutive billion-dollar quarter. The growth was driven by strong performance in royalties and licensing.
Royalty Revenue Royalty revenue increased 27% year-on-year to a record $737 million. This growth was driven by record units, strength across AI and general-purpose data center, and higher royalty rates per chip in smartphones.
Data Center Royalty Revenue Data center royalty revenue grew more than 100% year-on-year. The growth was attributed to the ramp of Arm-based chips by major hyperscaler companies and increased deployment of networking chips like DPUs and SmartNICs.
License Revenue License revenue was $505 million, up 25% year-on-year. Growth was driven by strong demand for next-generation architectures and deeper strategic engagements with key customers.
Non-GAAP EPS Non-GAAP EPS was $0.43, up from the previous year. This was driven by higher revenue and slightly lower operating expenses than expected.
Non-GAAP Operating Expenses Non-GAAP operating expenses were $716 million, up 37% year-on-year. The increase was due to strong R&D investment to support customer demand for more Arm technology.
Non-GAAP Operating Income Non-GAAP operating income was $505 million, up 14% year-on-year. This resulted in a non-GAAP operating margin of about 41%.
ACV (Annualized Contract Value) ACV grew 28% year-on-year, maintaining strong momentum following similar growth in Q2 and Q1. This reflects strong licensing trends.
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Operating Highlights
CSS (Compute Subsystems): Launched 2.5 years ago, demand continues to exceed expectations. Signed 2 additional CSS licenses for Edge AI tablets and smartphones this quarter, totaling 21 CSS licenses across 12 companies. Five customers are shipping CSS-based chips, including 2 shipping second-generation platforms. Top 4 Android smartphone vendors are shipping CSS-powered devices.
Neoverse CPUs: Surpassed 1 billion cores deployed. Arm's share among top hyperscalers is expected to reach 50%. AWS launched Graviton5 processor with 192 cores, NVIDIA's Vera CPU features 88 Arm-based cores, Microsoft's Cobalt 200 has 132 cores, and Google previewed its second Arm-based server processor with Axion-powered N4A instances.
AI Platforms: Organized into 3 business units: Edge AI (smartphones, IoT), Physical AI (automotive, robotics), and Cloud AI (data center, networking). AI workloads range from milliwatts to gigawatts, with Arm's platform addressing high performance, energy efficiency, and flexibility.
Data Center: Data center royalty revenue grew more than 100% year-on-year. Arm-based CPU chips are gaining traction with hyperscalers, with AWS, NVIDIA, Microsoft, and Google launching new products. Arm's share among top hyperscalers is expected to reach 50%.
Edge AI and Physical AI: Edge AI devices like smartphones are growing faster than the market. Physical AI markets, including automotive and robotics, are opening new growth opportunities. Rivian announced its third-generation Autonomy Computer based on Arm, and Tesla's Optimus humanoid robot uses a custom Arm-based AI processor.
Revenue Growth: Achieved record revenue of $1.24 billion, up 26% year-on-year. Royalties grew 27% to $737 million, and license revenue grew 25% to $505 million.
R&D Investment: Increased R&D investment by 37% year-on-year to $716 million, focusing on next-generation architectures, compute subsystems, and exploration into chiplets and complete SoCs.
AI Strategy: Focused on AI inference workloads, agent-based AI, and expanding Arm's role in data center architecture. Arm's platform spans cloud, edge, and physical AI use cases.
Customer Engagement: Signed 2 new Arm Total Access agreements and 2 new CSS licenses with leading smartphone OEMs. Strengthened strategic engagements with key customers, including SoftBank.
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Risk or Challenges
Market Conditions: The company is subject to risks and uncertainties that could cause actual results to differ materially from forecasts and targets. These risks are highlighted in their SEC filings.
Strategic Execution Risks: The company is making significant investments in R&D, including next-generation architectures and compute subsystems, which could pose risks if these investments do not yield expected returns or if execution falters.
Economic Uncertainties: The company’s revenue guidance reflects current market views, but economic uncertainties could impact end markets and licensing pipelines.
Regulatory Hurdles: The company’s operations and future results are subject to regulatory risks as described in their SEC filings.
Supply Chain Disruptions: No explicit mention of supply chain disruptions was made in the transcript.
Competitive Pressures: The company faces competitive pressures in AI, data center, and edge computing markets, requiring continuous innovation to maintain market share.
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Guidance & Outlook
Revenue Guidance for Q4 FY2026: Expected revenue of $1.47 billion, plus or minus $50 million, representing approximately 18% year-on-year growth.
Royalty Revenue Growth: Projected to grow in the low teens year-on-year for Q4 FY2026.
Licensing Revenue Growth: Expected to grow in the high teens year-on-year for Q4 FY2026.
Non-GAAP Operating Expense for Q4 FY2026: Projected to be approximately $745 million.
Non-GAAP EPS for Q4 FY2026: Expected to be $0.58, plus or minus $0.04.
Long-Term Revenue Confidence: Confidence in future revenue growth driven by strong customer demand, long-duration contracts, and structurally higher royalty rates.
Investment Focus: Continued investment in next-generation architectures, compute subsystems, and silicon to enable higher performance, greater efficiency, and more AI use cases.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:How does Arm view the role of CPUs in AI and cloud data centers, especially with the proliferation of AI agents?
A:Rene Haas explained that as the shift in data centers moves from training to inference, CPUs are increasingly deployed due to their power efficiency, always-on capability, and low latency. This trend benefits Arm as hyperscaler providers and NVIDIA are increasing the number of CPU cores in their chips.
Q:What are the risks to royalty revenue growth in fiscal '27, particularly from demand destruction in consumer electronics?
A:Jason Child noted that a 20% reduction in smartphone volumes would translate to a 2-4% impact on smartphone royalties and a 1-2% impact on total royalties. However, growth in Cloud AI and infrastructure is expected to offset these risks.
Q:Will SoftBank need to sell Arm stock to finance investments, and what are the implications for Arm's shares?
A:Rene Haas stated that SoftBank has no interest in selling any Arm shares, as confirmed in direct conversations with Masa.
Q:Why is there a forecasted deceleration in royalty revenue growth?
A:Jason Child attributed the deceleration to tougher year-over-year comparisons due to overperformance in prior quarters and potential impacts from memory shortages. However, absolute royalty revenue is expected to remain consistent.
Q:Can you quantify the data center revenue and clarify SoftBank's $200 million contribution?
A:Jason Child stated that data center revenue is growing faster than the rest of the business and could reach 20% of total revenue in the next 2-3 years. The $200 million contribution from SoftBank is a full-quarter impact of previously signed deals.
Q:How will the migration to v9 higher royalty rates offset lower smartphone units?
A:Rene Haas explained that v9 royalties are tied to Compute Subsystems (CSS), which see annual royalty rate increases. Jason Child added that even with a 20% reduction in smartphone units, the impact on revenue would be limited to 4-6% within smartphones.
Q:Will Arm develop a custom ASIC in partnership with SoftBank?
A:Rene Haas declined to comment on specific product developments.
Q:What is Arm's IP penetration rate in AI data center semiconductors, and how will it evolve over the next 3-5 years?
A:Rene Haas stated that AI workloads will increasingly run on Arm-based platforms, with CPUs taking on more tasks traditionally handled by GPUs. This trend presents a significant growth opportunity for Arm.
Q:What percentage of royalty revenue is from Compute Subsystems (CSS), and how will it change over the next 2-3 years?
A:Jason Child noted that CSS currently contributes in the teens percentage-wise to royalty revenue and could grow to 50% in the next few years due to its value in reducing design cycle times.
Q:What is the early view on fiscal '28 growth?
A:Jason Child stated that while fiscal '27 growth of 20% is reasonable, no specific guidance for fiscal '28 is available yet.
Q:Is memory already impacting smartphone volumes, and will bill of materials (BOM) challenges affect CSS adoption?
A:Jason Child said memory impact on smartphone volumes is minimal and not a driver of current guidance. Rene Haas added that BOM challenges are not affecting CSS adoption due to its value in accelerating time to market.
Q:What is the outlook for R&D investment in fiscal '27?
A:Jason Child indicated that R&D growth will moderate compared to fiscal '26, with a similar Q4 to Q1 step-up as last year.
Q:How will AI impact Arm's business beyond driving demand?
A:Rene Haas emphasized that AI workloads will run on physical chips, which Arm provides. He highlighted the transformative potential of AI across industries and Arm's role in meeting the growing demand for compute.
Q:What are Arm's thoughts on SRAM and power efficiency in AI workloads?
A:Rene Haas stated that power efficiency is a constant focus for Arm, especially in constrained environments. He also noted that Arm is involved in developing alternative memory technologies to address AI demands.
Q:Review of Unclear Management Responses
A:Management avoided giving a direct answer to the question about developing a custom ASIC in partnership with SoftBank, stating that they could not comment on specific product developments.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI workload
Arm AI
Arm chip
Arm compute
Autonomy
CPU chip
CPUs Arm
Cobalt
DPUs
Edge AI
Head Investor
Neoverse
Physical AI
Relations Arm
Rivian
Vera
application
compute platform
constraint
coordination
core count
custom Arm
edge AI
foundation
gigawatts
hyperscalers
industry
inference agent
latency
power efficiency
power envelope
processor
production
robotics
shift
strength
unit
watt
year center
ARM Transcript
Arm Holdings plc (ARM) Q3 2026 Earnings Call Transcript
Positive2-4
The earnings call reveals strong financial performance with a 25% revenue growth, robust ACV growth, and a positive outlook on AI trends. Although there are concerns about royalty revenue deceleration and smartphone volume impacts, these are offset by growth in Cloud AI and infrastructure. Management's commitment to R&D and strategic partnerships further enhance the positive sentiment. The Q&A reassures investors about potential risks, and guidance on non-GAAP EPS aligns with expectations. The overall sentiment is positive, likely leading to a stock price increase of 2% to 8% over the next two weeks.
Arm Holdings plc (ARM) Q2 2026 Earnings Call Transcript
Positive11-5
The earnings call summary reveals strong financial performance with significant year-on-year growth in revenue, operating income, and EPS. The Q&A section highlights strategic positioning in the AI market, partnerships with major tech companies, and a promising acquisition. Despite some vague responses, the overall sentiment is positive due to robust demand, improved margins, and optimistic guidance. The strong growth in royalties and licensing, alongside strategic investments in R&D and AI, further supports a positive outlook. The lack of market cap data suggests a potentially strong stock price reaction.
Arm Holdings Plc (ARM) Q1 2026 Earnings Call Transcript
Positive7-30
The earnings call summary is generally positive, with record high revenues, strong royalty growth, and optimistic guidance. The Q&A section reveals some uncertainties, particularly around specific strategy details and market entry, but overall sentiment remains positive due to strong market positioning and growth prospects. The Q1 results exceeded expectations, and the guidance suggests continued growth. The lack of full-year guidance is a minor concern, but not enough to overshadow the positive indicators. Therefore, the stock price is likely to see a positive movement in the short term.
Arm Holdings plc American Depositary Shares (NASDAQ:ARM) Q4 2025 Earnings Call Transcript
Positive5-8
Arm's earnings call indicates strong financial performance with record high revenue, significant licensing growth, and optimistic guidance for royalty revenue. The strategic initiatives, including AI partnerships and custom silicon demand, are positive indicators. While there are risks related to regulatory issues and economic factors, the company's strong market position and growth in key sectors like automotive and hyperscalers mitigate these concerns. The lack of a share repurchase program is a minor negative, but overall, the financial health and strategic direction suggest a positive stock price movement.
ARM Report
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