Arm (NASDAQ:ARM) reported what executives described as a record third quarter for fiscal 2026, citing broad-based strength in royalties and licensing as customers adopt newer architectures and compute subsystems across smartphones, data centers, and emerging AI-driven end markets.
Record quarter driven by royalties and licensing growth
Chief Executive Officer Rene Haas said Arm’s revenue increased 26% year-over-year to $1.24 billion, marking the company’s fourth consecutive quarter above $1 billion. Royalty revenue rose 27% to a record $737 million, which Haas attributed to record unit volumes and strength “across AI and general-purpose data center.” License revenue totaled $505 million, up 25% year-over-year, as more customers signed high-value agreements for next-generation technologies.
Data center momentum and AI inference trends
Haas emphasized a shift in cloud AI from training toward inference, and increasingly “agent-based” inference workloads that are persistent and power-constrained. He argued this trend increases the importance of CPUs for coordination, creating demand for higher core counts and power efficiency—areas where Arm believes its architectures have an advantage.
As examples of industry movement toward higher core counts on Arm-based designs, Haas highlighted several hyperscaler and partner CPU announcements discussed on the call, including AWS’s fifth-generation Graviton processor, NVIDIA’s next-generation Vera CPU, Microsoft’s Cobalt 200, and Google’s Axion-powered instances. Haas also said Neoverse CPUs have surpassed 1 billion cores deployed, and Arm’s share among the top hyperscalers is expected to reach 50%.
In response to a question about the magnitude of data center revenue, Child said Arm provides detailed data center revenue disclosures once per year. However, he referenced prior commentary that the category had “just hit double digit” and, given current growth rates, suggested investors “assume it’s going to be somewhere in the teens to probably getting closer to 20%” of total revenue. Haas added that over the next two to three years Arm expects data center to become similar to, or potentially larger than, the smartphone business, which Child characterized as roughly 40% to 45% of the total business.
Compute subsystems (CSS) and rising royalty rates
A recurring theme was Arm’s compute subsystems, or CSS, which Haas said were launched nearly 2.5 years ago and have seen demand “exceed expectations.” Arm signed two additional CSS licenses in the quarter for Edge AI tablets and smartphones, bringing the total to 21 CSS licenses across 12 companies. Haas said five customers are now shipping CSS-based chips, including two shipping second-generation platforms, and that the top four Android smartphone vendors are shipping CSS-powered devices.
Child described CSS as having a “material impact” on royalties, stating that CSS was approaching double digits of the royalty mix last year and is now “well into double digits,” characterizing it as “into the teens.” Looking ahead, he said CSS could be “upwards of 50%” of the royalty mix over the next couple of years, while noting uncertainty depends on the pace of customer adoption. Management also argued CSS shortens chip development cycles—Child said it typically cuts cycle time about in half—helping customers reduce integration risk and reach market faster.
On smartphones, Haas said the move to Armv9 and CSS is central to how Arm’s royalty rates increase. He noted that each smartphone cycle brings a new CSS, and royalty rates generally increase year over year with each new generation. Child added that the company’s view of smartphone royalty sensitivity to unit pressure factors in these higher rates.
SoftBank contribution and licensing trend
Child said licensing strength reflected deeper strategic engagements, including two new Arm Total Access (ATA) agreements and the two CSS licenses signed with leading smartphone OEMs. Of the quarter’s $505 million in licensing revenue, he said $200 million came from Arm’s Technology Licensing and Design Services agreement with SoftBank.
When asked about the step-up from a previously cited quarterly contribution of roughly $178 million, Child said the earlier figure reflected a partial-period impact, while the current quarter captured a full-quarter contribution. He said he expects $200 million to be the “right run rate going forward.”
Haas also addressed speculation about whether SoftBank might sell Arm shares to fund investments, saying he had spoken directly with SoftBank’s Masayoshi Son, who he quoted as not being interested in selling “one share” of Arm stock.
To smooth quarter-to-quarter variability from large deals, Child said Arm is focused on annualized contract value (ACV) as a key indicator. He reported ACV grew 28% year-over-year, matching the growth rate Arm cited in the prior two quarters and remaining above the company’s long-term expectation for mid- to high-single-digit license revenue growth.
Margins, investment, and Q4 outlook
Arm’s non-GAAP operating expenses were $716 million, up 37% year-over-year, which Child attributed to increased R&D investment and engineering headcount expansion. He said the work spans next-generation architectures, compute subsystems, and exploration into chiplets and “complete SoCs.” Non-GAAP operating income was $505 million, up 14% year-over-year, resulting in a non-GAAP operating margin of about 41%. Non-GAAP EPS was $0.43, which Child said was near the high end of guidance due to higher revenue and slightly lower operating expenses than expected.
For fiscal Q4, Arm guided to revenue of $1.47 billion ± $50 million, implying about 18% year-over-year growth at the midpoint. The company expects royalties to be up low-teens% year-over-year and licensing up high-teens%. Arm guided to non-GAAP operating expense of approximately $745 million and non-GAAP EPS of $0.58 ± $0.04.
On the Q&A, Child addressed investor concerns about potential smartphone demand impacts tied to memory supply constraints. He referenced commentary from MediaTek suggesting a possible 15% unit reduction next year and said Arm’s analysis suggests that even a 20% unit decline could translate to roughly a 2% to 4% impact on smartphone royalties and about a 1% to 2% impact on total royalties. He added that infrastructure growth has been exceeding expectations and is “more than compensating” for those risks.
Child also said the lower year-over-year growth rate implied for Q4 royalties is driven more by seasonality and tougher comparisons, including an “unusual timing” of a MediaTek chip release in the prior year, rather than memory constraints.
Arm also noted it will host an event on March 24, though Child said the company would not provide details ahead of the event.
About ARM (NASDAQ:ARM)
Arm Limited (NASDAQ: ARM) is a global semiconductor IP company best known for designing energy-efficient processor architectures and related technologies that underpin a wide range of computing devices. Founded in 1990 as a joint venture between Acorn Computers, Apple and VLSI Technology and headquartered in Cambridge, England, Arm develops the ARM instruction set architectures and core processor designs that chipmakers license and integrate into custom system-on-chip (SoC) products. The company operates a licensing and royalty business model rather than manufacturing chips itself.
Arm’s product portfolio includes CPU core families (such as Cortex and Neoverse lines), GPU and multimedia IP (Mali), neural processing units (Ethos) and a suite of system and physical IP blocks.
