Arm's FY26Q2 covers July through September 2025.
Arm FY26 Q2 Earnings Highlights:
Revenue was $1.14B, up 34% year over year and 8% sequentially.
GAAP gross margin 97.4%, up 1.2 percentage points year over year, remaining unrivaled globally.
GAAP operating income $160M, up 155% year over year. GAAP operating margin 14%, up 6 points year over year.
Non-GAAP operating income $470M, up 43% year over year. Non-GAAP operating margin 41%, up 2 points year over year.
GAAP net income $240M, up 122% year over year. GAAP net margin 21%, up 8 points year over year.
Non-GAAP net income $420M, up 32% year over year. Non-GAAP net margin 37%, down 1 point year over year.
Despite near-100% gross margins, GAAP operating income remains low, often loss-making historically, primarily due to high R&D spend, 61% of revenue this quarter, and sales & marketing at 22% of revenue. With the expense ratio declining this quarter, Non-GAAP operating margin recovered to 41%.
Business Segments:
License & Other revenue was $520M, up 56% year over year.
Signed 4 Arm Total Access (ATA) agreements this quarter, bringing cumulative total to 48 (ATA annual fees escalate 7% per year, three-year renewals). Arm Flexible Access (AFA) now has 312 customers, down 1 sequentially.
License revenue benefited from securing 3 second-generation CSS licenses across smartphone, tablet, and data center. Total CSS licenses now stand at 19 across 11 companies. The top four global Android smartphone vendors are now shipping CSS-based devices. Launched the most advanced mobile compute platform, Lumex CSS; flagship devices from partners including OPPO and vivo expected to ramp later this year. The largest license deal this quarter actually came from China.
ACV $1.6B, up 28% year over year and 5% sequentially. RPO $2.25B, down 6% year over year, remaining weak. 29% to be recognized in the next 12 months, 16% in months 13-24.
Royalty revenue was $620M, up 21% year over year.
Royalty growth this quarter was driven by all major markets: data center, smartphone, automotive, and IoT. Largest contributors were smartphone (higher per-chip royalty rates) and data center (continued share gains from hyperscaler custom silicon). Data center Neoverse royalty revenue more than doubled year over year. Automotive and IoT also grew year over year. FY25 Cloud & Networking was 10% of royalty revenue. When analysts projected FY26 rising to 15-20%, management concurred and will update the figure at year-end.
Arm Neoverse CPU platform has now deployed over 1B CPUs, including NVIDIA Grace, AWS Graviton, Google Axion, and Microsoft Cobalt. Expect ~50% of new hyperscaler server CPU chips in 2025 to be Arm-based.
First-gen CSS royalty is 2x Armv9; second-gen higher still. Historically Armv8 royalty ~2.5-3% of chip ASP; Armv9 ~5%; first-gen CSS ~10%; second-gen CSS will exceed 10%.
Arm FY26 Q2 Call Highlights:
Guiding Q3 revenue of $1.225B, up 25% year over year. Non-GAAP net income $438M, up 5% year over year.
Expect Q3 royalty revenue growth slightly above 20% year over year. License revenue growth 25-30% year over year.
China accounted for ~22% of revenue this quarter. Royalty growth in China is strong, but more growth came from License. Very strong License pipeline for the remainder of the year.
SoftBank accounted for ~$178M of related-party transactions this quarter, including license and design services. Design services carry lower margins.
Acquired DreamBig Semiconductor, IP focused on Ethernet and RDMA controllers, important for scale-up and scale-out.
Announced strategic partnership with Meta this quarter, aiming to improve AI efficiency across every compute layer from AI wearables to AI data centers through a consistent compute platform.
Arm's Core Growth Formula
The doubling of data center royalty revenue this quarter and optimistic guidance for a significant full-year revenue share increase convinced the market that Arm can ride the AI wave, pushing its already lofty valuation even higher. Expect second-gen CSS licenses to accelerate royalty growth later, though Arm's quarterly revenue and profit volatility warrants attention.