Arm FY26 Q3 corresponds to calendar October/November/December 2025.
Arm FY26 Q3 Highlights:
Revenue $1.24B, up 26% year over year, slightly above consensus $1.23B; prior guidance was $1.23B.
GAAP gross margin 97.4%, up 0.4 percentage points year over year, slightly below consensus 97.7%, still leading the vast majority of global companies.
GAAP operating income $185M, up 6% year over year, below consensus $246M; GAAP operating margin 15%, down 3 percentage points year over year.
Non-GAAP operating income $488M, up 10% year over year, in line with consensus; Non-GAAP operating margin 39%, down 6 percentage points year over year.
GAAP net income $223M, down 12% year over year, below consensus $232M; GAAP net margin 18%, down 8 percentage points year over year.
Non-GAAP net income $457M, up 10% year over year, above consensus $438M; Non-GAAP net margin 37%, down 5 percentage points year over year.
Despite near-100% gross margins, Arm's GAAP operating income remains low and was frequently negative in the past, primarily due to high R&D expense, which reached 59% of revenue this quarter, up 38% year over year in absolute terms, far outpacing revenue growth. Sales & marketing expense stable at 23% of revenue. Therefore, whether R&D intensity can decline directly determines whether operating margin can expand.
Business Segments:
License & Other revenue $505M, up 25% year over year.
Signed 2 Arm Total Access (ATA) agreements this quarter, cumulative 50 (ATA annual fee escalates 7% per year, three-year renewals); Arm Flexible Access (AFA) now has 318 customers, up 6 sequentially.
License revenue benefited from securing 2nd-generation CSS licenses from two handset customers; total CSS licenses now 21 across 12 companies; the top four global Android handset vendors are now shipping devices with CSS.
ACV $1.62B, up 28% year over year; RPO $2.15B, down 8% year over year, second consecutive quarterly decline.
Royalty revenue $737M, up 26% year over year.
Royalty growth driven by data center and handset; largest contributors: data center (continued share gains from hyperscaler custom silicon) and handset (higher per-chip royalty rates); data center Neoverse royalty revenue doubled year over year for multiple consecutive quarters, now representing high-teens percentage of royalty revenue, approaching 20%; management expects data center revenue to surpass handset as Arm's largest business in 2-3 years; automotive up double digits year over year; handset royalty growth continues to outpace overall handset shipment growth, driven by CSS high royalty rates.
Management says Agentic AI fueling strong server CPU demand with heightened focus on CPU performance-per-watt, Arm's core strength; Amazon AWS launched 5th-gen 192-core Graviton Arm CPU, NVIDIA launched 88-core Vera Arm CPU, Microsoft launched 132-core Cobalt 200 Arm CPU, Google launched 2nd-gen Axion Arm CPU; also benefiting from increased network chip deployments driven by new AI data center build-out, particularly DPUs and SmartNICs, where Arm holds very high share.
First-generation CSS carries roughly twice the Royalty rate of Armv9, and the second generation is priced higher still. Armv8 historically earned about 2.5%-3% of chip ASP, Armv9 about 5%, first-generation CSS roughly 10%, and second-generation CSS more than 10%. CSS contributed a low-teens percentage of Royalty revenue in FY26 and could exceed 50% over the next several years.
Arm FY26 Q3 Earnings Call Highlights:
Guiding next quarter revenue $1.47B, up 18% year over year; Non-GAAP net income $620M, up 6% year over year.
Guiding Q4 royalty revenue up low-double-digits year over year, license revenue up high-double-digits year over year; management thought Q3 royalty would grow 20%, actual 27%, sees some carryover into Q4, but difficult to say if strength extends into next year, mainly due to memory and even wafer capacity shortages.
Management says FY27 revenue growth of ~20% year over year is reasonable.
Related-party revenue including Arm China and SoftBank $338M this quarter, up 19% year over year, ~27% of revenue; SoftBank accounts for ~$200M of related-party revenue, including license and design services, the latter with lower margins.
Management says assuming 2026 handset shipments decline 20%, Arm handset royalty revenue would be impacted ~4-6%, a ~1-2% headwind to total company; each handset generation delivers all-new CSS, each new CSS delivery typically commands a higher royalty rate year over year, so as handset v9 migrates to CSS, royalty revenue rises annually at higher rates.
CSS pricing impact on customer BOM is minimal.
SoftBank does not intend to sell Arm shares.
Arm's Core Growth Formula
Previously, data center royalty revenue doubling and rising share convinced the market that Arm could ride the AI wave.
Arm's long-term certainty remains; near-term, data center continues to double but the larger handset business faces growth pressure, compounded by persistently high R&D spend further suppressing profit growth. Management's FY27 guidance aligns with our estimates over the past year; FY27 Non-GAAP net income still ~$2B+ scale. Arm will have truly transformed only when data center revenue overtakes handset.