Arm Holdings plc American Depositary Shares Q3 FY2026 earnings call

• Arm delivered a record third quarter with revenue growth of 26% to $1.24 billion, fourth consecutive billion-dollar quarter. Royalties grew 27% to $737 million, driven by AI and data center strength. License revenue was $505 million, up 25%.
• Organized into three business units: Edge AI (smartphone and IoT), Physical AI (automotive and robotics), Cloud AI (data center and networking).
• CSS (compute subsystem) has 21 licenses across 12 companies, with five customers shipping CSS-based chips. Top four Android smartphone vendors are using CSS-powered devices.
• In Cloud AI, shift to inference and agent-based workloads benefits Arm, with hyperscalers launching products with increased core counts. AWS, NVIDIA, Microsoft, Google are using Arm-based chips.
• Edge and physical AI markets offer growth opportunities with Arm's strengths in power efficiency and software foundation. Examples include Rivian, Tesla, and Qualcomm using Arm-based solutions.

Arm Holdings plc delivered a record third quarter. Total revenue grew 26% year on year to $1.24 billion, marking the fourth consecutive billion-dollar quarter. Royalties increased 27% to a record $737 million, contributing approximately 59.4% of total revenue ($737M / $1.24B). License revenue was $505 million, up 25% year on year, making up about 40.6% of total revenue ($505M / $1.24B). The data center royalty revenue has grown more than 100% year on year and is expected to become the largest business in a few years.

• For Q4 2026, expected revenue of $1.47 billion, plus or minus $50 million, representing ~18% y/y growth.
• Royalties expected to be up low teens y/y, licensing up high teens y/y.
• Non-GAAP operating expense expected to be approximately $745 million, non-GAAP EPS expected to be $0.58, plus or minus $0.04.

• Memory supply chain constraints could impact smartphone volumes. However, cloud AI growth is offsetting potential negative impacts. For example, a 20% reduction in smartphone volumes would translate to at most a 2-4% negative impact on smartphone royalties, and a 1-2% negative impact on total royalties overall.

Q: Joe Quatrochi from Wells Fargo asked about the role of the CPU in AI and cloud data centers and impact of AI agents.

A: Rene Haas stated CPUs are well-suited for agent-based AI workloads due to power efficiency and low latency, with hyperscalers and NVIDIA increasing core counts in CPUs.

Q: Simon Leopold from Raymond James asked about SoftBank selling Arm shares and royalty revenue growth deceleration.

A: Rene Haas said Masa is not interested in selling Arm shares; Jason Child mentioned royalty growth deceleration is due to stronger comps and memory supply chain impacts, but cloud AI growth offsets risks.

Q: Vivek Arya from Bank of America asked about data center revenue quantification and SoftBank's $200M contribution.

A: Jason Child said data center revenue is growing rapidly and expected to grow into a significant portion, and the $200M from SoftBank is a full quarter impact and expected to continue.

Q: Mehdi Husseini from Susquehanna Financials asked about smartphone v9 migration offsetting lower units.

A: Rene Haas and Jason Child explained v9 in smartphones has increasing royalty rates with each CSS cycle, and the impact of unit volume changes is minimized by higher royalties on premium segments.

Q: Vijay Rakesh from Mizuho asked about SoftBank's AI roadmap and custom ASICs.

A: Jason Child said no specific details could be provided on upcoming products.

Q: Krish Sankar from TD Cowen asked about Arm's IP penetration in AI data centers.

A: Rene Haas said AI workloads will run on all compute hardware, and Arm is well-positioned to mold where AI goes due to its widespread use in compute platforms.

Q: Harlan Sur from JPMorgan asked about CSS royalty mix and future proportion.

A: Jason Child said CSS royalty mix is in the teens and expected to accelerate to upwards of 50% in the next couple of years.

Q: Charles Shi from Needham and Company asked about FY 2028 guidance.

A: Jason Child said no early view on FY 2028 yet, but 20% growth is reasonable for FY 2027.

Q: Srini Pajjuri from RBC asked about memory impact on next quarter royalties and CSS adoption.

A: Rene Haas said CSS adoption isn't impacted by bill of materials due to time-to-market benefits; Jason Child said memory impact on next quarter royalties is minimal, driven by seasonality and comps.

Q: Andrew Gardiner from Citi asked about OpEx growth into FY 2027.

A: Jason Child said Q4 to Q1 OpEx growth will be similar to last year, but growth after Q1 is expected to moderate.

Q: John DiFucci from Guggenheim Securities asked about stock market reaction to software companies and AI leverage.

A: Rene Haas said AI is linked to hardware, and Arm is in early days of AI integration, with huge demand for compute driving opportunities.

Q: Timm Schulze-Melander from Rothschild and Co asked about SRAM at edge and power efficiency cadence.

A: Rene Haas said Arm is highly involved in SRAM and alternative memory technologies, and focuses on power efficiency continuously as AI drives more compute demand