Earnings Call Transcript - ARM Q2 2026

Jeff Kvaal, VP, Investor Relations

Thank you, Sharon, and welcome, everyone, to our earnings conference call for the second quarter of fiscal '26. On the call are Rene Haas, Arm's Chief Executive Officer; and Jason Child, Arm's Chief Financial Officer. During the call, Arm will discuss forecasts, targets, and other forward-looking information regarding the company and its financial results. While these statements represent our best current judgment about future results and performance, our actual results are subject to many risks and uncertainties that could cause results to differ materially. In addition to any risks that we highlight during this call, important risk factors that may affect our future results and performance are described in our registration statement on Form 20-F filed with the SEC. Arm assumes no obligation to update any forward-looking statements. We will refer to non-GAAP financial measures during the discussion. Reconciliations of certain of these non-GAAP financial measures to their most directly comparable GAAP financial measures can be found in our shareholder letter as can a discussion of projected non-GAAP financial measures that we are not able to reconcile without unreasonable efforts and supplemental financial information. Our earnings-related materials are on our website at investors.arm.com. And with that, I'll turn the call to Rene. Rene?

Rene Haas, CEO

Thank you, Jeff, and welcome, everyone. We continued fiscal year 2026 with strong momentum, fueled by accelerating demand for AI compute from milliwatts in the smallest of edge devices to megawatts in the world's largest hyperscale data centers. Artificial intelligence is reshaping every layer of technology and Arm is the only compute platform delivering AI everywhere. Q2 is our best second quarter ever, with revenue of $1.14 billion, up 34% year-on-year, marking our third consecutive billion-dollar quarter. Royalty revenue reached a record $620 million, up 21% year-on-year, driven by growth in all major markets, including data center, smartphones, automotive, and IoT. Unprecedented compute demand has led to our data center Neoverse royalties more than doubling year-on-year. Licensing revenue rose 56% to $515 million as companies continue choosing Arm to build their next-generation AI products. Our strong results lifted non-GAAP EPS above the high end of guidance. During the quarter, we announced a strategic partnership with Meta to scale AI efficiency across every layer of compute from AI-enabled wearables to AI data centers on a consistent compute platform. This partnership combines Arm's leadership in energy-efficient compute with Meta's innovation in AI infrastructure and open technologies to deliver richer, more efficient AI experiences to billions of people worldwide. In the data center, access to power has now become the bottleneck, accelerating the adoption of Arm's Neoverse compute platform, which has now surpassed 1 billion CPUs deployed. Our compute forms the foundation of custom silicon from leading partners, including NVIDIA Grace, AWS Graviton, Google Axion, and Microsoft Cobalt. For example, Google's Arm-based Axion chip delivers up to 65% better price performance while using 60% less energy. As a result, Google is migrating the majority of their internal workloads to run on Arm. Customers are increasingly deploying Arm Neoverse CPUs alongside their AI accelerators to orchestrate massive clusters, highlighting the versatility and scalability of our platform. The addition of 5 new Stargate sites this quarter further expands visibility into future AI capacity and reinforces Arm's central role in the hyperscale build-out. As AI chip design becomes more complex, our compute subsystems, or CSS, are helping customers accelerate their development cycles and reduce execution risk. Demand for CSS continues to exceed expectations. During the quarter, we signed 3 new CSS licenses; 1 each in smartphone, tablets, and data centers, bringing our total to 19 CSS licenses across 11 companies. We also expanded our collaboration with Samsung, which is leveraging CSS for its Exynos family of chipsets, driving up to 40% AI performance over the previous non-CSS generation. As a result, the top 4 Android phone vendors are now shipping CSS-powered devices. CSS has quickly become the starting point for customers building next-generation silicon, offering faster time to market and delivering higher royalty rates for Arm. In the quarter, we also launched Lumex CSS, our most advanced mobile compute platform to date. Lumex enables rich on-device AI experiences such as real-time translation, image enhancement, and personal assistance. Flagship devices from partners like OPPO and vivo are expected to ramp later this year, bringing console-quality performance and new AI capabilities directly to mobile devices. At the edge, AI is transforming how people interact with their devices in their hands, homes, and vehicles. Google launched the Pixel 10 smartphone featuring the new Arm-based Tensor G5 chip, which runs Gemini models up to 2.6x faster and twice as efficiently as prior generations. NVIDIA began shipping its Arm-based DGX Spark system for AI developers, a compact desktop supercomputer for local model training, fine-tuning, and inference. In automotive, a flagship electric vehicle built on Arm's platform introduced advanced park assist, voice control, and safety features featuring Arm's Automotive Enhanced technology. Tesla's next-generation Arm-based AI5 chip delivers up to 40x faster AI performance, enabling the next wave of intelligent vehicles and autonomous machines. Our leadership in AI is amplified by our unmatched software developer ecosystem, now more than 22 million strong, representing over 80% of the world's developer base. This ecosystem is a powerful growth engine for Arm. Every new Arm-based device brings more developers, which drives more software innovation, which in turn fuels greater demand for our compute platform across every market we serve. As mentioned in our last call, we are continuing to explore the possibility of moving beyond our current platform into additional compute subsystems, chiplets, or complex SoCs. As a result, we continue to accelerate investment in our R&D as we are seeing increased demand from our customers for our work from Arm. AI is shaping how the world computes, and Arm is a foundation making it possible. From milliwatts to megawatts, we deliver the performance, efficiency, and scalability to meet this moment and the years ahead. And with that, I'll hand it over to Jason.

Jason Child, CFO

Thank you, Rene. We have delivered another strong quarter. Total revenue grew 34% year-on-year to $1.14 billion, a record for Q2. It exceeded the midpoint of our guidance range by $75 million and marked our third consecutive quarter above $1 billion. Royalty revenue exceeded our expectations, growing 21% year-on-year to a record $620 million versus our guidance of mid-teens. The biggest growth contributors were smartphones with higher royalty rates per chip and in data centers where we continue to see share gains from custom hyperscaler chips. Royalty revenue from smartphones grew in order of magnitude faster than the market as multiple OEMs ramped smartphones based on Armv9 and CSS chips. Data center royalties doubled year-on-year given the continued deployment of Arm-based chips by hyperscaler companies. Automotive and IoT both continued to grow year-on-year and contributed to our strong royalty performance. Overall, royalty growth rates continue to reflect Arm's increasing royalty rates and rising market share. Turning now to license. License and other revenue was $515 million, up 56% year-on-year. Growth was driven by strong demand for next-generation architectures and deeper strategic engagements with key customers. We further expanded our license and services agreement with SoftBank. We also signed 4 ATA and 3 CSS deals. These agreements reflect the continued investment by our customers in next-generation Arm technology. As always, licensing revenue varies quarter-to-quarter due to the timing and size of high-value deals. So we continue to focus on annualized contract value, or ACV, as a key indicator of the underlying licensing trend. ACV grew 28% year-on-year, maintaining strong momentum following the 28% year-on-year growth we reported in Q1. This is well above our usual run rate of low teens growth rate and is also above our long-term expectations of mid- to high single-digit growth for license revenue. Turning to operating expenses and profits. Non-GAAP operating expenses were $648 million, up 31% year-on-year on strong R&D investment and slightly below guidance. These investments in R&D reflect ongoing engineering headcount expansion to support customer demand for more Arm technology, including continued innovation in next-generation architectures, compute subsystems, and possibly chiplets or complete SoCs. For example, over the past 4 years, we've invested heavily in developing the technology that makes up the Lumex Compute Subsystems for smartphones, which we announced in September. This project took around 1,000 man-years with a team size peaking over 450 engineers and required hundreds of millions of dollars in investment. Lumex CSS has attracted strong market interest and we're already seeing royalty revenue from an early licensee. Non-GAAP operating income was $467 million, up 43% year-on-year. This resulted in a non-GAAP operating margin of 41.1% and an improvement from 38.6% a year ago. Non-GAAP EPS was $0.39, $0.06 above the midpoint of our guidance range, driven by both higher revenue and slightly lower OpEx. Turning now to guidance. Our guidance reflects our current view of our end markets and our licensing pipeline. For Q3, we expect revenue of $1.225 billion, plus or minus $50 million. At the midpoint, this represents revenue growth of about 25% year-on-year. We expect royalties to be up just over 20% year-on-year and licensing to be up 25% to 30% year-on-year. We expect our non-GAAP operating expense to be approximately $720 million and our non-GAAP EPS to be $0.41, plus or minus $0.04. Our higher revenue allows us to both accelerate R&D investment and pass through upside to EPS. We are seeing strong demand from our customers for Arm technology, which gives us confidence in our long-term growth trajectory, and our strategy to enable AI everywhere, in the cloud, at the edge, and in physical devices. We will continue investing aggressively in R&D to capture these opportunities and ensure that AI runs on Arm. With that, I'll turn the call back to the operator for the Q&A portion of the call.

Sebastien Cyrus Naji, Analyst

Congrats on the nice results. Rene, I wanted to ask about the AI opportunity. There's been a seemingly nonstop stream of new data center deals announced over the last quarter, calling for tens of gigawatts of additional computing capacity to be stood up. How do you feel about Arm's strategic positioning with respect to these AI deals? And what do you view as the opportunity across the build-out?

Rene Haas, CEO

Thank you for the question, Sebastien. As a Board member of SoftBank and also given our heavy involvement there with Stargate and regular dialogue with OpenAI, I believe I have a unique perspective in terms of visibility in this market. One thing that's become quite evident is that power has become the bottleneck for everyone and power not only means access to energy, but everything underneath it in terms of infrastructure build-out, turbines, transformers, everything associated with generating power. So in that environment, everyone wants to move to the most efficient compute platform possible. Arm is about 50% more efficient than competitive solutions. We've seen that across the board in benchmarks, but also more importantly, in real-life performance. And that's why we see NVIDIA, Amazon, Google, Microsoft, and Tesla all using Arm-based technology. We see unprecedented demand for compute, and all the incremental compute that we've seen announced has been based on Arm. So that's driving huge growth opportunity for us, and it's one of the indicators as to why we've seen such growth in our Neoverse business more than doubling year-over-year.

Joseph Quatrochi, Analyst

I noticed in the filing you announced your intention to acquire DreamBig Semiconductor. I'm curious just kind of what's behind that? And how does that kind of fold into your plans to potentially expand beyond your current offering platform?

Rene Haas, CEO

Yes. Thank you for the question. So DreamBig is a great company. They've got a lot of interesting intellectual property particularly around the Ethernet area and already make controllers, which are very key for scale-up and scale-out networking. So when we look at the demand for what's going on inside the data center, particularly in the area of high-speed communications, that type of technology will be very helpful for us to broaden our offering to end customers. So we're very excited about the company, and DreamBig has got some fantastic engineers.

James Schneider, Analyst

I noticed in your disclosures that you saw a significant increase in related party revenue. I was wondering if you could talk a little about the recent announcements related to Stargate and SoftBank since the last earnings call. Can you provide some insight on the nature of that relationship and how things are evolving in terms of design activities?

Rene Haas, CEO

One way to think about Stargate and particularly given the relationship between Arm and SoftBank is a huge opportunity for Arm to partner with SoftBank and SoftBank's partners to provide technology into all those solutions. Without getting into too many specifics, at a high level, if you think about what's associated with building out these data centers, you have the compute, obviously, you have the networking, you have everything associated with power distribution, and potential technology that gets into the power mechanism of the data center, and then everything associated with even potential assembly of the data center. As a result of all the work SoftBank and the SoftBank family of companies are doing, it provides a huge opportunity for Arm to provide solutions in that space. So that, at a high level, is the way to think about how the SoftBank family works together on these designs.

Ross Seymore, Analyst

I wanted to go back to the OpEx side of things. I know it was a little bit below your guide in the second quarter, but the third quarter looks like it's going to step up again. Kind of a bigger picture one. You mentioned about exploring different sorts of go-to-market methodologies, chiplets, et cetera. When do you expect to give us more color on when that's going to go from exploration to return on investment or the actual strategy? How should we monitor that and expect to get more information from you?

Rene Haas, CEO

Yes. Thank you for asking. The best detail I can give you is there's nothing I can talk to you about today in terms of timeline, about products or technologies. When the time comes for us to announce it, you'll be the first to know in terms of what we're doing. Right now, the best commentary I can give is that everything associated with those solutions does require a significant level of R&D. Now as you've seen on the guidance going forward, our revenue go forward is higher than our OpEx increase, which is something we've been very careful to manage. So we feel comfortable about that. But at the same time, what we're looking at in terms of the opportunity for compute—and more importantly, compute using Arm—has never been greater. So as a result, we want to make sure we're in the best position possible to capture it. We're looking at all possibilities in terms of how to do that. And when we're ready to talk about what that is, we will certainly advise.

Jason Child, CFO

The only thing I would add is, I think last quarter we said, as soon as the way we think about when we announce something, if it were to be something related to full SoCs, it would be once there's tape-out, once there's samples back, and once there's actually non-cancelable customer orders. When we achieve all 3 of those milestones, that's when we would probably talk about something because this would be a new business and something we haven't done before. So whenever those milestones are achieved, that's when you should expect to hear from us.

Vivek Arya, Analyst

I just wanted to clarify how much was the SoftBank contribution in Q2 versus what you thought? And then what is baked in for Q3 and hopefully, if you have the number for Q4? The real question is how long can this quarterly rate persist? If you do move into physical chips or chiplets or any other products as part of target, does it start to cannibalize this licensing stream?

Jason Child, CFO

Yes. So thanks for the question. In terms of the impact, it was about a $50 million increase from last quarter. Last quarter, we think we were about $126 million. It actually went up $52 million, so now about $178 million. That's a good run rate to assume going forward. The only way it would change is if we have any additional deals. Again, these are license plus design services, so think of it as being licenses to our IP to work with SoftBank on exploring solutions. But then think of the design services as effectively a kind of a funded R&D model. And that's a lower margin revenue, of course. So these—in terms of how long these revenue streams will occur, we're not at liberty to say yet, but I would say, as Rene said, at some point probably in the next year or so, you'll hear us talk about what products those might be. Obviously, that's not just up to us; it's when SoftBank is ready to talk about what these products could look like and what the revenue profile, etc. is. Assuming that, there would be some different revenue source, whether it's royalties or gross revenue from selling a chip if, in fact, it's a full SoC. Those are all things that are still to be worked out. And yes, I would think of that as being somewhat cannibalistic of whatever the current license and design services are. But then, of course, if there is a product, you could also assume there could be successive generations of products after that, in which case you could stack royalty between license and design services. But then, of course, there could also be royalties or whatever the revenue relates to whatever the product that ships in the market is. So I would think of it as very much durable revenue, in that I think if SoftBank wasn't a related party, we would just be booking license and design services—and it wouldn't be a related party—but then the numbers would be pretty similar. The fact that the related party is probably what makes it look somewhat unique. The reality is we also, as Rene already mentioned, this is not really just between us and SoftBank. They also have contracts with many others, OpenAI, and other Stargate partners as well. So I would think of this as all being part of a larger effort.

Timm Schulze-Melander, Analyst

I had 2, please. Just following on the Stargate theme and the sites. Can you talk about the shape of what that revenue opportunity looks like on a sort of 1-, 3-, and 5-year view just when it's going to start influencing the annual revenue or quarterly revenue of the business? My second question was, just to make sure, I wasn't sure I caught it right. You talked about the Lumex CSS. I think that's a product that you launched in September, but you said you already have royalty revenues associated with that. If you could expand on that a little bit, that would be really helpful.

Rene Haas, CEO

Sure, sure. I'll take the first part of that question, and I'll let Jason take the second half. Without giving you a go-forward forecast of 1, 3, 5 years, a way to think about it is, back in January of this year, OpenAI with Oracle and SoftBank announced Stargate, which was a $500 billion project to build out data centers over the next number of years. When we go back to where we are now 11 months later, I would say the demand picture for compute is greater than it was at that time. This is a bit of why you're seeing all kinds of different accelerated announcements around spend. If nothing else, I think the opportunity for compute has only grown since we made that Stargate announcement. To be clear, that announcement is around a joint partnership with OpenAI and SoftBank being equity partners in this investment for compute. We are quite bullish in terms of the overall demand for compute. Right now, what is in the way of realizing that potential is all of the infrastructure required around the power. Everything that we can tell from people we talk to inside the ecosystem, the demand for compute to train these new models, reinforcement learning to make them great and then inference to serve them, the demand opportunity is stronger than what we announced 11 months ago. We're accelerating all the investments we talked about to take advantage of that opportunity. On the Lumex CSS royalty question, I'll let Jason answer that one.

Jason Child, CFO

Yes. I would say the licensee that we're already receiving royalties from is earlier than expected. The way it's happened so quickly is this actually — we're not able to say which partner it is, but it is a partner where this is not their first CSS; this is their second CSS. As a result, there was already kind of close partnership on the first generation. So when we launched the next generation, because the teams have been working closely, it allowed that second generation to be adopted very quickly and for royalties to come within a couple of months after the technology was delivered. It's unusual and ahead of what we expected, but it very much speaks to why CSS has been more successful even than we thought when we launched it 2 years ago. It's really about speeding up time to market, and this is an excellent example of that occurring.

Harlan Sur, Analyst

Rene, you talked about Neoverse royalties growing 2x year-on-year with all these cloud-based CPUs ramping. Also, with these high-performance AI clusters, right, they're using more DPUs or SmartNICs that are also using Arm cores. On the networking side, data center switching and routing chips have multiple Arm cores embedded for things like telemetry, load balancing, and overall system management. The bottom line is that there's significant Arm compute going into all aspects of the data center. We're also even seeing Arm taking over x86 in the service provider networking markets as well. So last fiscal year, cloud and networking accounted for about 10% of royalty revenues. We're midway through this fiscal year. Maybe you guys could just true us up. I assume this mix has increased. Is it approaching 15%, 20% of total royalty revenues for the team? Any color here would be great.

Rene Haas, CEO

Yes. I'll let Jason address the numbers, but thank you for being a great salesman and describing our penetration across domains. You're 100% right. There's Arm technology in virtually every part of the networking stack. The BlueField technology at Mellanox, DPU-based — that's Arm. Significant technology goes into the switches around Tomahawk and Arista are all using Arm technology. We are definitely seeing an acceleration of all that. The power efficiency piece is probably the biggest accelerant in terms of being able to offload as much as everything you can onto the more power-efficient domain of the compute platform. I'll let Jason comment on royalties scheme in terms of where that is going directionally.

Jason Child, CFO

Harlan, so on the royalties, it ended the year at around 10-ish percent. With the growth rate in infrastructure being double all the other categories in overall average royalty, you should expect it to continue to increase. We'll provide a full update at the end of the year. Your trajectory of somewhere in the 15% to 20% range is not a bad assumption and probably a reasonable expectation for where we expect to trend throughout the year.

Sreekrishnan Sankarnarayanan, Analyst

I have a question for Rene. Clearly, you highlighted how you have strengthened smartphones and also increased market share in data centers. I'm curious: when you look over the next few years, how do you see chip demand and token generation playing out and its implication for Arm, especially as you move into more of an inference world where edge devices may play a bigger role?

Rene Haas, CEO

I think from some accounts of people I talk to, they will say that today in some of these data centers, these build-outs of multi-hundred megawatts still—again, depending on how you define training versus inference and reinforcement learning—the majority of compute is being used for training still. That clearly will flip. At some point, it has to, we think. That demand starts to move to inference. We're seeing lots of demand for different architectures and compute type of solutions to run inference not in the cloud. You're going to not rely 100% on something on the edge. Today, it's the reverse; it's about 100% on the cloud. We think that is going to change. We are already seeing lots of demand for the CPUs and Lumex that have these scalable matrix extensions, which allow the running of AI workloads at higher performance. That's only going to continue. For Arm, that is an enormous trend for us on two levels. Number one, it's a huge trend for us because the further you move away from the cloud onto battery-level devices, that's a domain that Arm can play in, in the sense of the software workload running exclusively there. But customers would love a scalable software solution between the cloud and the edge. Much of what is behind the announcement we made with Meta in October is to work with Meta so that whether they're running something in the cloud or the edge, developers can efficiently port models no matter where they're running. This is all good for us because more tokens mean more compute, which means more compute needed at the edge. More compute at the edge is good for us because we believe we are in a unique position to address that.

Lee Simpson, Analyst

Well done everyone on a great quarter. I see China is maybe 22% of sales this Q. I was just wondering what is driving that? Is it more licensing or royalties for strength in the quarter? As you look at the licensing pipeline for the rest of the year, have you seen more reason to be confident in the growth this year for licensing, especially as you look to Q4, which, as I believe we said before, there's potential for good renewal deals this year.

Jason Child, CFO

Thanks for the question, Lee. In terms of the China performance, yes, it definitely has done well. Overall, I'd say the demand in China looks to be as strong as we've ever seen. We did have one of our largest license deals actually come out of China. License was slightly more of a—I'd say, more of the overperformance came from license. Royalties are also growing strong in China, but license was a bigger driver this quarter. Our pipeline indicates that we have a strong license pipeline for the remainder of the year. In terms of overall license revenue, it's hard to say as we get into Q4. There are some large deals as we always have in terms of timing. Right now, we're just guiding on Q3. Next quarter, we'll have much more clarity around what deals will land in Q4 and whether there's any pull forward, push-outs, or whatnot. Remember, we don’t lose deals; it’s really about the market needs for customers and when they need it. Given the current CapEx forecast and all the AI cycles that continue to be strong, I have confidence, but we'll provide more detail next quarter on what will land in Q4.

Rene Haas, CEO

Thank you, and thank you, everyone for the questions. As we stated, we could not be more happy with the results last quarter. Royalties at a record, 34% growth year-on-year, just terrific results. More importantly, when we think about the opportunity for Arm going forward, the future has never been brighter. Artificial intelligence is driving unprecedented demand for compute. Given the unprecedented demand for compute, we are seeing constraints on power and infrastructure to deliver that compute, which means that the compute delivered for AI needs to be as efficient as possible. That's also a great place for Arm. As more of this AI compute moves from the cloud to edge devices and requires the most efficient compute on the planet, that's a great place for Arm, too. We are extremely excited about the future going forward. We continue to invest to ensure that we can take advantage of that opportunity. On behalf of everyone inside Arm who made this quarter happen and to our partners and customers, thank you so much, and thank you for all the questions.

Operator, Operator

Thank you. That was our final question for today. I will now hand the call back to Rene for closing remarks. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.