Earnings Call Transcript
ARM HOLDINGS PLC /UK (ARM)
Earnings Call Transcript - ARM Q3 2025
Jeff Kvaal, Head of Investor Relations
Thank you, and welcome to our earnings conference call for the third quarter of fiscal '25, which ended December 31, 2024. On the call today 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 as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially. In addition to any risks that we highlight during the 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, as well as a discussion of certain projected non-GAAP financial measures that we are not able to reconcile without unreasonable efforts and supplemental financial information, can be found in our shareholder letter. The shareholder letter and other earnings-related materials are all available on our website at investors.arm.com. And with that, I'll turn the call over to Rene.
Rene Haas, CEO
Thank you, Jeff, and good afternoon, everyone. AI demand continues to drive strong momentum for the Arm ecosystem, which is built on the world's most pervasive compute platform. We're pleased to report record total revenue and an all-time record royalty revenue for the third quarter of fiscal 2025. Total revenue grew 19% year-on-year to an all-time high that exceeded the high-end of guidance. Our royalty revenue grew 23% year-on-year to a new record. This was driven by adoption and deployment of v9 and strong demand for Arm CSS. Licensing remains strong, as our partners make long-term commitments to more of our advanced technology to take AI everywhere. AI growth requires significantly more compute across all of our end-markets, from smartphones with better chat features to autos with better driving and parking assist, to IoT microprocessors with embedded MPUs. This is driving continued adoption of our v9 and CSS technologies. New flagship smartphones from Oppo and Vivo take advantage of MediaTek's new Dimensity 9400 system-on-chip. This SoC is based on our CSS for client, which includes the Arm Cortex-X925 CPU and the Immortalis-G925 GPU. Increased chip complexity is driving the top hyperscalers to customize silicon on the latest Armv9 and CSS. We are gaining share in the data center with AWS Graviton, Microsoft Cobalt, Google Axion, and NVIDIA's Grace ARM-based chips. AWS recently announced more than 50% of new CPU capacity installed over the past two years was on Graviton. Over 90% of AWS' top 1,000 EC2 customers use Graviton. We have more than 20 million developers, the world's largest developer community, and we continue to increase investment in our ecosystem. NVIDIA also announced Project DIGITS, which combines the ARM-based Grace CPU and the Blackwell GPU into the new GB10 Superchip that powers the world's smallest AI supercomputer. The Grace CPU is based upon Arm CSS for client and includes 20 power-efficient Arm cores, 10 Cortex-X925 and 10 Cortex-A725. With Project DIGITS, developers, data scientists, and AI researchers will be able to more easily build inference models before deploying them into the cloud. I'd also like to call out two key projects that further cement Arm's position at the very center of the AI ecosystem. Along with SoftBank Group and OpenAI, Stargate for AI infrastructure deployment and advanced enterprise AI called Cristal Intelligence to develop AI agents for knowledge work. We strongly believe that the advances in AI, both for training and inference, are going to increase the demand for compute in the AI Cloud. We expect Arm solutions to address the needs from the cloud to the edge to power growth in the world's most popular compute ecosystem for decades to come. And with that, I will hand it over to Jason.
Jason Child, CFO
Thank you, Rene. Q3 was another record quarter as we continue to deliver strong growth. Total revenue reached $983 million, exceeding the upper end of our guidance. Royalty revenue hit a record $580 million, growing 23% year-on-year and surpassing our expectations. This growth stemmed from the ongoing adoption of Armv9 and the initial shipments of chips based on our compute subsystems, along with increased revenues from custom silicon for the data center. Royalty revenue from chips in smartphones, data centers, networking equipment, and automotive met our expectations, while royalty revenue from IoT showed signs of recovery after several weak quarters. According to the latest reports, revenues from smartphones continue to outpace the overall smartphone market, aided by chips utilizing both Armv9 and CSS, such as MediaTek's Dimensity 9400, which is being used in flagship smartphones from Oppo and Vivo. Licensing revenue rose 14% year-on-year to $403 million, outperforming our forecasts. License revenue can fluctuate quarterly due to variations in the timing and scale of high-value license agreements and contributions from backlog. As always, we advise looking at annualized contract value, or ACV, to gain a clearer picture of licensing growth. In Q3, ACV increased by 9% year-on-year, slightly lower than our recent low-teens run rate but above our long-term plan. Remaining performance obligations, or RPO, decreased slightly quarter-over-quarter as Arm delivered products that released revenue from backlog. As you know, Arm's revenues today are derived from technology developed many years ago, and our current costs are investments for future revenue streams. To maximize these future opportunities, we aim to enhance our R&D investments today. In the third quarter, our elevated R&D spending pushed non-GAAP operating costs to the highest level of $522 million, which aligned with our expectations. Concurrently, we achieved near-record non-GAAP operating profit of $442 million. Moving forward, we will continue balancing increased investments for long-term business growth with near-term profitability. Now, regarding guidance, I will briefly mention both the fourth quarter and the fiscal year ending March 31, 2025. This guidance reflects our current outlook on end-markets and our licensing pipeline. For Q4, we anticipate revenue between $1.175 billion and $1.275 billion. At the midpoint, this signifies a revenue growth of 32% year-on-year. We have set the revenue guidance range slightly wider than in previous quarters due to several large licensed deals underway. While we are confident about the closure of these deals, the timing can be unpredictable, and some may extend into the next fiscal year. As noted earlier, our current revenue growth allows us to boost investments in the essential R&D for our long-term success. We are accelerating investments in our next generation technologies. We now project Q4 non-GAAP operating expenses to be around $590 million, and for Q4, we expect non-GAAP EPS to fall between $0.48 and $0.56. For fiscal year '25, we are raising the midpoint of our full-year guidance to approximately $4 billion. This midpoint signifies about a 24% year-on-year growth, ahead of our long-term target of 20%. Consequently, we anticipate a full-year royalty revenue growth rate in the high teens year-on-year, consistent with our prior guidance. We expect full-year license revenue to rise by about 30% year-on-year. Our projected non-GAAP operating expenses for the year are approximately $2.1 billion, reflecting a 21% year-on-year increase. As a result, we anticipate our full-year non-GAAP EPS will be between $1.56 and $1.64. I will now turn the call back to the operator for the Q&A portion.
Operator, Operator
And your first question comes from the line of Lee Simpson from Morgan Stanley. Please go ahead.
Lee Simpson, Analyst
Hi, good afternoon. Thank you for taking my question. I would like to start by asking about the strengths we see in licensing as we move into the next year, particularly in light of recent developments in the broader AI landscape that relate to Arm's capabilities. Looking back two weeks, we saw the announcement of Stargate in the U.S., with budgets exceeding $100 billion. Recently, we also learned about the new collaboration between SoftBank and OpenAI called Cristal Intelligence. I’m trying to understand Arm's position in this context, as it seems to be both an enabler and potentially have a first-mover advantage in this new era of Agentic AI. Could you provide a clearer outline of the opportunities that exist for Arm, particularly regarding the introduction of new products to these significant projects and the long-term benefits for Arm from an earnings perspective? Thank you.
Rene Haas, CEO
Yes. Thank you for the question. There's a lot there. So, I'll try to simplify a bit. So, Stargate, a project that was announced a few weeks back, which is an extremely significant infrastructure project in the United States, where $100 billion will be invested immediately and $500 billion over-time. And this is a partnership with OpenAI and Oracle and SoftBank, technology partners being those companies in addition to ourselves, Microsoft, and NVIDIA. For Arm, we are extremely excited to be the CPU of choice for such a platform. Combined with the Blackwell CPU with Grace, Arm will be the CPU of choice for the initial configurations. And going forward, there will be huge potential for technology innovation around that space. So, incredibly exciting project, which we think will be transformational for the industry. Cristal Intelligence, which was discussed earlier this week, is really about Agentic AI and agents moving across every node of the hardware ecosystem. So, if you think about the smallest devices such as earbuds, all the way to the data center, this is really about agents increasingly being the interface and/or the driver of everything that drives AI inside the device. For Arm, it's a significant opportunity because AI workloads will run on every one of those endpoints that I mentioned. Additionally, given that Arm is the world's most pervasive compute platform, those AI workloads will run on Arm and through Arm. And through our Kleidi AI libraries, we will make it very easy for developers to target and optimize to the Arm platform running these agents. So, both of those announcements are very significant in terms of their impact on the industry and represent significant opportunities for our Company.
Jason Child, CFO
In response to your question about the licensing upside components, during the quarter, licensing revenue increased by approximately $27 million compared to our guidance, or a 14% increase year-on-year. The main drivers have remained consistent over the past few quarters, particularly in AI and the ongoing need to utilize v9 technology for AI chip preparation. Additionally, as Rene mentioned, we have sold more CSS contracts and are continuing to work on them. Looking ahead to the next quarter, we anticipate that license revenue could grow by around 60% year-on-year. Since the beginning of the year, we have expected several significant deals for Q4, and these are largely on track and consistent with our projections, primarily driven by AI and CSS.
Lee Simpson, Analyst
Thanks, Jason.
Jason Child, CFO
Thank you.
Operator, Operator
Thank you. Your next question comes from the line of Joe Quatrochi from Wells Fargo. Please go ahead.
Joseph Quatrochi, Analyst
Yes. Thanks for taking the question. You mentioned that the partner demand for CSS is stronger than initially anticipated. I guess, how should we think about the contribution to royalty revenue ramping as we enter fiscal '26 versus your prior expectations?
Jason Child, CFO
Yes. So, we're not ready to talk about '26 yet, but in terms of exit rate, we feel very good about the momentum that we've delivered. For example, this last quarter of $500 million of royalty revenue, that's about 13% higher than our previous record of $514 million. Certainly, no surprise that, that also is in the first quarter that we actually have material CSS revenue this quarter, led mostly by the Dimensity 9400 chip that we talked about, also Cobalt CSS starting to see shipments and deployments and that's flowing into royalty revenue now. As we continue to see more CSS deployments over the next couple of quarters, we do expect there to be continued momentum. In terms of quantifying the momentum, we're going to have to wait until next quarter.
Joseph Quatrochi, Analyst
Fair enough. Thank you.
Jason Child, CFO
Thank you.
Operator, Operator
Thank you. Your next question comes from the line of Charles Shi from Needham & Company. Please go ahead.
Charles Shi, Analyst
Yes. Can you hear me?
Rene Haas, CEO
Yes.
Charles Shi, Analyst
Thank you. I want to bring up the recent media attention surrounding the trial last month involving one of your significant clients. It appears that there is a discrepancy between your understanding and theirs regarding the expiration of the contract, as they believe it ends in 2028, while you believe it's 2025. Although this relates to the calendar year, what is your current perspective on this matter? Specifically, regarding the revenue, there seems to be an expectation that it could materialize in calendar year 2025, but perhaps that won't occur in the next calendar year. I'd like to hear your thoughts on this.
Jason Child, CFO
This is Jason. I think the question was about the impact of the Qualcomm lawsuit and on revenue.
Charles Shi, Analyst
Correct.
Jason Child, CFO
Yes, there is no impact. We had anticipated this situation all the way back to the IPO and continue to plan as if we will not win that lawsuit. The main reason for the lawsuit was to protect our intellectual property, which is significant. However, from a financial standpoint, we had expected to keep receiving royalties at the same rates that have been paid in the past and will continue to be paid.
Charles Shi, Analyst
Got it. Maybe another question, just a little bit of clarification. I don't see a Armv9 contribution number from the shareholder letter, maybe I missed this number. But if you have a number, can you tell us what the number is for the past quarter?
Jason Child, CFO
Yes. As a percentage of total royalties in the quarter, it was 25%, so consistent with the prior quarter.
Charles Shi, Analyst
Okay, so it seems like it's been a couple of quarters at 25%. Do you expect it to increase again in the coming quarters? I assume the answer is likely yes, but could you also explain why it's been stalling at that 25% for a couple of quarters?
Jason Child, CFO
Let me just maybe cover just some of the math piece and then I'll let Rene kind of talk about the overall kind of larger view of how v9 adoption is occurring and how it will continue to occur. So, I would just say, first of all, the math is, it's a percentage of total. And so, we saw 23% growth in the quarter. So, it's flat as a percentage of total. But if you actually look just at the v9 dollars, the rate went from about 15% a year ago to about 25% this quarter. So, the absolute dollars grew by, I would say, triple-digit rate. And so, the fact that it's relatively flat actually is a great indication of the fact that we have a longer runway for future growth. We still expect that you will see v9 grow to probably 67% to 70% of total royalties. And the fact that we're able to kind of meet or exceed our royalty growth rates, while it's not been accelerating, should provide more confidence about our ability as that rate goes higher, our ability to drive further royalty growth in the next quarters and beyond.
Rene Haas, CEO
Yes. Maybe just to give you a sense of how to think about those transitions, they're largely driven by the transitions of OEM products and when they get introduced. So, take for example, the MediaTek 9400, which has been designed into Oppo the Vivo phones, those are now in their ramp for production. So, you'll see a spike up as they ramp and then you get to a steady state. But as the next versions are released, a couple of things happen. Broader adoption across the high-end of the segment and then the high- to mid-range to mid-range products start to move from v8 to v9. So, the transition rate that we're seeing is completely expected and very, very consistent with how we expected the overall ramp to be. So, very happy about where we are. And as you said, room for expansion, but it's largely driven by OEMs shifting their chip mix as opposed to licensing new companies.
Charles Shi, Analyst
Thanks, Rene. Thanks, Jason. Appreciate the color.
Jason Child, CFO
Thank you.
Rene Haas, CEO
Thanks.
Operator, Operator
We will now transition to the next question. Timm Schulze-Melander from Redburn Atlantic, please go ahead.
Timm Schulze-Melander, Analyst
Yes, hi. Thanks very much for taking my question. Maybe just to key off the question on the royalty growth. Can you maybe just talk a little bit more specifically about FY '26 and kind of what momentum and what kind of mix evolution we should expect Armv9 to contribute to the full year? Thank you.
Jason Child, CFO
Yes, this is Jason. We'll provide guidance for 2026 next quarter, just like we did last year when we announced our Q4 results. I want to emphasize that we expect royalties to grow at a mid-20% growth rate, which we’ve mentioned previously. We’re not updating that today. The way we plan to achieve this is through a combination of v9 adoption and CSS. In the most recent quarter, v8 demonstrated strong growth, which is promising. However, you should anticipate continued growth for v9 over time. It's also important to note that v9 is just one factor in our growth strategy. The adoption of CSS plays an even larger role in growth since the royalty rate for CSS is approximately double that of v9, which itself is roughly double the rate of v8. Therefore, it's essential to consider all these elements. The momentum we saw in the last quarter, along with our expectations for the upcoming quarter, positions us well for a successful 2026.
Rene Haas, CEO
Yes. And maybe just to expand further on that and make sure Jason doesn't kill me. But the royalty rate on a CSS of '26 is not necessarily the same as the royalty rate for a CSS in '25. Those CSS rates change year-on-year when the new solution is offered to the market. So, those are variable over-time and they increase over-time.
Timm Schulze-Melander, Analyst
That's great. Super helpful. And then, maybe, just one quick follow-up. The licensing revenue, clearly, it's super hard to predict the exact week or day or month, but is there anything that's sort of structurally changing in terms of the complexity of your client agreements, that means that these are just structurally going to take longer and longer to get over the line? Is that something we should expect to see in coming years? Thanks very much.
Jason Child, CFO
This is Jason. I would say no, but you need to kind of look at the contracts primarily in two buckets. There's brand new contracts with someone we haven't done work with before, that probably takes a while. There's a lot longer approval process versus a renewal of maybe an existing ATA, and that's probably a shorter cycle. But nonetheless, the larger the deal is, the longer the timeframe. Typically, when these get into hundreds of millions of dollars, they probably involve Boards of Directors and all these different approvals that can just take many, many months. But in general, to your question, is anything changing now or next year versus where it's been this last year, no, it's all the same factors.
Timm Schulze-Melander, Analyst
Great. Super helpful. Thank you.
Jason Child, CFO
Thank you.
Operator, Operator
Thank you. Your next question comes from the line of Vijay Rakesh from Mizuho. Please go ahead.
Vijay Rakesh, Analyst
Yes, hi. Thanks, Rene and Jason. Just a quick question on the AWS. It looks like on AWS, you're having very good success, almost 90% of the top 1,000 customers using Graviton and the Arm IP. Can you talk to how the Cobalt 100 is progressing, how that's ramping? And I've a follow-up.
Rene Haas, CEO
I'll leave it to Microsoft to discuss the shipments of Cobalt. To clarify, we have taken the comments from AWS directly. Overall, what we're observing with Microsoft regarding Cobalt, as well as with all our partners, is a notable increase in the deployment of these products into the cloud. The shift from an x86 plus H100 to a Grace Blackwell GB200 is also boosting Arm databases in the data center. With Grace as the primary CPU handling all host control, this presents a positive trend for us. We're pleased with the overall momentum. Again, I would suggest turning to Microsoft for specific insights about Cobalt, but the momentum has been excellent.
Vijay Rakesh, Analyst
Got it. Thanks. And then, on the related party side, it looks like very nice traction sequentially. I saw it up 48%. Just wondering long-term, are you seeing any changes there? Does that ramp? As you look out longer-term, how does that progress? Thanks.
Jason Child, CFO
I would anticipate a fairly steady trajectory. The largest aspect of related party is Arm China, which I expect to remain consistent. Over time, however, Arm China is likely to represent a smaller portion of our revenue. This quarter, it was around 25%, and I have mentioned before that we foresee it declining to the mid-teens in the future. Yet, in the coming quarters, I don't expect significant changes.
Vijay Rakesh, Analyst
Got it. Thank you.
Operator, Operator
Thank you. Your next question comes from the line of Andrew Gardiner from Citi. Please go ahead.
Andrew Gardiner, Analyst
Good afternoon. I appreciate you taking the question. I have one regarding mergers and acquisitions. There has been ongoing speculation in the media about potential M&A activity, be it related to Arm or possibly SoftBank. Specifically, I’m curious about the potential for you to evolve from a traditional IP model into the silicon sector. Without revealing specific details about M&A, which I understand is not possible, could you share insights on the internal discussions you're having and what your customers are seeking? What developments are prompting you to consider this direction as you look beyond the immediate future? Thank you.
Rene Haas, CEO
Yes. Thank you for the question. And as you surmised, there isn't very much we can say about speculation and/or rumors. We spend a lot of time, most of my time personally, thinking about growth and thinking about the future. One thing I can say that we're seeing that I'm sure all of us in the market in our space are trying to reflect upon is, at the rate at which AI is evolving and the rate at which the software models change, it puts a tremendous pressure on our ecosystem to develop products faster, better, sooner, and more efficiently. And as Arm is the heart of all of that, we look very hard in terms of how to solve customer problems. But unfortunately, I can't give you much more detail than that, and certainly, can't speculate on any rumors on M&A.
Operator, Operator
Thank you. Your next question comes from the line of Harlan Sur from JPMorgan. Please go ahead.
Harlan Sur, Analyst
Yes. Good afternoon. Thanks for taking my question. Maybe as a follow-on to that question, Rene. I mean, the team has always led with a system-level strategy, which then pulls demand for your compute IP solutions, right? AMBA was a good example of that. Your move to CSS is another good example of that. Now it seems like the team is like scaling the strategy to attack the complex SoC market that is rapidly moving towards this more sort of heterogeneous sort of chiplet-based strategy. You guys are building an ecosystem around your CSA, or this chiplet system architecture? Like what's the progress like so far? Are you seeing an acceleration of activity around CSA? And more importantly, like how is the Arm team going to monetize this strategy?
Rene Haas, CEO
Thank you, Harlan. You've made some excellent points. We have definitely observed an increase in demand for CSS, as Jason noted. Customers clearly recognize its advantages. We are currently engaged with CSS in nearly all the major markets we operate in, and there is substantial demand for this product. Additionally, we've launched the Arm Total Design Partners initiative, which enables design houses to utilize our CSS to potentially develop chiplets, and there is very strong interest in that program as well. Regarding what is driving this trend, as I mentioned earlier, the designs have become extremely complex to create, and this complexity is increasing. There is a strong relationship between hardware and software. Since Arm is central to everything that happens in these chips concerning the software ecosystem, we are receiving considerable requests to deliver more quickly and assist in bringing products to market faster. We are in an exceptional period in our industry where the demand for computing power exceeds the silicon available to meet it. Many inquiries revolve around the smartphone market and the AI capabilities needed to leverage what is happening there. It is important to note that the chips in these smartphones were designed two to three years ago, and the memory subsystem, power, and other components were pre-designed. Therefore, integrating small language models or anything within the phone presents quite a challenge since there also needs to be space for a display, an operating system, and applications. Our focus is on expediting the process of bringing products to market.
Harlan Sur, Analyst
Thank you.
Operator, Operator
Thank you. Your next question comes from the line of Vivek Arya from Bank of America. Please go ahead.
Vivek Arya, Analyst
Thank you for taking my question. I wanted to revisit the topic of v9 adoption. I understand that, in absolute terms, it represents more dollars as a percentage of your royalty. However, at the beginning of the fiscal year, you mentioned that adoption would increase by 5 points each quarter, but it has stalled at 25%. Could you explain what is happening compared to your initial expectations? Additionally, since we didn't see significant growth in the last fiscal year, does this suggest an acceleration or upside potential for next year, or should we consider this differently? Thank you.
Jason Child, CFO
Yes, this is Jason. I'll address that. Essentially, the question revolves around whether this situation positions us for improved growth next year. I think it has the potential to, although I'm uncertain about the specific timing—whether it's next year, in the following year, or something else. Reflecting on our previous assumptions, we've observed that over three consecutive quarters, the percentage of total went from 10% to 15%, then to 20%, and up to 25%, where it’s stabilized recently. We share this metric to clarify the adoption of v9. The recent slowdown in its percentage of total is actually a positive sign as it provides a clearer perspective on our growth outlook. We still anticipate it reaching 60% to 70% of the total. Our confidence stems from having secured contracts and gaining insight into forthcoming v9 products. The timing remains the only variable. It’s somewhat unexpected that growth has stalled in the last few quarters, particularly since we've seen stronger VA growth than anticipated, which is encouraging. If older generations maintain strong growth, that is favorable. However, the new offerings are already contracted, and we are aware that they will be available; we just need to determine when shipments will happen and their composition. These factors ultimately drive our growth. The rationale for providing this figure was to serve as an indicator for understanding the trends related to royalty growth. Despite a slower growth in the v9 mix, our ability to meet or exceed royalty targets is indeed positive, and I suggest focusing more on the overall royalty growth rather than solely on v9 adoption.
Vivek Arya, Analyst
Thank you.
Jason Child, CFO
Thank you.
Operator, Operator
Thank you. Your next question comes from the line of John DiFucci from Guggenheim Securities. Please go ahead.
John DiFucci, Analyst
Thank you. My question is for Rene. It's a high-level question. There has been significant investor discussion about trading optimization and specifically regarding DeepSeek. If we assume this is accurate, how does it affect your perspective on Arm's opportunities in AI, if at all? Additionally, I would like to hear your broader thoughts on this topic beyond just Arm.
Rene Haas, CEO
There are several points to consider. Regarding the achievements of DeepSeek, specifically their generic model V3 and reasoning model R1, significant work built upon existing models has been done. DeepSeek creatively enhanced these models to create a highly efficient inference system. This is beneficial for the industry because it promotes efficiency and reduces costs, which in turn increases the demand for computing power. For Arm, this is particularly relevant as AI workloads will need to be run in various environments, and lower-cost, more efficient inference is crucial for applications with power and compute limitations. This aligns well with Arm's capabilities since their technology is already utilized in smartphones, earbuds, and automobiles, areas where more powerful solutions may not fit. While there are impressive products like Grace Blackwell, they may not be suitable for all devices. As inference costs decrease, it creates a positive situation for Arm. However, it’s important to acknowledge that we are still not at a point where we have fully transformational capabilities in AI. Major players in the market, like Google, Meta, and Microsoft, are significantly increasing their investments, which indicates that there’s still a long way to go in terms of AI development. Overall, this trend is a good sign, as it is likely to drive increased demand for computing power, particularly in sectors where efficiency is crucial, which is a strong area for Arm.
John DiFucci, Analyst
Makes sense. And thanks for your thoughts, Rene.
Rene Haas, CEO
Yes.
Operator, Operator
Thank you. Your next question comes from the line of Krish Sankar from TD Cowen. Please go ahead.
Krish Sankar, Analyst
Yes, hi. Thanks for taking my question. Jason, just wanted to follow-up on the ACV. You mentioned the growth deceleration. I know you will give full-year guidance later on. Just kind of curious how to think about the ACV on a go-forward on a longer-term basis? Are there any big data center or mobile programs that are coming that could ramp it back to the teens of double-digit growth? And how much of the ACV is coming from the Arm China business today? Thank you.
Jason Child, CFO
Sure. Let's discuss the forecast and where we believe it should be headed. When we went public, we indicated that annual contract value (ACV) should ideally grow in the mid- to high-single-digits. This expectation stems from treating all our deals as ratable, considering that most of our license revenue and ACV is derived from ATA deals, which usually have a 7% annual increase. Therefore, growth is likely to hover around that 7% mark in either direction. In the past six quarters, we've observed acceleration in licenses due to AI, primarily from the adoption of version 9 and CSS. This has raised our growth outlook from the approximate 7% to about 14% or 15% at its peak. Whether we will return to the mid-teens range is uncertain, and that’s not something we have forecasted, though it is a possibility. I'll provide more clarity in the next quarter's guidance. For the long-term growth model, expect most growth to come from royalties. Version 9, in particular, offers a significantly higher royalty rate, and as mentioned earlier, both version 9 and CSS are not just temporary boosts in the royalty rate; they represent a substantial increase. However, each year will likely see further annual increases with new versions. Overall, anticipate that future growth will primarily stem from royalties rather than licensing.
Krish Sankar, Analyst
Got you. And just how much of ACV is Arm China? Thank you.
Jason Child, CFO
The Arm China portion is around 20%, which is close to the overall mix. This last quarter it was about 25%, so it's within that range.
Krish Sankar, Analyst
Thank you very much. Thank you.
Jason Child, CFO
Thank you.
Operator, Operator
Thank you. We will now take our final question for today. And your final question comes from the line of Mark Lipacis from Evercore. Please go ahead.
Mark Lipacis, Analyst
Thank you, Mark Lipacis from Evercore, for your question. I would like to ask Jason and Rene about CSS activities. Jason, is the CSS license activity primarily focused on data centers, or is it evenly distributed between data centers and handsets? And Rene, just to clarify your earlier comments, as AI is integrated into smartphones, does that mean that those processors will likely have a chiplet architecture, leading to a high attach rate of CSS in smartphones in the long run? Similarly, on the IoT side, does the earbud also qualify as a CSS device, or is it simply a monolithic die that features more processing power on the Arm chip? Thank you.
Rene Haas, CEO
Yes. So maybe I'll take the first part of that and then Jason sort of can address the numbers. I think every endpoint that you just described, earbuds maybe not just because they're so, so tiny. But certainly, this chiplet approach is going to be pervasive across just about every SoC, if you will. In other words, inside the package, you'll have a number of small die everywhere. It exists on the high-end today almost as a standard. But I think you'll see that everywhere, which is a gigantic opportunity for us because not only can we provide the compute CSS from a CPU standpoint, but it allows us to have the right mix of whether it's an NPU or combined with a GPU and the right CPU combination to maximize performance. You've sort of hit on a very, very key point in terms of demand driver, which is why we're seeing really strong CSS type of demand across all those end-markets. And I'll just let Jason the last piece.
Jason Child, CFO
Yes, on the CSS mix, we've said in the past that auto, we've announced that it's coming, not here yet. So, in terms of the roughly dozen that we've sold, assume that it's basically about 50-50 between infrastructure and our client business.
Mark Lipacis, Analyst
Great. Very helpful. Thanks so much, guys.
Jason Child, CFO
Thank you, Mark.
Operator, Operator
Thank you. I will now hand the call back for closing remarks.
Rene Haas, CEO
Thank you. Thank you and thank you everyone for all your questions. As always, we very much appreciate the interest in what Arm is doing and very, very good questions. As summarized at the beginning, the quarter was just phenomenal, a record quarter. We've never been close to $1 billion before in revenue and we just about got there, Royalty is a record at $580 and we're now guiding to well north of $1 billion in the next quarter, which is something obviously the Company has never done before. So being able to share with you record revenues for the quarter just ended and a projection to beat that by a healthy margin in the next quarter is just something we're so proud of at Arm. So we are very excited about the future, whether it's about the near-term execution of our strategies with v9 and CSS to all the opportunities that Stargate and Crystal Intelligence bring us a fantastic time to be with Arm. So thank you all for your questions and interest, and we will speak to you next quarter.
Operator, Operator
Thank you. This concludes today's conference call. Thanks for participating. You may now disconnect.