Arm 2026 Q1 Financials

Another $1b Quarter, More Growth Expected

With their unusual 9-months ahead fiscal year, it’s already time to talk about Arm’s 2026. The prolific IP provider has been riding a wave of growth built on the backs of both the smartphone – and increasingly, AI – businesses, all of which has been lifting Arm to new revenue records through the past several quarters. And the first quarter of their 2026 fiscal year was no exception.

With $1.05b in revenue for Q1’FY26, Arm has once again set a new high-water mark for Q1 revenue. We’ll break things down in a bit, but in short revenue was up 12% year-over-year, with all of that growth, 20% year-on-year, coming from royalty revenue. Meanwhile licensing revenue dropped by 1%. Overall, this marks the second quarter that $ARM has booked over a billion dollars in revenue – and the second consecutive quarter, at that.

Overall, Arm’s situation is largely unchanged from the previous quarter. While the IP business is more insulted from immediate market swings - and thus more consistent than what the hardware vendors themselves can see - Arm has nonetheless been pushing hard to expand its own revenue generating opportunities over the past couple of years. And those efforts are paying off, especially with royalty revenue in the most recent quarter. Coupled with the higher margins afforded by pre-assembled Compute Subsystems (CSS) IP blocks, it has set up Arm rather well for continued revenue growth. During this earnings, we were given a nice update as to exactly where some of those licensing values sit now compared to previous years.

Arm has also been a significant beneficiary from the AI boom, of course. While the company does not provide high-end AI accelerators of its own, even with stating in the prepared remarks of the financial call that it’s something they’re exploring with Softbank, the company is providing the architecture used by many of the CPUs driving AI systems - most famously NVIDIA’s Grace CPUs, which feature in their Grace Blackwell systems. As a result, Arm has found itself in the lucrative position of selling important IP to the pickaxe maker itself - or perhaps it would be more appropriate to say they’ve found their niche in the AI space in selling the pickaxe handles.

Key Takeaways (GAAP)

💵 Q1 Revenue, $1.05b, up 12% YoY from $906m and down 15% QoQ
📈 Q1 Gross Margin at 97.2%, up 0.7pp YoY and down 0.5pp QoQ
💰 Q1 Net Income of $130m, down 42% YoY from $223m and down 38% QoQ
🪙 Q1 EPS $0.12, down 43% YoY, down 40% QoQ

Highlights

• Record Q1 revenue – second best quarter ever

• Compute Subsystem (CSS) licensees reaches 16, more than double Q1’FY25

• Arm discloses rough royalty rates from v8 up to current CSS offerings

Financial Overview

For the first quarter of their 2026 fiscal year, Arm booked $1.05b in revenue. This was a 12% increase year-over-year, setting a new Q1 record for the company. And while it didn’t set a new overall record – especially coming off of the back of Arm’s especially strong Q4’FY25 – it does mark the second quarter of revenues over the billion-dollar mark.

Because of the pure play nature of Arm’s IP business, virtually all of the company’s gross income is profit, and Q1’FY26 is no exception. For the quarter Arm recorded a GAAP gross margin of 97.2%, a 0.7pp increase over Q1’FY25. Meanwhile, though still quite profitable, Arm’s net income has continued its slide we saw in the previous quarter. $130m in net income is down 42% from the year-ago quarter, when Arm booked $233m in profits.

Digging into Arm’s financials a bit more, the biggest factor driving down net income appears to be R&D costs. With those costs representing the bulk of Arm’s overall operational costs, spending there is effectively a proxy for Arm’s engineering headcount. And while Arm is no longer disclosing their total headcount on a quarterly basis starting this year – though they’ll still report it on an annual basis at the end of the year – their earnings report plainly confirms that the company has been increasing its engineering headcount.

All told, over the past year, Arm has increased R&D spending by 34%, with GAAP R&D spending jumping from $485m to $650m. Even compared to just the previous quarter, where Arm spent $546m on R&D, R&D spending is up 19% in just the last three months.

As an aside, it’s interesting to see how much of that cost is in share-based compensation (SBC) versus salary. Of the $650m in GAAP R&D costs for the quarter, $210m of that (32%) was in share-based compensation. All of which indicates that Arm is operating a bit more like a startup right now, with a significant amount of its compensation going out in the form of stock. It also means that Non-GAAP R&D numbers went to $440m this quarter from $298m the same quarter last year, a 47% rise.

Licensing and Other Revenue

💵 Q1’26 Revenue $468m, down 1% YoY

With Arm breaking down its revenues into two groups, licensing and royalties, we’ll once again start with the more volatile of Arm’s two business categories. As it’s not directly tied to hardware shipments or other client hardware success, it varies quite a bit based on when companies sign new or updated license agreements.

Overall, licensing revenue was down 1% YoY for Arm, with the company collecting $468m in license revenues. Arm attributes the year-over-year drop to “normal fluctuations in the timing and size of multiple high-value license agreements and contributions from backlog,” which is Arm’s usual line here. While Arm’s licensing revenue grows more often than it shrinks, the overall volatility of the business means that it’s pretty common to see licensing revenue drop on a YoY basis at least one time a year.

Looking at Arm’s license sales altogether, Arm is reporting that they’ve sold 1 new Arm Total Access licenses for the quarter, bringing the total to its all-encompassing license plan to 45 active (extent) clients. Meanwhile the company has lost 1 of their R&D-focused Arm Flexible Access licensees, bringing that total down to 313. Like licensing revenue itself, this is the more volatile of Arm’s licensing plans, and this is the third time in the last few years that Arm has lost a Flexible Access licensee going from one quarter to the next.

Finally, Arm’s CSS licensing program has picked up multiple new customers. The company signed 3 additional licenses in Q1 – two for datacenter chips, and most interestingly of all, one for PCs. This brings Arm to a total of 16 CSS licenses spread over 10 companies, with 9 compute licenses, 6 infrastructure licenses, and 1 automotive license. Overall, this is more than double their CSS license count from the year-ago quarter. Consequently, according to Arm “CSS is becoming the preferred starting point for customers and a significant tailwind for royalty revenue growth.”

Royalty Revenue

💵 Q1’26 Revenue $585m, up 25% YoY

Arm’s second major revenue category – and in most quarters, the larger of the two – is Arm’s royalty revenue. Directly tied to the success of clients’ chips and the volumes shipped thereof, Arm’s business model thrives on royalties, especially as the long-term nature of these agreements means that Arm can still collect significant revenues for IP designs 10+ years old.

For the first quarter of Arm’s 2026 fiscal year, Arm recorded $585m in royalty revenues. This was up 25% from the year-ago quarter, when Arm booked $467m in revenue. And with 25% YoY growth, it marks a Q1 record for royalty revenues – though falling just a bit short of surpassing Q4’FY25.

As has been the case for the last several quarters, Arm is attributing the bulk of the growth in royalty revenues to three major areas.

First has been the increased adoption of the Arm v9, which fetches higher royalties per unit than old architectures. Unfortunately, with Arm no longer providing a breakdown of royalties by architecture, we no longer have insight into just how much of Arm’s revenue is coming from the latest family of architectures. In Arm’s Q4’25 earnings, which was the last time they offered this breakdown, Armv9 had just surpassed Armv7 (& older) architectures in revenue, at 31%. Though it still had a way to go to catch up to Armv8 revenue, which was at 44%.

The second major contributor to Arm’s royalty growth has been the sales of the company’s Compute Subsystems (CSS) - pre-assembled IP blocks that include not only Arm CPU cores but other bits of IP, allowing companies to skip that part of the integration process and bring products to market sooner. CSS designs feature more Arm IP, and in line with the additional work Arm does in assembling them, they fetch higher margins per chip than just licensing Arm’s CPU cores or other IP. In the analyst call, Arm stated that CSS licensing is around double that of an equivalent v9 core license, for perspective. To reiterate what we mentioned above, Arm has 16 CSS licensees these days, with 9 of those being for client chips, 6 for infrastructure/server chips, and 1 unnamed EV automotive manufacturer.

Speaking of CSS, while Arm isn’t making any kind of product announcement at this time, as part of the company’s earnings call, the company outlined how it won’t be stopping with just subsystem IP. The long-term plans for CSS will include chiplets as well, and potentially even full end-to-end chip solutions. The company isn’t making any hard commitments at this time, but laying the groundwork for selling full chiplets and chips is where some of Arm’s R&D hiring has been going to in recent quarters. In remarks to analysts, Arm CEO Rene Haas noted that he has managed such products before, and that the trend from customers is that they are seeking to further accelerate their time to market. In which case, being able to buy a chiplet (or whole chip) from Arm is even faster than spinning up one’s own design based on a CSS block. Rene also highlighted the growth in licensing with Softbank as a driver, especially exploring what strategy works best for Softbank’s AI plans.

Otherwise, Arm is once again underscoring how much CSS is growing smartphone revenues even when smartphone unit sales growth is rather tepid. Thus, even in a largely mature market, Arm has been able to claim a larger piece of the revenue pie thanks to CSS, and ultimately by providing a larger share of the chip IP.

Finally, the third major contributor, as always, has been the continued growth of Arm CPU usage in the data center space. This goes for both general servers, and in AI systems. In the case of the latter, Arm doesn’t have a high-performance accelerator IP of its own; but because CPUs are still needed to drive AI-focused systems (e.g. Grace + Blackwell), AI system sales still drive the sale of Arm-based chips, all of which pays out as royalties for Arm. The company is especially pleased that, with Google and Microsoft adopting NVIDIA Grace Blackwell-based systems, it has significantly increased the use of Arm IP at both cloud service providers. All told, Arm estimates that 70,000 enterprises now run AI workloads on Arm Neoverse-based chips, which is up 40% year-over-year.

And while Arm is no longer providing a royalty revenue breakdown by architecture, for the first time in ages, the company has provided some fresh guidance on their royalty rates for different tiers of products, helping to underscore just how much more profitable CSS designs are than Arm CPU cores alone.

Broadly speaking, royalties on Armv8 chips are in the 2.5% to 3% range. Meanwhile for Armv9 cores, those royalties are closer to 5%. On top of that, Arm also clarified that its v9 royalties in the smartphone space, of which they’re on the fourth generation of v9 cores, has been rising generation over generation.

But with Arm’s CSS designs – which have the company doing a larger share of the design work – the royalty rate is closer to 10%. In fact, Arm is expecting the royalty rate on the next generation of CSS designs to be even higher, shooting past the 10% mark altogether. In comments made during today’s earnings call, the company noted that when the CSS program started, they thought 10% was near the ceiling. But based on their experiences with customers since then – and what customers have been demanding – there’s room for Arm to do more CSS design work, and to charge higher royalties as well.

Outlook, Q1 2026

Outlook is as follows:

💵 Q2’26 Revenue, $1.06b, +/- $50m
📈 Q2’26 EPS, $0.33, +/- $0.04

Rounding out Arm’s first earnings report for FY2026, we have their guidance for the second quarter of FY2026. As with the end of FY2025, Arm is not providing any formal full-year guidance here; rather they are taking things one quarter at a time.

Coming off of what is normally one of Arm’s weaker quarters of the year, Arm’s Q2 guidance only calls for the company’s revenues to grow by the slightest amount on a quarterly basis. With a forecast of $1.06b, +/- $50m, this would still amount to significant year-over-year revenue growth for the company – just under 26% – however it would mean that Arm sees virtually no quarterly growth despite moving later into the fiscal year. Then again, as Arm’s Q2 revenue has declined on a quarterly basis a couple of times over the past few years, any kind of revenue growth is still an improvement on that.

Arm is also forecasting a quarterly decline in non-GAAP EPS – and by extension, net income. With guidance of $0.33 +/- $0.04, if this comes to pass it would be a $0.02 decline versus Q1. On a year-over-year basis, however, this would represent a decent jump in earnings, as Arm booked an EPS of $0.30 for Q2’25.

Driving the conservative revenue target in large part is currency exchange issues with the weak US Dollar. While two-thirds of Arm’s operating expenditures are in Euros or British Pounds – reflecting that the bulk of the company is in the UK – Arm does business in USD. So with the Dollar just recently recovering from a multi-year low against the Pound, it has been driving up Arm’s operational costs. All-told, the company expects the weak Dollar to drag down EPS by $0.01 for each quarter of the year, for a total hit to EPS for the year of $0.04.

Past this, the nature of Arm’s business as an IP provider – and a broad one, at that – means that there is no one product or IP release that is going to immediately and uniquely drive sales for the company in the next quarter. That means that Arm’s growth is going to be fueled by an amalgamation of many of the same factors that drove Q3 growth: data center chip royalties, expanding use of Arm CSS, and other higher royalty uses of Arm’s IP.

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It includes all the CEO Rene Haas prepared remarks as well as the Analyst Q&A.
You could probably get these transcripts elsewhere, but that’s not here, is it? :)