Arm Beat Estimates on a Licensing Surge, but Royalties Fell Short

Arm's licensing revenue jumped 50% in the September quarter as customers paid up for AI chip designs, carrying total revenue up 27% to a record $1.44 billion.

Arm Holdings reported revenue of $1.44 billion for the quarter ended September 30, 2026, up 27% from $1.14 billion a year earlier and its best second quarter on record. The figure beat the $1.38 billion average estimate compiled by LSEG. Adjusted earnings of $0.52 a share beat the $0.47 LSEG estimate, and both results cleared the top of Arm's own guidance range.

Arm does not manufacture chips. It licenses processor designs to chipmakers and collects a royalty — a per-chip payment — each time one ships. That split is the whole story this quarter: the upfront licensing money surged, while the recurring royalty stream grew slowly.

Licensing did the heavy lifting

License and other revenue rose 50% to $773 million, far above the $625.1 million LSEG estimate. Arm credited strong demand for its designs, the timing and size of several high-value license agreements, and contributions from backlog.

Annualized contract value — Arm's normalized measure of licensing revenue — rose 12% to $1.79 billion. Arm treats licensing as a leading indicator: designs licensed today become royalty-paying chips when they enter production, and the company said it expects royalty revenue to accelerate as these designs ship.

Royalties grew just 8%

Royalty revenue rose 8% to $670 million, short of the $720.8 million LSEG estimate. Data-center royalties doubled from a year earlier, and chips built on the newer Armv9 architecture and compute subsystems carry higher royalty rates per chip.

The drag was phones. Arm said royalty growth was partly offset by the impact of memory pricing on the smartphone market, where handset makers are absorbing much higher memory costs.

Two profit stories in one quarter

On the adjusted figures Arm emphasizes, operating income rose 37% to $638 million, a margin of 44.2% of revenue. Non-GAAP net income rose 36% to $566 million.

The statutory picture looks worse, for a one-off reason. GAAP net income fell 45% to $130 million, or $0.12 a share, because the year-earlier quarter included a $131 million gain on the disposal of a business. GAAP operating income itself rose 23% to $201 million.

Operating cash flow fell 63% to $207 million in the quarter. Over the last twelve months, non-GAAP free cash flow was $1.1 billion, up 2%, and Arm held $3.6 billion in cash and short-term investments.

Guidance clears the bar, by inches

For the December quarter, Arm guided revenue to $1.54 billion, plus or minus $50 million. That midpoint sits just above the $1.53 billion LSEG average estimate. It guided adjusted earnings to $0.56 a share, plus or minus $0.04, against a $0.55 consensus, and non-GAAP operating costs of about $825 million.

Investors focused on the royalty miss. The shares had already fallen 5.3% in Wednesday's regular session, closing at $191.80 amid a rough day for chip stocks, before the results were released. In after-hours trading after the print, the stock fell more than 3% to $185.66, according to an Investor's Business Daily snapshot.

The bigger bet is Arm's own chip

Alongside licensing, Arm now sells a processor of its own design, the Arm AGI CPU, aimed at AI data centers. “Our confidence in achieving up to $2 billion in Arm AGI CPU revenue over FY27–28 has increased over the last 90 days, supported by additional supply and customer mix,” the company said in its letter.

Purchase orders from multiple customers now extend through calendar 2027, and first commercial deliveries remain on track for the fiscal fourth quarter. Oracle Cloud Infrastructure plans to offer Arm AGI CPU instances in 2027.

Arm-based chips accounted for more than half of server deployments at the top hyperscalers in calendar 2025, up from 15% in 2024. Arm expects that share to exceed 60% by the end of 2026. Partners shipped more than 10 billion Arm-based chips in the quarter, 1.5 billion more than a year earlier.

A courtroom question still hangs over royalties

Last month, a Delaware jury found that Arm breached parts of its licensing agreement with Qualcomm and interfered with Qualcomm's relationship with Meta. It awarded just $2 in nominal damages, and the jury sided with Arm on the remaining claims, including pricing claims under a separate agreement.

The consequential question is still open. A judge must decide whether Qualcomm may suspend royalty payments to Arm for up to five years, under a contract clause Arm argues is unenforceable. No ruling has been made.

What remains unknown

Arm gave no full-year guidance in the letter, and it did not restate the royalty-growth outlook from its first quarter, when it expected full-year royalty growth in the high teens. Whether this quarter's 8% royalty growth is a floor or a trend is the central unknown.

Also unknown is the timing of the Delaware ruling, and whether this quarter's licensing surge repeats. Arm itself notes that licensing revenue moves with the timing and size of individual agreements, which makes a 50% jump a hard act to follow.

What to watch next

Watch the royalty line first: whether data-center royalties keep doubling while smartphone royalties recover from memory-price pressure. Then watch the December-quarter print against the $1.54 billion guide, the first AGI CPU deliveries due in the fiscal fourth quarter, and any ruling from Delaware.