Arm's results for the July–September quarter, announced on November 4, 2026, showed revenue up 27% year over year to $1.443 billion, topping the high end of the company's own guidance of $1.430 billion. However, about 84% of the revenue increase came from licensing and other revenue, while royalty revenue grew only 8%. Arm cites growing adoption in AI data centers as a growth driver, but that effect has not yet shown up strongly in total royalty revenue. The results suggest that growth is still led by licensing, and it is hard to conclude that the company has shifted to royalty-driven growth.
Revenue beats guidance, but GAAP net income falls 45%
According to the shareholder letter Arm published, non-GAAP earnings per share (EPS) were $0.52, above the company's guidance of $0.47 ± $0.04. Non-GAAP operating income was $638 million, and the operating margin improved from 41.1% a year earlier to 44.2%. Revenue has now grown more than 20% year over year for five consecutive quarters, so the company's earnings base continues to expand.
On the other hand, net income under U.S. generally accepted accounting principles (GAAP) was $130 million, down 45% from $238 million a year earlier. Operating income itself rose 23%, from $163 million to $201 million, so the main cause of the decline was a smaller non-operating gain. Non-operating income fell sharply, from a $139 million gain a year earlier to a $7 million gain this quarter.
Non-GAAP free cash flow was also just $110 million, down 73% from $411 million a year earlier. Over the trailing 12 months, however, it totaled $1.096 billion, so quarterly fluctuations may be a factor. According to Benzinga Pro data, Arm shares fell 3.55% to $185 in after-hours trading following the earnings release.
Licensing and other revenue accounts for about 84% of the increase
What stands out in these results is which revenue source drove the increase. Total revenue rose $308 million, from $1.135 billion a year earlier to $1.443 billion, and $258 million of that came from licensing and other revenue. That is about 84% of the increase. Royalty revenue, by contrast, rose by only $50 million.
| Revenue item | Year-earlier quarter | This quarter | YoY change |
|---|---|---|---|
| Total revenue | $1.135 billion | $1.443 billion | +27% |
| Licensing and other revenue | $515 million | $773 million | +50% |
| Royalty revenue | $620 million | $670 million | +8% |
At an exchange rate of ¥158 to the dollar, the $258 million increase in licensing and other revenue works out to roughly ¥40.8 billion. This is an illustrative conversion only and does not use the exchange rate on the earnings date.
License revenue and royalty revenue are recognized differently. According to Arm's shareholder letter, part of its license revenue is recognized at the later of the delivery of the intellectual property (IP) and the start of the contract term. Royalty revenue, by contrast, is recognized in the quarter when customers ship semiconductor products that use Arm technology, based on shipment volumes and similar factors. As a result, license revenue tends to fluctuate with the size and timing of large contracts, while royalty revenue is affected by actual product shipments and royalty rates per unit.
Arm attributes the 50% rise in licensing and other revenue to growing demand for its IP, variations in the size and timing of several large license agreements, and contributions from its backlog. It has not disclosed how much each factor contributed to the increase.
Annualized contract value (ACV) is a useful reference for thinking about this difference. ACV is an operating metric that annualizes the fixed fees under signed license agreements, and it cannot be directly reconciled with accounting revenue. This quarter's ACV was $1.790 billion, up 12% from $1.6 billion a year earlier. Against a 50% rise in licensing and other revenue, ACV grew only 12%, which suggests that the timing of large contracts may have affected this quarter's revenue. However, because contract-level breakdowns have not been published, the size of that effect cannot be quantified.
Data center royalties double, but total royalties rise only 8%
Still, Arm's explanation that licensing revenue expands first and royalty growth accelerates afterward is not without basis. The company expects future royalty revenue to rise as customers move new semiconductor designs they have licensed into volume production. Indeed, data center royalty revenue doubled from a year earlier. Arm also says the share of Arm-based servers at major hyperscalers (large cloud providers) grew from 15% in 2024 to more than 50% in 2025.
As for why total royalty revenue grew only 8%, Arm points to the impact of memory prices on the smartphone market. In other words, even as growth in AI data centers advanced, headwinds in its smartphone business may have partly offset the effect. If that explanation is correct, there is room for growth in total royalty revenue to accelerate as smartphone market conditions improve.
However, the "doubling" of data center royalties cited in the shareholder letter is a growth rate, and the actual revenue amount has not been disclosed. It is also unclear how much the smartphone market weighed on royalty revenue. For that reason, it cannot currently be verified whether data center growth has reached a scale that changes the overall revenue structure. In fact, royalty revenue in the previous quarter was $715 million (up 22% year over year), compared with $670 million this quarter, a decline of $45 million from the prior quarter.
Next focus: a royalty rebound and Arm AGI CPU shipments
What will shape the assessment of these results is whether royalty revenue growth recovers next quarter. If it returns to double-digit year-over-year growth, the view that this quarter's 8% was due to temporary headwinds such as the smartphone market would strengthen. If growth stays in the single digits, it may take more time before data center growth lifts total royalty revenue.
For the next quarter, October–December 2026, Arm guides to revenue of $1.540 billion ± $50 million. The midpoint is about 6.7% above this quarter's result, but the company has not given a breakdown between licensing and other revenue and royalty revenue. Meeting guidance alone therefore cannot confirm a change in the revenue structure.
Another point of interest is the "Arm AGI CPU," a semiconductor designed by Arm and supplied directly to customers. The company plans its first commercial shipments in the fourth quarter of fiscal 2027 (January–March 2027) and says it has secured orders from multiple customers through the end of 2027. If this new business of selling Arm-designed silicon gets fully under way alongside the existing IP licensing business, the revenue structure could change.
What can be confirmed at this point is that licensing and other revenue drove this quarter's increase and that data center royalties are growing rapidly. Going forward, the key questions are whether total royalty revenue growth returns to double digits and whether commercial shipments of the Arm AGI CPU begin as planned. Once the revenue contribution of both businesses becomes clear, it should be easier to assess how much the two pillars Arm is promoting, IP licensing and silicon, are supporting growth.