ARM Q1 2026: Data Center Share Nears 50%, Royalties Up 25%
- Accelerated Data Center Adoption: ARM’s market share in hyperscalers has surged from around 18% last year to nearly 50% this year, driven by integrated ARM designs in AI data centers that are contributing to robust royalty growth.
- Enhanced CSS Royalty Rates: The next-generation Compute Subsystem (CSS) deals are delivering significantly higher royalty rates—rising from previous figures (e.g., from about 3% to over 10%)—demonstrating the growing monetization potential of ARM’s custom silicon solutions.
- Strong Partner Pipeline & Geographic Expansion: ARM is securing major deals, exemplified by expanded licensing agreements with partners like SoftBank and solid growth in key markets such as China (increasing from 14% to 21% of revenue), which, along with emerging opportunities in automotive through Xeno CSS, supports a bullish long‑term outlook.
- Execution risks in new market expansions: Management signaled uncertainty regarding their move beyond current platform offerings into ASICs and full end solutions, noting there are considerable complexities and execution risks in these areas.
- Underperformance in smartphone royalty growth: Although smartphone royalties grew significantly, management acknowledged slower-than-expected growth in this segment, which could pressure overall revenue growth.
- Ongoing FX headwinds affecting margins: The persistent FX impact of around $0.01 per quarter—and potential cumulative annual effects—adds uncertainty to margins and overall financial performance.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue Guidance | Q2 2026 | no prior guidance | $1,010,000,000 – $1,110,000,000 with 25% YoY growth | no prior guidance |
Royalty and Licensing Revenue | Q2 2026 | no prior guidance | flat sequentially | no prior guidance |
Non-GAAP Operating Expense | Q2 2026 | no prior guidance | $655,000,000 | no prior guidance |
Non-GAAP EPS | Q2 2026 | no prior guidance | $0.29 to $0.37 | no prior guidance |
FX Impact | Q2 2026 | no prior guidance | reduces EPS by $0.01 per quarter for the next three quarters | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Accelerated Data Center Adoption | Q2 2025 mentioned NeoVerse driving general-purpose and AI integration along with examples like AWS Graviton adoption ( ) and Q3 2025 highlighted strong adoption in hyperscalers with tools like NVIDIA’s Grace and high market capacity ( ). | Q1 2026 emphasized a nearly 50% market share in hyperscalers, robust integration in AI workloads, improved customization benefits, and CapEx tailwinds driving adoption ( ). | Positive acceleration with improved market share and deeper AI integration, reinforcing the platform’s cost and performance advantages over previous periods ( ). |
Enhanced CSS Royalty Rates and Demand | Q2 2025 focused on CSS’s higher royalty rates (double or more than v9) with strong demand in markets like mobile and automotive ( ). Q3 2025 stressed CSS’s significant revenue contribution with royalty rates roughly double that of Armv9 ( ). | Q1 2026 reported that CSS deals are now delivering royalty rates north of 10% with multiple new licenses signed across data centers and PCs, further accelerating CSS’s contribution to royalty revenue ( ). | Upward trajectory as CSS continues to outperform previous royalty expectations, with enhanced rates and broad market adoption building on earlier momentum ( ). |
Stalled v9 Architecture Adoption with Shifting Sentiment | Q2 2025 noted v9 adoption growing from 10% to 25% but highlighted a temporary stall in mid-market smartphone dynamics ( ). Q3 2025 reported v9’s share “stalled” at 25% while expressing optimism for future growth ( ). | Q1 2026 did not mention any stalling; instead, it noted that v9 royalty growth accelerated (from 18% to 25% year-on-year), indicating a more positive trajectory without the earlier concerns of stagnation ( ). | Improved sentiment where earlier stall concerns have eased and the focus has shifted towards robust v9 royalty growth, suggesting that market dynamics are normalizing ( ). |
Leadership in Chiplet‑Based Architecture Transition | Q3 2025 highlighted the acceleration in chiplet-based designs through its CSS and the launch of the Arm Total Design partners program ( ). Q2 2025 did not mention this topic. | Q1 2026 underscored leadership in the chiplet transition by discussing further integration for complex SoCs through the Arm Total Design ecosystem and showcasing enhanced chiplet support ( ). | Continued leadership with an expanded focus on chiplet integration, building on strong market demand observed in Q3 2025 and establishing a broader ecosystem approach ( ). |
AI Ecosystem Integration and Strategic Initiatives | Q2 2025 detailed AI everywhere themes with collaborations (e.g., Meta, NVIDIA, Microsoft) and initial v9/CSS momentum ( ). Q3 2025 expanded on this with initiatives like Project DIGITS, agentic AI, and partnerships with SoftBank and OpenAI ( ). | Q1 2026 reinforced AI integration through a marked expansion—with over 70,000 enterprises running AI workloads on Arm chips, strategic CSS initiatives including Xeno CSS, and strengthened partnerships, further boosting the AI ecosystem ( ). | Consistent growth with an expanded scale and deeper strategic partnerships, strengthening Arm’s leadership in AI from edge to data center relative to previous periods ( ). |
Geographic Expansion and China Market Dynamics | Q2 2025 discussed strong handset numbers in China, local brand momentum, and an expected v9 transition in premium and midrange segments ( ). Q3 2025 mentioned Arm China’s revenue contribution and its role in ACV ( ). | Q1 2026 highlighted that China’s revenue contribution increased from around 14%-15% to 21%, tracking global dynamics and indicating robust growth in the region ( ). | Enhanced performance in China with a clear increase in revenue share, demonstrating stronger geographic expansion and improved market dynamics compared to earlier quarters ( ). |
Emerging Automotive Expansion via Xeno CSS | Q2 2025 had only general mentions of automotive demand for CSS (e.g., ADAS/IVI) and Q3 2025 did not address chip-specific automotive expansions. | Q1 2026 explicitly introduced Xeno CSS for automotive applications, focusing on L2-L4 ADAS and the merging of IVI with ADAS, with a lead customer already signed ( ). | Newly emerging as a distinct topic with clear focus and growth potential in the automotive sector, marking an evolution from general CSS discussion in previous periods ( ). |
Legal and Litigation Risks Impacting Future Revenue | Q2 2025 provided detailed discussion on Qualcomm litigation—highlighting fair treatment and no immediate revenue impact ( ). Q3 2025 confirmed that the lawsuit has no financial impact on revenues ( ). | Q1 2026 did not mention legal or litigation risks. | Declining prominence as the topic was notably absent in Q1, suggesting that litigation concerns are no longer a focal point compared to previous discussions ( ). |
Royalty Revenue Growth and Smartphone Performance | Q2 2025 noted robust royalty revenue growth (23% YoY) driven by a 40% year-over-year increase in smartphone royalties, despite low shipment growth ( ). Q3 2025 reported record royalty revenue ($580 million) with strong smartphone performance ( ). | Q1 2026 reported record royalty revenue ($585 million) with smartphones growing at a strong pace relative to the market, even as overall smartphone market growth was slower than expected ( ). | Consistent robust growth with smartphones continuing to outperform market trends, maintaining strong royalty expansion despite softer market shipment growth ( ). |
FX Headwinds Impacting Margins | Q2 2025 and Q3 2025 did not address FX headwinds. | Q1 2026 explicitly noted a $0.01 EPS impact per quarter from FX, with an anticipated annual impact of $0.04, attributable to the unhedged portion of expenses ( ). | Newly highlighted in Q1 as an emerging concern, indicating increased FX sensitivity compared to prior periods where it wasn’t mentioned ( ). |
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Royalty Growth
Q: Which end market drove 25% royalty growth?
A: Management noted that royalty revenue grew 25% year-over-year, with smartphones performing slightly below expectations yet still far outpacing overall market growth; sequential royalty levels are expected to remain similar. -
Data Center Market
Q: How did ARM achieve nearly 50% market share?
A: They explained that strategic AI and data center integrations boosted market share from around 18% a year ago to nearly 50% now, driven by leading hyperscalers adopting ARM solutions. -
FX & Shares
Q: What’s FX impact and x86 outlook?
A: Management estimates a modest $0.01 EPS impact per quarter from FX and emphasized that ARM’s customizable designs will continue growing market share beyond 50%, even as x86 remains in niche segments. -
Licensing & ACV
Q: What drove the ACV step-up and CSS royalty increase?
A: They attributed the rise to three renewed CSS deals and a major OEM GPU licensing, along with an expanded SoftBank agreement—lifting ACV growth to around 28% and nearly doubling CSS royalty rates from roughly 5% to above 10%. -
China Performance
Q: How is ARM China performing this quarter?
A: Management reported that the China business now accounts for about 21% of total revenue, up from 14% a year ago and 15% last quarter, aligning well with global trends. -
V9 Adoption
Q: What is the current V9 adoption level?
A: While the annual update is pending, previous figures indicated over 30% adoption, with royalty impact rising from 18% to 25% this quarter as more advanced V9 iterations roll out. -
CapEx Impact
Q: How do rising hyperscaler CapEx affect ARM?
A: Increased CapEx is viewed as a strong tailwind, reinforcing demand for ARM’s integrated solutions and bolstering future royalty and licensing prospects across segments. -
SoftBank Strategy
Q: Will ARM use merchant CPUs or rely on licensing?
A: Although specifics were not disclosed, management reiterated their focus on licensing core CPU designs for large-scale data center and SoftBank-related projects, rather than pursuing merchant CPU production. -
ASIC Strategy
Q: Is ARM entering into ASICs or full solutions?
A: Management confirmed no new announcements but indicated that they are actively exploring integrated chiplets and full solutions leveraging their extensive semiconductor expertise. -
Edge & Auto Tech
Q: What is the Ethos and Xeno CSS roadmap?
A: They described Ethos as evolving for low-power, edge-device applications and positioned Xeno CSS for automotive uses (L2–L4 ADAS), with a promising pipeline of follow-on licensing deals expected soon.
Research analysts covering ARM HOLDINGS PLC /UK.