Arm's royalties grew 8% as a licence surge carried its quarter

Arm Holdings is paid in two ways: chip designers pay licence fees to use its processor designs, then a royalty on each Arm-based chip they ship. In the September 2026 quarter its revenue rose 27%, ahead of the company's guidance. The two streams behind that figure moved very differently. Licence revenue rose 50% and royalties 8%, against July guidance of about 30% for licences and the low teens for royalties. The quarter beat on the fees customers pay to sign up and fell short on the line that follows chips actually being sold.

Jason Child, the chief financial officer, said licence revenue came in around $100 million above plan because of "an acceleration of interest from customers wanting to sign long-term commitments to access Arm technology", and the shareholder letter credits continued strong demand for its designs as well as the timing and size of several large agreements. Without that extra amount, licence revenue would have grown 30.7%, calculated from the reported figures, which is almost exactly what the company had guided. Arm expects the strength to continue: it guided licence and other revenue for the current quarter up a little over 50% year on year, citing strong customer demand and its visibility into the licensing pipeline. Annualised contract value, the company's measure of committed licence fees annualised over the life of each active contract, rose 12%. Licences still matter for what comes later: the company calls licensing momentum a leading indicator of royalties, because the designs signed today become chips that pay royalties once they reach production.

Royalties are the nearer test of demand, and their growth slowed within one quarter, from 22% growth the quarter before to 8%. The slowdown sat mostly in phones. Data-centre royalties doubled, and the company said higher royalty rates per chip helped while memory pricing weighed on smartphones. Child said royalties from edge devices, a category led by phones, were roughly flat: "Higher memory prices continue to pressure smartphone unit sales, particularly in the mid- and lower tier segments."

That matters for the full-year figure. In July, management said royalty growth for the year to March 2027 would probably be closer to the high teens. Royalties grew 14.9% in the first half, calculated from the reported quarters, so reaching the high teens requires the second half to grow faster than the first. The company guided royalties for the quarter now under way up only low single digits year on year, against a year-earlier quarter that was the largest of the six in the chart above. That leaves most of the work to the final quarter of the fiscal year, which compares with a softer quarter a year earlier, and Child said he expects edge royalties to start recovering then.

The other source of growth management points to is a chip it sells itself. Arm now says it is more confident of up to $2 billion of revenue from its AGI CPU, a server processor, across this fiscal year and next, up from the $1 billion opportunity it described in July. Customers have placed purchase orders running through next calendar year, and first commercial deliveries are due in the final quarter of this fiscal year. A chip carries manufacturing costs that a design licence does not. Child said the first version should earn a gross margin of 30% to 40%, a little below the high-30s to low-40s range given in July, while the existing business earned a non-GAAP gross margin of 97.9% last quarter. Each dollar of chip revenue therefore leaves far less gross profit than a dollar of licence or royalty revenue, and "up to" marks a ceiling, not a point forecast.

Taken together, the quarter shows a business whose headline growth held up while its sources changed. The licence jump came from customers committing faster than Arm expected, and it guides for similar licence growth this quarter. The royalty slowdown came mainly from phones, and the growth management expects next leans on data centres and on a chip business that keeps a much smaller share of each sale as gross profit.