Arm Holdings (ARM) Q3 FY26 earnings call: guidance and Q&A

How does Arm view its role and the role of the CPU in AI and cloud data centers, especially with the proliferation of AI agents?

Rene Haas explained that the shift from training to inference, particularly agent-based AI, is well-suited for CPUs due to their power efficiency, always-on capability, and fast latency. This trend drives increased deployment of CPUs, especially Arm-based ones, which offer high core counts and efficiency within data center power constraints, leading to a positive tailwind for Arm.

“These workloads are persistent, always-on and power constrained. This is a fundamental change in how AI systems operate. This is because agent-based AI requires coordination across many agents running continuously, and that the CPU can only do coordination.”

asked by Joseph Quatrochi · answered by Rene Haas

How should we think about the puts and takes of royalty revenue growth for FY27, considering potential demand destruction in consumer electronics from memory supply chain constraints?

Jason Child acknowledged potential 15-20% reduction in smartphone unit volumes due to memory supply constraints. He estimated this would translate to a 2-4% impact on smartphone royalties and a 1-2% negative impact on total royalties. However, he noted that the Cloud AI/infrastructure business growth is more than compensating for these risks, leading to a 'very good setup' for next year.

“So I think if you were to say, what if there's a 20% reduction in volumes next year, for us, that would translate to probably somewhere around a 2% or 4% at worst impact on smartphone royalties. If you then project that across the whole business, it'd be a 1%, maybe 2% negative impact on total royalties.”

asked by Joseph Quatrochi · answered by Jason Child

What are Arm's thoughts on whether SoftBank might sell some of its Arm stock to finance investments, and the implications for Arm shares?

Rene Haas stated that Masa Son (SoftBank CEO) has no interest in selling any Arm stock, based on direct conversations. He is very bullish on Arm's long-term prospects.

“I can tell you from talking to Masa about this, and I would quote him directly, he is not interested in selling 1 share of Arm stock. And that doesn't mean 2 shares or 3 shares. That means any shares.”

asked by Simon Leopold · answered by Rene Haas

Can you elaborate on the forecast for some deceleration in royalty revenue growth? Is it due to more difficult comps or something else?

Jason Child explained that royalty trends for next year are consistent in absolute dollars, but the growth percentage is down due to stronger comps from overperformance in Q3 and Q4. He also mentioned that Q4 (calendar Q1) is typically a slower quarter due to seasonality, and they are lapping an unusual MediaTek chip release from a year ago.

“The growth percentage is down a bit because of the overperformance that we saw last quarter and expected to see again this quarter. So we are coming off of a stronger comp.”

asked by Simon Leopold · answered by Jason Child

Can you quantify the exact amount of data center revenue and clarify the SoftBank contribution, especially the $200 million figure?

Jason Child stated that data center revenue was in the 'teens to probably getting closer to 20%' of total business, and is expected to grow to be similar or larger than the smartphone business (40-45% of total) in 2-3 years. For SoftBank, the $200 million contribution is the full quarter impact of deals signed last quarter, which was $178 million, and is expected to be the run rate going forward.

“The full quarter has the impact now is about $200 million. So nothing new, it's just a full quarter impact. I would expect that $200 million going forward -- is the right run rate going forward.”

asked by Vivek Arya · answered by Jason Child

How will the migration to v9 higher royalty rates help offset lower smartphone unit volumes?

Rene Haas explained that with each new CSS (Compute Subsystems) release for smartphones, royalty rates generally increase year-on-year. Jason Child added that the higher royalty rate per unit, already contractually agreed to, is incorporated into their guidance, mitigating the impact of potential unit volume reductions.

“Each time we deliver the brand-new CSS, the royalty rates are generally increased year-on-year. So when we think about v9 in smartphones, the appropriate way to think about it is it's all CSS.”

asked by Mehdi Hosseini · answered by Rene Haas

What percentage of the royalty mix is CSS today, and what proportion could it become over the next 2-3 years?

Jason Child stated that CSS was approaching double digits last year, is 'well into double digit' this year (in the teens), and could be 'upwards of 50%' of royalties over the next couple of years. He highlighted that customers are adopting CSS to shorten cycle times, cutting it by about half.

“I think of CSS last year, I think it was just kind of approaching double digit. And this year, it's well into double digit. Think of it as being into the teens. And then I would say over the next couple of years, I expect it to probably -- it could be upwards of 50%.”

asked by Harlan Sur · answered by Jason Child

Can you provide an early view into FY27 and FY28 growth, similar to previous soft guidance?

Jason Child confirmed that for FY26, they are exceeding the 20% growth target, now guiding to 22%. For FY27, he stated that a 20% growth rate is 'very reasonable' and they are not backing away from it. For FY28, he said it's too early to provide guidance, but they are contemplating other offerings that could impact numbers.

“For '27, not guiding on full year, but in terms of kind of at a high level, the 20% growth rate, I think, certainly is very reasonable and not anything that we back away from.”

asked by Charles Shi · answered by Jason Child

Is memory already impacting Q4 royalties, and are you seeing any impact on CSS/v9 adoption due to bill of materials pressure?

Jason Child clarified that memory impact on Q4 royalties is minimal; the low-teens growth guidance is primarily due to seasonality and difficult comps. Rene Haas stated they are not seeing any impact on CSS adoption from bill of materials pressure, as the value of accelerating time to market outweighs cost considerations, given the complexity and short design windows for advanced chips.

“No, we're not seeing any of that at all. What we are seeing is that the value gain by accelerating time to market outweighs anything that customers are considering.”

asked by Srinivas Pajjuri · answered by Rene Haas

How does AI affect Arm's business beyond driving demand, specifically how will Arm leverage AI in the design of chips and systems?

Rene Haas emphasized that AI won't replace physical chips, as hardware is needed to run software. He sees enormous growth opportunities, noting that AI is still in 'super early days' for enterprise integration. For leveraging AI, he highlighted that CPUs need memory and vice-versa, and Arm is highly involved in research for alternative memory technologies and solutions to address increasing AI demands, constantly focusing on power efficiency for smaller form factors.

“AI is not going to replace a physical chip anytime soon. They're kind of linked at the hip, if you will, relative to -- you need the hardware to run the software.”

asked by John DiFucci · answered by Rene Haas