ARM Q1 2026 Earnings Report

ARM EPS Results

• Actual EPS: $0.35
• Consensus EPS: $0.34
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $0.40

ARM Revenue Results

• Actual Revenue: $1.05 billion
• Expected Revenue: $1.06 billion
• Beat/Miss: Missed by -$8.70 million
• YoY Revenue Growth: +12.10%

ARM Announcement Details

• Quarter: Q1 2026
• Date: 7/30/2025
• Time: After Market Closes
• Conference Call Date: Wednesday, July 30, 2025
• Conference Call Time: 5:00PM ET

ARM (NASDAQ:ARM) Limited (NASDAQ: ARM) is a global semiconductor IP company best known for designing energy-efficient processor architectures and related technologies that underpin a wide range of computing devices. Founded in 1990 as a joint venture between Acorn Computers, Apple and VLSI Technology and headquartered in Cambridge, England, Arm develops the ARM instruction set architectures and core processor designs that chipmakers license and integrate into custom system-on-chip (SoC) products. The company operates a licensing and royalty business model rather than manufacturing chips itself.

Arm’s product portfolio includes CPU core families (such as Cortex and Neoverse lines), GPU and multimedia IP (Mali), neural processing units (Ethos) and a suite of system and physical IP blocks. It also provides software tools, reference designs, development platforms and ecosystem support to help customers implement and optimize Arm-based designs. Arm architectures are widely used across mobile devices, embedded systems, IoT, automotive applications, networking and increasingly in servers and cloud infrastructure due to their focus on power-efficient performance.

Arm serves a global customer base of semiconductor companies and device manufacturers through offices and partner relationships around the world. The company was acquired by SoftBank Group in 2016 and subsequently returned to the public markets in 2023 via an initial public offering on the Nasdaq; SoftBank remained a significant shareholder following that offering. Arm’s executive leadership in recent years has emphasized expanding its footprint beyond mobile into data center, automotive and edge computing markets while nurturing a broad partner ecosystem that supports hardware and software innovation around Arm architectures.

ARM Q1 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Q1 record revenue of $1.05 billion exceeded guidance, driven by 25% YoY royalty growth to $585 million and $468 million in licensing revenue.
• Positive Sentiment: ARM Neoverse data center share surged, with over 70,000 enterprises using its chips—a 40% YoY rise—and hyperscaler share to nearly 50% expected this year.
• Positive Sentiment: Compute Subsystem (CSS) adoption accelerated, with five customers on Gen 1 CSS delivering double the V9 royalties and three new Gen 2 CSS licenses at record-high royalty rates.
• Positive Sentiment: Q2 guidance remains strong, forecasting $1.01–1.11 billion in revenue (≈25% YoY growth) and non-GAAP EPS of $0.29–0.37, reflecting confidence in ongoing AI-driven demand.
• Negative Sentiment: Increased R&D investments to support next-generation technologies will raise non-GAAP operating expenses to about $655 million in Q2, weighing on near-term profitability.

Presentation

[Operator]

Good day,` and thank you for standing by. Welcome to the Arm first quarter of fiscal year 2026 webcast and conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Jeff Kvaal, Vice President Investor Relations. Please go ahead.

[Jeff Kvaal, VP of Investor Relations at Arm]

Thank you very much, Sharon, and welcome, everyone. This is our first earnings call of Fiscal Year 2026. On the call today are Rene Haas, Arm's Chief Executive Officer, and Jason Child, Arm's Chief Financial Officer. During the call, Arm will discuss forecasts, targets, and other forward-looking information regarding the company and its financial results. While these statements represent our best current judgment about future results and performance, our actual results are subject to many risks and uncertainties that could cause results to differ materially. In addition to any risks that we highlight during this call, important risk factors that may affect our future results and performance are described in our registration statement on Form 20F filed with the SEC. Arm assumes no obligation to update any forward-looking statements. We will refer to non-GAAP financial measures during the discussion.

[Jeff Kvaal, VP of Investor Relations at Arm]

Reconciliations of certain of these non-GAAP financial measures to their most directly comparable GAAP financial measures can be found in our shareholder letter, as can a discussion of certain projected non-GAAP financial measures that we are not able to reconcile without unreasonable effort and supplemental financial information. The shareholder letter and other earnings-related materials are available on our website at investors.arm.com. With that, I'll turn the call over to Rene. Rene.

[Rene Haas, CEO at Arm]

Thank you, Jeff, and welcome, everyone. We began Fiscal Year 2026 with strong momentum, fueled by the insatiable compute demands of AI. From smart sensors in homes and factories to the world's most advanced AI supercomputers, AI workloads are being deployed everywhere. This is driving unprecedented demand for compute that's not only performant but also energy-efficient, and Arm is the only compute platform built to deliver AI performance across the full spectrum of power and performance, from milliwatts to megawatts. As a result, Q1 was our second-highest revenue quarter, at $1.05 billion. Royalty revenue reached $585 million, up 25% year-on-year, with strong momentum across all of our end markets. Licensing revenue was $468 million, as companies continue to make Arm the AI platform of choice. Custom silicon on Arm is driving unmatched AI scale in the cloud.

[Rene Haas, CEO at Arm]

More than 70,000 enterprises now run AI workloads on Arm Neoverse data center chips, a 40% increase year-on-year, and a 14x surge since 2021. Arm Neoverse CPUs now power the most important AI infrastructure in the world, including NVIDIA Grace, AWS Graviton, Google Axion, and Microsoft Cobalt, among others. Driven by a performant and efficient compute, for example, NVIDIA Grace Blackwell is 25 times more energy-efficient than the previous x86-based system. We expect the market share of Arm Neoverse-based chips at top hyperscalers to reach nearly 50% this year. We are also seeing AI move to the edge, where the need for local, real-time intelligence is enabled by Arm's efficiency and scale. Our compute platform delivers a unique combination of AI performance acceleration and energy efficiency, including the Ethos-U85 NPU for enhanced image recognition.

[Rene Haas, CEO at Arm]

Our v9 CPUs with scalable matrix extensions for accelerating language models can boost the performance of these models while limiting power and latency overhead. Technology leaders, including Apple, Samsung, and MediaTek, are integrating these AI capabilities for faster, more efficient AI on premium smartphones. AI workloads are going local, and Arm is making it possible. Our leadership in AI is amplified by our unmatched software developer ecosystem. Over 22 million developers, more than 80% of the global base, build on Arm. This ecosystem is a powerful flywheel. More developers means more software availability, which in turn drives more demand for our compute platform across every market. Our compute subsystems, CSS, are helping customers move faster, and the demand has exceeded our expectations. Our first generation of CSS is now in market with five customers and is delivering double the royalty of Armv9.

[Rene Haas, CEO at Arm]

We signed three additional CSS licenses this quarter with existing CSS customers, including two for the data center and one for PCs, more than doubling our CSS licenses from a year ago. Recently, Xiaomi launched the XRing 01, and Samsung launched the Galaxy Flip7 using the Exynos 2500, both based on the latest Arm compute subsystem platform. These subsequent generations of our CSS platforms deliver even greater value, functionality, and time-to-market, and bring the highest royalty rates we have seen to date. This includes the launch of Zena CSS, a platform optimized for AI-driven automotive workloads like autonomous driving. Also, in the quarter, a major smartphone OEM is committed to our GPU platform to accelerate graphics and AI in multiple generations of their flagship smartphones through 2030. Our business relationship with SoftBank has expanded to help them build towards their greater, broader AI vision.

[Rene Haas, CEO at Arm]

We are continuing to explore the possibility of moving beyond our current platform into additional compute to subsystems, chiplets, and potentially full-end solutions. To ensure these opportunities are executed successfully, we have accelerated the investment into our R&D. These investments include expanding engineering delivery across multiple levels, adding to the already significant product investments we have made to date. Momentum behind the broad CSS adoption and increased demand for AI compute on Arm are driving a powerful growth trajectory for the company. With that, I'll hand over to Jason.

[Jason Child, CFO at Arm]

Thank you, Rene. We have started Fiscal Year 2026 with another strong quarter. Total revenue of $1.05 billion was our second successive quarter over $1 billion, our best Q1 ever, and above the midpoint of our guidance range. Royalty revenue grew 25% year-on-year to a Q1 record of $585 million. Royalty revenue is growing across all target-end markets, including smartphones, data center, automotive, and IoT. Smartphones grew an order of magnitude faster than the market, given continued uptake of flagship smartphones based on Armv9 and CSS. Licensing and other revenue decreased 1% year-on-year, as expected, following a very strong Q1 of Fiscal Year 2025. Rene mentioned our progress with three new CSS deals. What is unique about these deals is that we closed on our first three opportunities to upgrade existing CSS customers into next-generation platforms.

[Jason Child, CFO at Arm]

Our next-generation CSS platforms deliver even greater value, functionality, and time-to-market, and bring the highest royalty rates we have seen to date. This gives us confidence into further investment in the platform. Also contributing to our license revenue, ACV and RPO growth, was a multi-generational GPU deal with the leading smartphone OEM. SoftBank expanded its IP licensing and design services agreements with us. Licensing revenue varies quarter to quarter due to normal fluctuations in timing and size of multiple high-value license agreements and contributions from backlog. As always, we recommend that you look at annualized contract value, or ACV, to best understand the underlying licensing growth rate. ACV in Q1 was up 28% year-on-year. This is well above the high end of our recent run rate of low teens and our long-term expectation of mid to high single-digit license growth, in part given the new licensing deals I mentioned.

[Jason Child, CFO at Arm]

We have not changed our long-term view of licensing growth of mid to high single digits. Remaining performance obligations, or RPO, was flat sequentially as the new licensing deals offset revenue we recognized from licenses signed in prior quarters. As you know, Arm Holdings' revenues today come from technology developed years or even decades ago and are cost today our investments for future revenue streams. In the first quarter, R&D spending led our non-GAAP operating expenses to $619 million. Operating expenses were slightly lower than expected, as the timing of some expenses will now fall into Q2 of Fiscal Year 2026. The CSS royalty rate increases that we've outlined are one example of the return from previous R&D expense. This translated to $412 million of non-GAAP operating profit and non-GAAP EPS of $0.35, which was above the midpoint of our guidance range, inclusive of a $0.01 FX headwind.

[Jason Child, CFO at Arm]

Let me spend a moment on the current tariff and macro climate. We continue to expect a limited direct impact on our royalty and licensing revenues given current conditions. We have less visibility into the indirect impact on end demand. The continued uncertainty reduces near-term visibility on royalty revenue. In licensing, customers have historically invested through near-term slowdowns given lengthy chip development timelines. Turning now to guidance. Our guidance reflects our current view of our end markets and our licensing pipeline. For Q2, we expect revenue between $1.01 billion and $1.11 billion. At the midpoint, this represents revenue growth of about 25% year-on-year. We expect both royalties and licensing to be about flat sequentially. Consistent with Q1, we are accelerating investments in our next generation of technologies. We expect our Q2 non-GAAP operating expense to be approximately $655 million.

[Jason Child, CFO at Arm]

This includes the impact of the Q1 expenses that will now fall into Q2 plus FX. We expect non-GAAP EPS to be in the range of $0.29-$0.37. We have high confidence in healthy growth in the coming year and in years to come. Our confidence stems from our visibility into customer design pipelines, contracted royalty rates, rising demand for custom silicon, and AI from cloud to the edge. We expect to continue pressing our advantage by investing aggressively in R&D to support our customers and partners, capture our opportunities, and ensure AI runs on Arm. With that, I'll turn the call back to the operator for the Q&A portion of the call.

[Operator]

Thank you. To ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. In the interest of time, please limit yourself to one question only and rejoin the queue for any follow-ups. To withdraw your question, please press star one and one again. We will now go to the first question. Your first question comes from the line of David O'Connor, Exane BNP Paribas. Please go ahead.

[David O'Connor, Security Analyst at Exane BNP Paribas]

Great. Good afternoon, Anna. Thanks for taking my question. Rene, you mentioned in your script expanding and moving into full-end solutions. When we look out there in the market, a lot of reports that Arm is potentially entering into things like the ASIC market with partners, which itself is a lot of execution risk for Arm. You questioned why you guys think you would be successful in such a market when others are struggling. I guess my question is, is there anything that you can share with us today around kind of Arm's strategy in ASICs or moving to these full-end solutions? Thank you.

[Rene Haas, CEO at Arm]

Thank you for the question. Yes, you're right. I have nothing to specifically announce today. What can I say, however? Further integration has been the direction of travel for our companies. One of the things that we're seeing with newer customers, such as CSPs and OEMs, and also even traditional customers, has asked for a better starting point as they develop their SOCs. This is largely driven by the complexity of these chips and the time it takes to develop them. This led us to CSS, our compute subsystem, which, as I mentioned and Jason mentioned, have been successful beyond our expectations. Many of the chiplets that are being developed are mostly Arm IP, and we already support chiplet development through our Arm Total Design ecosystem. With that, we're looking now at the viability of moving beyond the current platform to additional subsystems, chiplets, or possibly full solutions.

[Rene Haas, CEO at Arm]

Inside a company, we have either insight or access to all the expertise and technologies we would need to design, implement, and have a chiplet, for example, manufactured. Personally, I appreciate the complexity of this, having lived this in multiple semiconductor companies in my career. Amongst the leadership team, we also have comprehensive experience in this area. When we look at what's going on inside the market today, both in terms of the direction of travel of delivering complex chips and Arm being the only compute platform that can provide a solution from the smallest devices to the largest data centers, milliwatts to megawatts, we're in a very unique space to provide solutions in a way that no one else can. As a result, we're looking deeply at those possibilities.

[David O'Connor, Security Analyst at Exane BNP Paribas]

Thank you.

[Operator]

Thank you. Your next question comes from the line of Vivek Arya from Bank of America. Please go ahead.

[Vivek Arya, Managing Director and Senior Equity Research Analyst at Bank of America]

Thanks for taking my question. On the royalty side, it grew 25%. I think last quarter, you had suggested 25%-30%. Just which end market drove a little bit of that delta versus your expectation? I think you had also suggested that royalty could grow 10%-15% sequentially in Q3 and Q4 also of this year. Is that still kind of the trend line we should be expecting? Thank you.

[Jason Child, CFO at Arm]

Hi, Vivek. This is Jason. I'll take that. On the royalties in the quarter, we came in very close to our forecast, within a percent or so. I think we talked last quarter about a little bit of a range. I would say we were in the lower end of that range. I don't know if I'd say there's weakness, but maybe the growth wasn't quite as strong in the smartphone sector as we'd expected. As mentioned in the call, we still grew an order of magnitude faster than the market, but the market was in the low single digits kind of growth rate. I think that was a little bit slower than folks expected. In terms of the forecast for the rest of the year, I don't expect too much difference.

[Jason Child, CFO at Arm]

Maybe this kind of smartphone impact we'll have to keep an eye on to see as we go later in the year. Overall, I expect royalties to be pretty close to where we were from the previous quarter.

[Vivek Arya, Managing Director and Senior Equity Research Analyst at Bank of America]

Thank you.

[Operator]

Thank you. Your next question comes from the line of Derek Otake from Wells Fargo. Please go ahead.

[Derek Otake, Equity Research Analyst at Wells Fargo]

Yeah, thanks for taking the question. You talked about your Neoverse at top hyperscalers expected to reach nearly 50% this year. Any help in the context of what that was last year, and how do we think about just the mix of those workloads running internal versus external?

[Rene Haas, CEO at Arm]

Thank you for the question. I think if we look back to a year ago, one of the significant changes that we've seen has been where our share last year was probably sub 20%, called 18%, and now we're looking to approach nearly 50%. It's a combination of two things. It is what I would call in the general purpose workloads where Arm has been taking share versus conventional x86. This is through Graviton and Google Axion and Microsoft Cobalt. Those share gains continue. In addition to that, you also have these AI workloads running specifically for training and/or inference, which in previous generations were on the NVIDIA Hopper generation, which connected to an external x86, now moving to Grace Blackwell, GB200, and then GB300, which is an integrated Arm design along with NVIDIA Blackwell next-generation GPU.

[Rene Haas, CEO at Arm]

The combination of the growth in the AI data centers, also the fact that we are going from essentially zero share with Hopper to almost exclusive share with Blackwell, and when you combine that with our growth in the conventional data center market, that's what's putting us close to a net 50%.

[Derek Otake, Equity Research Analyst at Wells Fargo]

Thank you.

[Operator]

Thank you. Your next question comes from the line of Mark Lipacis from Evercore. Please go ahead.

[Mark Lipacis, Senior Managing Director at Evercore]

Thanks for taking my question. I had a question for Jason and maybe a bit of a quick follow-up for Rene. Jason, you mentioned FX was a one-penny impact EPS for this quarter. You said that the out-quarter guidance included the impact of FX, but I don't believe you quantified that. I was hoping that you could just remind us, spell that out for us. How much is FX expected to impact EPS for next quarter? Remind us your hedging strategy and the rule of thumb of how to think about FX going forward. Rene, if your Neoverse chips are going to get to 50% this year, that's just 50% share still for x86. What is the reason that customers stay with x86? Does your share asymptote somewhere below 100% at some point in time? How should we think about ultimately where you guys could get? Thank you.

[Jason Child, CFO at Arm]

Thanks, Mark. I'll answer the FX question quickly. Yeah, $0.01 impact on the current quarter. We expect approximately $0.01 per quarter impact over the next three quarters for the balance of the year. The way our FX strategy works is we basically start on the hedging process at the beginning of the year. Of course, we collect all of our revenue in U.S. dollars. About 2/3 of our OpEx or so is in euro and pounds. We basically make estimates on our expenses. In this case, we're maybe starting to increase some of our OpEx related to some of the opportunities that Rene expected. We have some unhedged portion, and that's why there's maybe a little more impact than what we've seen in the past. Overall, for the full year, thinking something like $0.04 or so.

[Rene Haas, CEO at Arm]

Regarding the question in terms of where could the market share go, I think a couple of things going on make us very, very positive about these share gains continuing beyond 50%. One is the fact that the Arm architecture allows for a high degree of customization and a high degree of unique design capabilities that could be done at the chip level, at the blade level, and even at the rack level, to greatly not only change the total cost of ownership, but maximize the overall performance because customization is very, very beneficial in those cases. Huge benefit there because of our unique position. Secondly, as the share gains continue across the AI data center, there are advantages to keeping to a single software stack across a single CPU architecture that simplifies management of the overall software of the data center. That's another intangible that could help us.

[Rene Haas, CEO at Arm]

In general, we're very, very pleased about getting to the number that I just described, and we think it can grow beyond that. We have high confidence.

[Mark Lipacis, Senior Managing Director at Evercore]

Thank you.

[Operator]

Thank you. Your next question comes from the line of Andrew Gardiner from Citi. Please go ahead.

[Andrew Gardiner, Head of European Technology Equity Research at Citi]

Good afternoon. Thank you for taking the question. Jason, I was interested in the points you were making on the significant step up in ACV in the quarter. You mentioned both the GPU signing as well as additional licensing with SoftBank. Can you give us a sense as to the magnitude between the two of those drivers? In particular on the GPU side, in the press release, I think you said a major smartphone OEM. In your prepared comments, I feel like I heard the major OEM. I just wanted to sort of clarify that. Any color you can provide behind those two drivers would be great. Thank you.

[Jason Child, CFO at Arm]

Sure. First, I would say it's a major OEM. That's what you should take away. In terms of the other question, all right, ACV. The ACV step-up, again, the three big kind of CSS deals, which, as I said in our prepared remarks, were exciting because this is actually the first chance for someone who's used the CSS now to decide if they want to adopt the next generation. To sign those deals, we think is a pretty big deal and a pretty good verification or testimony to the value that CSS is providing. While that provided a significant amount of incremental license revenue, only a portion of that, of course, is booked. Part of it goes in RPO, and of course, part of it's booked in the quarter.

[Jason Child, CFO at Arm]

If you were to just look at all those rest of world deals, that would take ACV up to, call it, 17% ish. Of course, this large step-up in the relationship with SoftBank and our custom design services relationship and license with them, that's what gets you up to kind of the 28% level. By all dimensions, we've seen an acceleration from both the rest of world, our customers across all geographies, as well as specifically with SoftBank.

[Andrew Gardiner, Head of European Technology Equity Research at Citi]

Okay. Understood. Just quickly, a follow-up on the CSS signings. You mentioned the second generation will generate an even higher royalty rate than the prior one. Can you give us any sense as to the magnitude of that change?

[Jason Child, CFO at Arm]

We've said in the past that CSS was roughly, if you kind of think of the best example of, say, flagship or premium mobile, it used to be that a v8 was in the, what, 2.5%, 3% of ASP, and then a v9 was at roughly 5%. So it roughly doubled. CSS doubled that to roughly 10%. The new CSS deals are north of 10%. Too early to say exactly what the percentage is. I think in the past, when we launched the CSS program, we thought that CSS probably was at 10%, was getting close to a ceiling. The good news is we're seeing that it's not the ceiling. We'll provide more clarity as more deals get signed and as we start to guide to future periods. Make no mistake, this is definitely higher royalty rates than what we'd expected and what we had forecasted in the out year.

[Jason Child, CFO at Arm]

It's definitely good news.

[Andrew Gardiner, Head of European Technology Equity Research at Citi]

Thanks very much. That's great.

[Operator]

Thank you. Your next question comes from the line of Vijay Rakesh from Mizuho. Please go ahead.

[Vijay Rakesh, Managing Director and Senior Semiconductor Analyst at Mizuho]

Hi, Rene. Just going back on the same question on the ACV. With SoftBank expanding the license deal there, can you give us some more color on how that looks? I think it's probably with the Stargate for next year. As you look at that, as you guys do an accelerator there, are you going to benefit from the full ASP, or will it be a licensing deal? Can you give us some color?

[Rene Haas, CEO at Arm]

Yeah. Yeah. Thanks for the question, Vijay. I'll try to answer your question as succinctly as possible, although there's some details you asked for that I can't really make a comment on. At a very high level, Stargate, which is a joint investment venture between SoftBank and OpenAI, is looking to scale up to 10 GW over the next number of years in terms of overall investment. That is a lot of compute, and there's a huge potential for lots of different design opportunities. SoftBank has a very broad AI vision. We're looking to help them with that. Again, without mentioning specific products and application spaces, you can imagine in a data center of that size running different workloads around inference, training, and such. Today, all of the Stargate opportunities use Arm as the core CPU. We have a unique opportunity to provide solutions there.

[Rene Haas, CEO at Arm]

A lot of that work has now started, but we're not able to give you any specifics in terms of products or timelines.

[Vijay Rakesh, Managing Director and Senior Semiconductor Analyst at Mizuho]

Got it. Going back on the server side, when you look at the 50% share that you talked about, you obviously have some good big customers there, between Google and Amazon and obviously Microsoft. You also have another CSP that is potentially starting. Do you expect Arm to be in the market with a merchant CPU, or will it all be kind of licensed platforms that run internally?

[Rene Haas, CEO at Arm]

Right now, I'm not able to really say anything regarding your question in terms of us providing a specific product. The market share gains that we anticipate over time are somewhat independent of that strategy. We feel super confident both in terms of the direction of travel of investment of software that's running on Arm and the roadmap that we'll be able to provide the product technology in any form to increase market share.

[Vijay Rakesh, Managing Director and Senior Semiconductor Analyst at Mizuho]

Great. Thank you.

[Operator]

Thank you. Your next question comes from the line of Krish Sanker from TD Cowen. Please go ahead.

[Operator]

Hi. Yeah. Thanks so much for taking my questions. This is Steven calling on behalf of Chris. Rene, I had a question for you, kind of big picture. Just over the last couple of weeks, a number of hyperscalers have increased their CapEx targets for this year, and I was talking about further growth into next year. I'm kind of curious. Just for your initial thoughts on the implications for, number one, royalty growth for this year and next year as it pertains to existing Arm processor, ASIC-type design wins, and also looking a little further out for licensing opportunities for further CSS-type wins. Thank you.

[Rene Haas, CEO at Arm]

Thank you for the question. I think I would interpret this continued increase in CapEx for all of these AI data centers as only a very strong tailwind for Arm, both on the technology side in terms of the products that we provide and also with the royalty rates associated with it. As Jason mentioned, we're now on to our second generation of CSSs. We talked about CSS as a concept a couple of years ago before we went public, and we're now starting to see the benefits of those hitting our royalties. Over the next number of years, as these newer CSSs with even higher royalty rates hit, we should expect an expansion of the royalty growth on that. Right now, on the overall CapEx side, what we are seeing is still unabated demand for that.

[Rene Haas, CEO at Arm]

One of the broader reasons for this is that AI has one of the unique capabilities that it will touch literally every industry that we know. Over time, there isn't really going to be anything that can't be impacted by it. It's still very, very early days in terms of how enterprises are broadly using it. I think you're seeing that in terms of the hyperscalers being very aggressive on the spend. You're seeing the evolution of the models support that the more compute, the better the models get, the better the models get, there's more need for compute. I think for us, it's all a good thing because we're at the heart of compute. Also, I think as these models evolve and start to move to different parts of the ecosystem more broadly, those are also domains where Arm is already the platform of choice.

[Rene Haas, CEO at Arm]

I think it all adds up for good news for us in the long run.

[Operator]

Thank you. Your next question comes from the line of Sebastien Naji from William Blair. Please go ahead.

[Sebastien Naji, Equity Research Analyst at William Blair]

Thank you for taking the question. I just wanted to ask if you could provide any commentary on the Arm China business. In particular, whether some of the loosening GPU export controls we've seen here over the last month could drive a more meaningful contribution from Arm China in the data center versus your prior expectations, even three months ago.

[Rene Haas, CEO at Arm]

Yeah. Thank you for the question. One of the things that we've been pretty consistent on communicating is that for Arm, the China market largely tracks the global market in terms of China really does rely very heavily on the Western ecosystem relative to the software that runs on Arm. Whether it's smartphones or autonomous vehicles or the data center, our traction and momentum in China is quite consistent with the rest of the world. To your direct question on have we seen anything potentially on the new export controls changing anything regarding our business, not really. The specific H20 release doesn't really impact us very much. I would say on that question, no. Again, more broadly, with Arm China, we continue to see consistent growth there that's aligned with the kind of growth we see across the rest of the world.

[Jason Child, CFO at Arm]

This is Jason Child here. Just to add on.

[Sebastien Naji, Equity Research Analyst at William Blair]

Thank you.

[Jason Child, CFO at Arm]

Arm China in Q1 was about 21% of revenue. It ticked up a little bit from the 15% that it was last quarter and about 14% of where it was a year ago. The China business is, I would say, strong and continuing to grow nicely.

[Sebastien Naji, Equity Research Analyst at William Blair]

Got it. Thank you both.

[Operator]

Thank you. Your next question comes from the line of Stephane Houri from ODDO BHF. Please go ahead.

[Stephane Houri, Head of Equity Research at ODDO BHF]

Yes. Good evening, everyone. I have a question about the adoption of Armv9. If you can give us the number where we stand now. Last quarter, I think it was about 30%, if I remember well. Where are we standing now? Thank you very much.

[Jason Child, CFO at Arm]

Thank you, Stephane. Yeah. We actually said last quarter, we gave the update for end of year, and it was a little over 30%. We're now just going to update this on an annual basis. However, wait till the end of this year is the next time we're going to provide the financial update or the percentage update. What I can tell you is that royalties did step up from 18% year-on-year growth last quarter to 25% this quarter. You should assume that v9 and CSS percentage continues to grow nicely.

[Rene Haas, CEO at Arm]

Yeah. The thing I would add on to that is, and one of the reasons why we're not communicating it to the level that we had in the past, it can be a little bit misleading because with version 9, for example, on some of the mobile phone iterations, we're on our fourth generation of Armv9 implementations delivered. On each generation, the royalty rate has increased. When we combine royalty rates increasing from 8 to 9, but more significantly, each generation of Armv9 is higher than the previous one. Those generations are on a per annum basis, or at least the implementations that use them. The royalty rates will continue to grow faster than Armv9 adoption. The one-to-one correlation between royalty rate growth and Armv9 penetration, we want to make sure that we communicate that should be separated out.

[Rene Haas, CEO at Arm]

Okay. Why don't we make the next question the last one? Thank you, Sharon.

[Operator]

Thank you. Your final question for today comes from the line of Lee Simpson from Morgan Stanley. Please go ahead.

[Lee Simpson, Managing Director and Senior Equity Analyst at Morgan Stanley]

Great. Thanks for squeezing me in there. I'll maybe ask a two-part question if I can get away with it. You did call out Ethos and Zena at CSS in the prepared remarks. I guess with Ethos, first of all, it has a good capability set at the edge, but does it make sense to actually stretch the performance here in time and go beyond that four TOPS level? Where could an NPU like that be applicable long-term? I mean, could it be used in a cloud environment? Is it applicable as a performance level there in time? Maybe just on Zena, interesting that you've had the first deal done already in CSS. Obviously, there's a range of opportunities in the car. I'm just trying to understand, do we think of this as a self-driving opportunity play, or is this more Geneva and ADAS?

[Lee Simpson, Managing Director and Senior Equity Analyst at Morgan Stanley]

Where would the ramp in licensing happen? Would it happen within this year? Thanks.

[Rene Haas, CEO at Arm]

Yeah. Thanks, Lee, for both questions and giving us a chance to shout out Ethos and Zena here. So, Ethos, we haven't announced its future roadmap, but you can imagine it'll be something that can continue to get larger than four TOPS. It's not a data center product. It's not the space to think about it. It's going to be much more in an area where it needs to run off a battery, and in some cases, batteries that don't get charged very often. Extremely low-power applications, but also small in terms of physical fit and form factor. I imagine it's something that could physically be on your body that could be doing AI acceleration. Lots and lots of application spaces for that. We're very excited about that platform and, more importantly, the long-term potential for it.

[Rene Haas, CEO at Arm]

Zena CSS, and again, thank you for asking about it and also recognizing that already we've got customers signed up for it. The automotive market is one that is an excellent candidate for CSS. The customers in that timeframe don't have decades and decades of SoC experience. They benefit greatly from a design that accelerates time to market. They benefit greatly in terms of the work that we do there. There's a lot of growth potential in terms of what we could do with Zena in the automotive sector. The way to think about where it likely lands is in an L2 to L4 ADAS type of application, working in that control plane, in that data plane around everything that has to do with the autonomous section. There's increasingly emerging of the IVI subsystem with the ADAS system.

[Rene Haas, CEO at Arm]

Both have huge amounts of software investment and software stacks that run on Arm. It was just natural that we would work with it. We ended up working on it sooner than we thought. As we talked about a few years ago when we kicked off CSS, we were quite purposeful in terms of the markets we entered. This was a market that we were seeing huge benefit for. We're very happy to have announced it. We're happy to have a lead customer, and momentum is very strong there.

[Lee Simpson, Managing Director and Senior Equity Analyst at Morgan Stanley]

the timing of follow-on license deals?

[Rene Haas, CEO at Arm]

We have a very strong pipeline of deals for that that we'll be able to share with you when we're able to announce them.

[Lee Simpson, Managing Director and Senior Equity Analyst at Morgan Stanley]

Great. Understood. Thank you.

[Operator]

Thank you. I will now hand the call back to Rene for closing remarks.

[Rene Haas, CEO at Arm]

Thank you for that, and thank you for all the questions. We are at a very unique time in the industry's history. I think we're seeing, obviously, AI being the most transformative technology, innovation, and disruption that will impact our lives going forward. AI requires a huge amount of compute. AI requires a huge amount of compute, whether you're doing that in the cloud, an automobile, smartphone, a PC, or even small devices like security cameras or earbuds. Arm is the only company on the planet with a compute platform that can address all that. We're seeing the indicators of that now with Grace Blackwell in the data center and customers using our acceleration capabilities instead of seeing it CPU with our SME or Ethos products. We are extremely excited about the future. It could not be a better time to be working in this industry.

[Rene Haas, CEO at Arm]

The growth trajectory of the company, I think, is unparalleled. Thank you, everyone, for your questions and your interest in Arm.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Participants

Executives

• Rene Haas, CEO
• Jason Child, CFO

Analysts

• Sebastien Naji, Equity Research Analyst at William Blair
• Analyst at TD Cowen
• Lee Simpson, Managing Director and Senior Equity Analyst at Morgan Stanley
• David O'Connor, Security Analyst at Exane BNP Paribas
• Mark Lipacis, Senior Managing Director at Evercore
• Derek Otake, Equity Research Analyst at Wells Fargo
• Jeff Kvaal, VP of Investor Relations at Arm
• Vivek Arya, Managing Director and Senior Equity Research Analyst at Bank of America
• Stephane Houri, Head of Equity Research at ODDO BHF
• Vijay Rakesh, Managing Director and Senior Semiconductor Analyst at Mizuho
• Andrew Gardiner, Head of European Technology Equity Research at Citi