Arm (ARM) Q1 2026: Neoverse Share Jumps from 18% to 50%, Unlocking AI Data Center Upside
Arm’s Q1 2026 results showcase a step-function leap in data center share, driven by AI-fueled hyperscaler demand and surging adoption of Neoverse CPUs. The company’s platform is now central to both cloud and edge AI infrastructure, while rising CSS and V9 royalty rates are reshaping its long-term margin profile. With aggressive R&D investment and expanding platform reach, Arm is positioning itself for outsized participation in the next wave of compute demand.
Summary
- Neoverse Share Inflection: Arm’s data center CPU share surged from 18% to nearly 50% YoY, signaling a structural shift in AI infrastructure.
- CSS Royalty Leverage: New compute subsystem deals command royalty rates above 10%, driving a higher-margin mix for future periods.
- AI Platform Expansion: Arm’s R&D acceleration targets both edge and cloud, with new verticals and custom silicon under active consideration.
Performance Analysis
Arm delivered its second consecutive billion-dollar revenue quarter, with royalty revenue up sharply across all end markets, especially in data center and smartphones. Royalty revenue growth was notably robust, outpacing the underlying smartphone market by a wide margin due to flagship adoption of Arm V9 and CSS-based designs. Licensing revenue was stable, reflecting timing dynamics but underpinned by a 28% YoY surge in annualized contract value (ACV), a key forward-looking metric for licensing momentum.
Operating expenses were primarily driven by R&D, reflecting Arm’s strategy to invest ahead of the curve in next-generation compute platforms. Non-GAAP operating profit and EPS both exceeded guidance midpoints, even after accounting for FX headwinds. China represented 21% of revenue, up from prior quarters, but management emphasized that growth there tracks global trends and is not materially impacted by recent export controls.
- Data Center Outperformance: Neoverse CPUs now power nearly half of top hyperscaler AI workloads, up from 18% last year, reflecting Arm’s deepening penetration in the most valuable compute segment.
- Royalty Rate Expansion: CSS deals are now delivering royalty rates north of 10%, well above the prior “ceiling” and contributing to a richer margin mix.
- ACV Acceleration: The 28% YoY ACV growth reflects both multi-generational GPU agreements and a significant licensing expansion with SoftBank.
While smartphone market growth was modest, Arm’s royalty revenue in that segment still grew far faster than the market itself, highlighting ongoing design win leverage and a premium mix shift. Licensing remains lumpy but the underlying pipeline is robust, supported by new compute subsystem generations and deepening relationships with major OEMs and cloud providers.
Executive Commentary
"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."
Renee Haas, Chief Executive Officer
"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 expectations of mid to high single digit license growth, in part given the new licensing deals I mentioned. We have not changed our long-term view of licensing growth of mid to high single digits."
Jason Child, Chief Financial Officer
Strategic Positioning
1. AI Data Center Penetration
Arm’s Neoverse platform, data center CPU designs optimized for hyperscalers, is now approaching 50% share at top cloud providers, up from 18% a year ago. This leap is driven by Arm’s role in both general-purpose and AI-specific workloads, particularly as Nvidia’s Grace Blackwell platform integrates Arm CPUs exclusively, displacing legacy x86 architectures.
2. Compute Subsystem (CSS) Royalty Model
Arm’s CSS, pre-integrated compute subsystem IP, is gaining traction with five customers in production and three additional next-generation licenses signed in Q1. Importantly, these next-gen CSS deals command royalty rates above 10% of ASP (average selling price), surpassing previous expectations and setting a new benchmark for Arm’s monetization per chip.
3. R&D and Platform Expansion
Arm is accelerating R&D investment to expand its platform into new verticals, including automotive (with Xena CSS for autonomous workloads) and potentially full end-to-end solutions or chiplets. The company is evaluating opportunities to move beyond IP licensing into more integrated offerings, leveraging its ecosystem and design expertise.
4. Developer Ecosystem Flywheel
Arm’s software ecosystem, now over 22 million developers strong, remains a core moat. This broad base drives software availability, which in turn reinforces hardware demand and platform stickiness across end markets.
5. Strategic Customer Partnerships
Deepening relationships with hyperscalers, smartphone OEMs, and SoftBank are fueling both near-term licensing wins and long-term design pipeline visibility. The SoftBank Stargate initiative, targeting massive AI data center buildouts, is a potential multi-year growth lever, though specifics remain undisclosed.
Key Considerations
Arm’s Q1 results underscore a business model in transition, with higher-margin royalty streams and a growing share of advanced compute infrastructure. Investors should monitor:
Key Considerations:
- Royalty Rate Upside: Next-gen CSS deals are breaking through previous royalty rate ceilings, raising the long-term profitability profile.
- AI Infrastructure Tailwind: Hyperscaler capex acceleration and Arm’s exclusive wins in new AI platforms signal durable demand for Arm-based compute.
- Licensing Visibility: ACV growth and multi-year GPU and CSS agreements provide forward revenue confidence, though quarterly licensing remains volatile.
- R&D Investment Leverage: Elevated R&D spend is a deliberate bet on capturing emerging verticals and maintaining technology leadership.
- China Exposure: Arm China’s revenue share is growing, but management sees no outsized risk or opportunity from recent regulatory shifts.
Risks
Key risks include potential execution complexity as Arm explores moving beyond licensing into chiplets or full solutions, which could expose the company to new operational and competitive challenges. Macro uncertainty and smartphone market softness may cap near-term royalty upside. Royalty growth remains partly dependent on continued AI investment cycles and hyperscaler capex, which could be volatile if macro conditions shift.
Forward Outlook
For Q2, Arm guided to:
- Revenue of $1.01 to $1.11 billion, implying roughly 25% YoY growth at midpoint
- Flat sequential royalty and licensing revenue
- Non-GAAP operating expense of approximately $655 million, reflecting continued R&D acceleration
- Non-GAAP EPS between $0.29 and $0.37
For full-year 2026, management maintained its long-term licensing growth outlook (mid to high single digits), noting:
- Visibility into customer design pipelines and contracted royalty rates
- High confidence in healthy growth driven by AI demand from cloud to edge
Takeaways
Arm’s Q1 marks an inflection in data center relevance and royalty leverage, setting the stage for structurally higher growth and profitability.
- AI-Driven Share Gains: Neoverse’s share jump to 50% at hyperscalers is a fundamental shift, positioning Arm as a default AI compute platform.
- Royalty Model Transformation: CSS and V9 adoption are driving royalty rates above 10%, unlocking a step-change in monetization potential.
- R&D and Platform Optionality: Aggressive investment is aimed at sustaining leadership and capturing upside in new compute verticals, but brings execution complexity to watch.
Conclusion
Arm’s Q1 2026 results highlight the company’s emergence as a core enabler of AI infrastructure, with data center share gains and royalty rate expansion reshaping its growth trajectory. Execution on R&D and platform expansion will determine how fully Arm capitalizes on this unique industry moment.
Industry Read-Through
Arm’s rapid share gains in AI data center CPUs signal a major architectural shift away from legacy x86 toward custom, energy-efficient designs. This has implications for incumbent CPU vendors, hyperscaler supply chains, and the broader semiconductor ecosystem. Rising royalty rates and integrated subsystem models may pressure traditional chip design economics, while Arm’s expansion into chiplets and end-to-end solutions could blur the lines between IP licensor and semiconductor provider. AI’s insatiable compute demand is driving a new competitive landscape, with Arm now positioned as a central platform for both cloud and edge innovation.