Arm (ARM) Q4 2025: Smartphone Royalties Surge 30%, Powering AI-Driven Royalty Upside
Arm’s Q4 set new records as AI and custom silicon adoption accelerated royalty growth, with smartphone royalties up 30% despite muted industry shipments. Management’s refusal to issue full-year guidance signals macro caution, yet momentum in data center and hyperscaler wins point to a structural shift in Arm’s market power. Investors should watch for continued royalty leverage as Arm V9 and compute subsystems (CSS) scale across cloud, automotive, and edge.
Summary
- AI-Driven Royalty Leverage: Smartphone and hyperscaler adoption of Arm V9 and CSS drove record royalty growth far above industry shipment trends.
- Strategic Partner Shift: Direct deals with OEMs and sovereigns signal Arm’s move up the value chain and deeper into custom silicon.
- Guidance Withheld Amid Macro Uncertainty: Management’s lack of full-year guidance highlights limited demand visibility despite strong pipeline signals.
Performance Analysis
Arm delivered a record-breaking Q4 with total revenue exceeding $1 billion for the first time, and royalty revenue reaching $607 million, up 18% year over year. Smartphone royalties surged 30% year over year, vastly outpacing modest 2% industry shipment growth, reflecting Arm’s ability to extract higher value per device through adoption of its latest Arm V9 architecture and compute subsystems (CSS, pre-integrated chip building blocks). Licensing revenue also hit an all-time high, rising 53% year over year to $634 million, propelled by new wins such as a multi-year AI partnership with the Malaysian government.
Growth was broad-based, with strength across data center, automotive, and IoT, supporting Arm’s diversification narrative. Infrastructure (cloud and hyperscaler) royalty growth accelerated, aided by widespread adoption of Arm-based CPUs in new server deployments by Nvidia, Google, Microsoft, and AWS. Automotive royalties continued to deliver double-digit growth, with the first auto CSS license signed. IoT and embedded segments showed positive, but slower, growth after bottoming out last year. Operating expenses were slightly below plan due to R&D timing, but management expects increased investment in fiscal 2026 to maintain technology leadership.
- Smartphone Royalty Outperformance: 30% YoY royalty growth on just 2% shipment growth demonstrates Arm’s pricing power and architectural upgrade leverage.
- Infrastructure Acceleration: High double-digit royalty growth in cloud and hyperscaler verticals reflects structural shift toward Arm-based server chips.
- Licensing Upside: 53% YoY licensing growth, including sovereign deals, signals Arm’s expanding business model beyond traditional chipmakers.
Rising adoption of Arm V9 and CSS is driving a step-change in royalty rates, with management confirming CSS deals command roughly double the royalty rate of standard V9 implementations. This positions Arm for sustained royalty expansion as next-generation custom silicon proliferates across industries.
Executive Commentary
"Q4 marked a record breaking close to a strong year for Arm, driven by strong demand for power efficient AI compute from cloud to edge. We crossed a major milestone in Q4 revenue exceeding 1 billion for the first time ever in our history. Our royalty growth is broad based, come from all major markets, data center, automotive, smartphones and IoT, showing the strength of our diversification strategy."
Rene Haas, Chief Executive Officer
"Royalty revenue grew 18% year on year to a record $607 million and was above our expectations. This upside was driven primarily by several flagship smartphone launches across multiple vendors based on Arm V9 and CSS. ACV in Q4 was up 15% year on year, which was at the high end of our recent run rate of low teens and is above our long-term expectation of mid to high single digit growth."
Jason Child, Chief Financial Officer
Strategic Positioning
1. AI and Custom Silicon as Growth Engines
Arm’s royalty and licensing model is being transformed by AI and custom silicon demand. The company is now a foundational supplier for hyperscaler and automotive OEMs building differentiated, AI-optimized chips. This shift is visible in direct deals with end customers (e.g., sovereign governments, automakers) and the proliferation of CSS, which bundles more Arm IP and commands higher royalty rates. AI workloads are shortening product cycles, driving more frequent upgrades and licensing opportunities.
2. Data Center and Hyperscaler Momentum
Arm’s penetration in cloud infrastructure is accelerating, with management citing that up to 50% of new server chip designs at hyperscalers will be Arm-based this year. The transition of Nvidia’s data center products from Hopper to Blackwell architectures, both powered by Arm CPUs, amplifies Arm’s royalty base and software ecosystem leverage. This positions Arm as the de facto standard for AI compute at scale.
3. Diversification and Ecosystem Leverage
Arm’s diversification strategy is bearing fruit, with royalty growth across all major end markets. Automotive and IoT, while smaller than smartphones and cloud, continue to grow double digits and provide optionality. The company’s investment in developer tools and AI software layers (e.g., Cliety AI, now at 8 billion installs) strengthens lock-in and ecosystem value, making Arm the preferred platform for next-gen workloads from cloud to edge.
4. Business Model Evolution and Direct Customer Relationships
Arm is moving up the value chain, increasingly signing deals directly with OEMs and sovereigns rather than just fabless chipmakers. This unlocks new addressable markets and embeds Arm deeper into custom silicon design cycles. The Malaysian government deal exemplifies this pivot, offering CSS-level access to startups and accelerating AI chip development at the national level.
Key Considerations
Arm’s Q4 demonstrates the company’s ability to monetize secular AI and compute trends, but also highlights the complexity of forecasting in a volatile macro environment.
Key Considerations:
- Royalty Rate Expansion: CSS and Arm V9 adoption are structurally raising royalty rates per chip, compounding royalty growth even in slow shipment environments.
- Direct-to-OEM and Sovereign Model: New licensing deals with governments and automotive OEMs expand Arm’s addressable market and deepen its strategic moat.
- Cloud and Hyperscaler Share Gains: Arm’s architectural standardization in data centers is driving high double-digit royalty growth, with upside as more workloads migrate to Arm-based CPUs.
- R&D Investment Cycle: Management plans to accelerate R&D spend in fiscal 2026, reflecting confidence in pipeline but potentially pressuring near-term margins.
- Macro and Tariff Sensitivity: While direct tariff impacts are limited, management acknowledges lower partner visibility and indirect demand risks from global trade disruptions.
Risks
Macro uncertainty and trade policy volatility are constraining management’s visibility, leading to the decision not to issue full-year guidance. Indirect impacts from tariffs could dampen demand for end devices, with management estimating a potential low single-digit royalty impact in a downside scenario. Rising R&D investment, while necessary, could weigh on operating leverage if revenue growth slows. The shift to direct OEM relationships may also disrupt traditional fabless semiconductor partnerships, introducing new competitive and execution risks.
Forward Outlook
For Q1 fiscal 2026, Arm guided to:
- Revenue between $1.0 and $1.1 billion, representing 12% YoY growth at the midpoint
- Royalty growth of 25% to 30% YoY, driven by smartphone and infrastructure strength
- Non-GAAP operating expense of approximately $625 million, reflecting catch-up R&D investment
- Non-GAAP EPS in the range of $0.30 to $0.38
For full-year 2026, management declined to provide guidance, citing:
- Lower visibility into partner demand and macro conditions, especially on the royalty side
- Confidence in healthy growth based on customer design pipelines, contracted royalty rates, and AI-driven demand signals
Takeaways
Arm’s Q4 results underscore the company’s leverage to AI and custom silicon trends, with royalty growth decoupled from industry shipment volumes. The pivot to direct OEM and sovereign deals, alongside deepening cloud and automotive penetration, positions Arm for long-term royalty expansion. However, investors should monitor execution on R&D investment and the impact of macro volatility on demand visibility.
- AI and CSS Adoption Drive Upside: Arm’s ability to monetize architectural upgrades and custom silicon is powering above-market royalty growth.
- Strategic Repositioning Unlocks New Markets: Direct partnerships with OEMs and governments broaden Arm’s business model and TAM.
- Macro Uncertainty Limits Guidance: Lack of full-year forecast reflects real risks, but underlying demand signals remain robust for now.
Conclusion
Arm’s record Q4 demonstrates the company’s growing royalty leverage and strategic repositioning as AI and custom silicon adoption accelerate. While management’s decision to withhold full-year guidance signals caution, the company’s broad-based growth and deepening customer relationships point to a durable shift in Arm’s market power.
Industry Read-Through
Arm’s results and commentary offer a clear read-through for the semiconductor and cloud infrastructure sectors: The transition to custom silicon and AI-optimized compute is compressing product cycles and raising the value of foundational IP suppliers. Hyperscaler standardization on Arm architectures signals accelerating displacement of legacy x86 in the data center, pressuring incumbent CPU vendors. Automotive and sovereign interest in custom chip development foreshadows a broader trend toward vertical integration and IP-driven differentiation. Industry participants should expect intensifying competition for ecosystem control, with Arm positioned as a critical enabler of next-generation AI workloads across devices and clouds.