Arm's AI data center business demonstrated robust performance, and the company provided a slightly better-than-expected financial outlook.
After U.S. markets closed on May 6, Arm announced its fiscal 2026 fourth-quarter results. Revenue grew 20.2% year-over-year to $1.49 billion, with adjusted earnings per share of $0.60, both surpassing analyst expectations.
Arm forecasts first-quarter revenue of approximately $1.29 billion and adjusted earnings per share between $0.36 and $0.44, both exceeding analysts' prior predictions.
Management highlighted that demand for high-efficiency CPU designs from AI data centers continues to intensify, effectively offsetting short-term pressures in the smartphone market. The company also revealed that customer demand for its AGI CPU products for fiscal years 2027 to 2028 has surpassed $2 billion.
Following the announcement, Arm's stock rose as much as 9% in after-hours trading before paring gains to around 6%.
License revenue delivered a strong performance, while the smartphone market faced headwinds.
Behind the quarter's revenue beat, Arm's two primary revenue streams showed a clear divergence. Licensing and other revenue increased 29% year-over-year to $819 million, while royalty revenue growth was more moderate, rising 11% to $671 million, slightly below market expectations.
Analysis suggests that despite fluctuations in end-device shipments, customers are actively prepaying licensing fees to secure early access to Arm's chip designs. Licensing revenue is relatively less correlated with recent product sales volumes, providing a buffer for overall performance during a softening consumer electronics market.
In terms of profitability, adjusted gross profit reached $1.57 billion, with an adjusted gross margin of 98.3%, exceeding the market expectation of 98.1%. Adjusted operating profit was $731 million, resulting in an adjusted operating margin of 49.1%.
Arm management explicitly noted headwinds facing the smartphone market in the earnings report. Tight supply of memory components could increase end-device prices, subsequently impacting phone shipments and the royalty income tied to those volumes. Mobile chip supplier Qualcomm conveyed a similar signal in its own financial outlook. Given that Arm architecture underpins the vast majority of global smartphones, the health of the phone market remains crucial for its royalty revenue. In the short term, supply chain pressures may constrain this income segment.
AI data centers emerge as a new growth driver, with substantial AGI CPU demand.
The AI data center business is becoming a critical pillar of Arm's growth narrative. Management stated that a growing number of designs based on Arm architecture are being deployed in AI data centers, where power consumption control and thermal management are increasingly critical constraints. This precisely highlights the competitive advantage of Arm's high-efficiency CPU designs.
The Arm AGI CPU, launched this March, has garnered significant customer interest. The company disclosed that total customer demand for this product for fiscal years 2027 to 2028 exceeds $2 billion. However, Arm also noted that the AGI CPU currently faces supply constraints, which somewhat limits near-term shipment volumes.
From a broader perspective, the computational demands driven by the AI wave are extending from specialized accelerator chips like GPUs to general-purpose CPUs. New-generation AI systems rely increasingly on task scheduling, memory access, and network coordination, opening new application avenues for Arm's CPU architecture in the future data center market.
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