ARM: AI tailwinds intact; handsets now a drag?

ARM (ARM.O) released its FY2026 Q3 results (quarter ended Dec 2025) after the U.S. market close on Feb 5 Beijing time. Key takeaways:

1) Key metrics:$Arm(ARM.US) delivered revenue of $1.24bn, up 26% YoY and in line with consensus ($1.23bn). The $100mn QoQ uptick was mainly driven by royalties. GPM was 97.6%, remaining above 97%.

2) Biz details: License vs. royalty mix near 4:6 License and royalty revenue were roughly split 4:6. That is, licenses vs. royalties.

a) License revenue was $510mn this quarter, down $10mn QoQ. The segment once peaked at $600mn in a single quarter due to a near-$250mn recognition from the Malaysian Gov. in that period. Excluding that one-off, license revenue has been on an upward trend. Fully authorized customers rose by 2 to 50 this quarter, with total customers reaching 368.

b) Royalty revenue was $740mn this quarter, up 27% YoY, driven by smartphones, data center and auto, with consumer electronics seasonality also helping. These were the main contributors.

Medium to long term, royalties should remain the primary growth driver. Demand from data center and auto continues to increase, and high-end smartphones (Arm v9 + CSS) should lift the take rate.

(Note: CSS, or Compute Subsystem, is a pre-assembled IP module that includes Arm CPU cores plus other IP blocks. It allows customers to skip integration and speed time-to-market.)

3) Core indicators: 1) Annual Contract Value (ACV) came in at $1.62bn, up 1.3% QoQ. We estimate new contracts added approx. $230mn of revenue this quarter. 2) Remaining Performance Obligations (RPO) were $2.15bn, down 4.4% QoQ and below consensus ($2.53bn).

3) ACV/RPO ratio: The ACV/RPO was 0.75 this quarter and continued to trend higher. This indicates a greater skew toward short-term orders.

4) Opex: R&D expense was $740mn this quarter, up 38% YoY. The continued ramp in R&D reflects heavier investment in chiplets and SoC to cover more complex compute scenarios. The R&D ratio stayed high at ~60%, directly pressuring margins, and net margin stood at 18%.

5) Next-quarter guide: ARM guides FY2026 Q4 revenue of $1.42–1.52bn, with a midpoint of $1.47bn (+18% QoQ), broadly in line with consensus ($1.43bn). Non-GAAP EPS is guided at $0.54–0.62, in line with consensus ($0.56).

Dolphin Research overall view: Smartphone headwinds; revenue growth likely to be revised down Smartphone headwinds are mounting. Revenue growth may be revised lower.

ARM posted a solid quarter, with revenue and GPM essentially meeting expectations, and both license and royalty growing 20%+. R&D intensity hovered around 60% this quarter, which weighed on bottom-line profitability.

Beyond the print, investors focused on three items: guidance, ACV and RPO. Details follow.

1) Management guidance: Not great. The company guides next-quarter revenue of $1.42–1.52bn vs. consensus at $1.43bn, essentially in line. However, management expects royalty revenue to grow only low-teens YoY (~11–13%) next quarter, implying a QoQ decline.

Dolphin Research believes smartphones are still ARM's largest revenue stream (40–45%). A severe 'memory shortage' is disrupting OEM stocking/shipment plans, which will directly hit royalties from smartphone chips.

2) ACV: A forward indicator for next-quarter revenue. ACV was $1.62bn, up 1.3% QoQ. Based on this quarter's revenue, we estimate about $400mn was recognized from prior contracts, while 'new-contract revenue recognized this quarter + this quarter's royalties' totaled roughly $840mn.

3) RPO: RPO was $2.15bn, below consensus ($2.53bn). The ACV/RPO mix suggests a tilt to shorter-duration orders, consistent with urgent AI-driven demand.

Taking these three indicators together, ARM still grows 20%+, but there are emerging risks: 1) a sharp deceleration in next-quarter royalty growth; 2) another decline in RPO.

Although ACV is inching up and orders skew short-term, Dolphin Research sees a 'sharp downturn' in smartphones adding uncertainty to growth.

At a current market cap of $111.3bn, ARM trades at ~99x FY2027E PE (assuming +20% revenue, 97.8% GPM, and a 12.3% tax rate). Investors previously awarded a near-100x multiple on AI scarcity and sustained high-growth potential.

That said, smartphones remain the largest revenue contributor. With memory prices rising, major houses have already cut growth estimates, and both ARM and Qualcomm outlooks imply a deeper handset downturn than the market expected.

For ARM, lower handset shipments will weigh on royalty volumes, while revenue per chip should benefit from higher v9/CSS penetration. ARM's hit could be milder than peers, but growth will still be dragged by the handset chain.

ARM's rich multiple cuts both ways: on the positive side, it reflects confidence in high growth, including rising data center demand, higher v9/CSS take rates, and future AI PC opportunities. On the flip side, if handset headwinds make high growth elusive, a high multiple becomes a double-edged sword.

A near-100x multiple requires sustained high growth and consistent beats to sustain confidence. Facing a potential 'sharp smartphone downturn,' growth will remain under pressure until the 'memory crisis' eases, and both outlook and valuation are likely to be revised down again.

Below are Dolphin Research's ARM earnings notes and related charts. See below.

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