# How Arm makes money

CXProWealth Business Lens · Arm (ARM) · FY2026

Read from the 20-F for the period 2025-04-01 to 2026-03-31, filed 2026-05-26 with the SEC (accession 0001973239-26-000097): https://www.sec.gov/Archives/edgar/data/1973239/000197323926000097/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $4.9B (+22.8% on the year)
- Operating income: $900.0M (operating margin 18.3%)
- Net income: $904.0M (net margin 18.4%)
- Gross margin: 97.5%
- Free cash flow: $979.0M (19.9% of revenue)
- Cash conversion (operating cash flow / net income): 1.69x
- Capital expenditure: 11.1% of revenue

## Where the money goes (FY2026)

- License and Other Revenue → Revenue: $2.3B
- Royalty Revenue → Revenue: $2.6B
- Revenue → Cost of sales: $121.0M
- Revenue → Gross profit (loss): $4.8B
- Gross profit (loss) → Total operating expenses: $3.9B
- Total operating expenses → Selling, general and administrative: $1.1B
- Total operating expenses → Research and development: $2.8B
- Total operating expenses → Disposal, restructuring and other operating expenses, net: $8.0M
- Gross profit (loss) → Operating income (loss): $900.0M
- Operating income (loss) → Income (loss) before income taxes: $900.0M
- Other non-operating income (loss), net → Income (loss) before income taxes: $132.0M
- Interest income, net → Income (loss) before income taxes: $111.0M
- Income (loss) from equity investments, net → Income (loss) before income taxes: $14.0M
- Income (loss) before income taxes → Income tax benefit (expense): $253.0M
- Income (loss) before income taxes → Net income (loss): $904.0M

## Where the revenue comes from

### Products and services (Revenue - Schedule of Disaggregation of Revenue (Details))

| Member | Value | Share |
|---|---:|---:|
| Royalty Revenue | $2.6B | 53.1% |
| License and Other Revenue | $2.3B | 46.9% |

The members sum to total revenue.

### RelatedPartyTransactionsByRelatedParty (Consolidated Income Statements)

| Member | Value | Share |
|---|---:|---:|
| Nonrelated Party | $3.4B | 69.5% |
| Related Party | $1.5B | 30.5% |

The members sum to total revenue.

### TimingOfTransferOfGoodOrService (Revenue - Schedule of Disaggregation of Revenue (Details))

| Member | Value | Share |
|---|---:|---:|
| Point-in-time revenues | $1.2B | 24.9% |
| Over-time revenues | $1.1B | 22.0% |

The members do not sum to total revenue.

### RelatedPartyTransaction (Related Party Transactions (Details))

| Member | Value | Share |
|---|---:|---:|
| IP Licensing Revenue | $790.6M | 16.1% |
| Common Control in SoftBank | $704.4M | 14.3% |
| Other Entities Controlled By SoftBank Group | $0 | 0.0% |

The members do not sum to total revenue.

## Income statement, as filed

| Line | FY2026 | Of revenue |
|---|---:|---:|
| Revenue | $4.9B | 100% |
|   Nonrelated Party | $3.4B | 69.5% |
|   Related Party | $1.5B | 30.5% |
| Cost of sales | ($121.0M) | 2.5% |
| **Gross profit (loss)** | $4.8B | 97.5% |
| Research and development | ($2.8B) | 56.4% |
| Selling, general and administrative | ($1.1B) | 22.7% |
| Disposal, restructuring and other operating expenses, net | ($8.0M) | 0.2% |
| **Total operating expenses** | ($3.9B) | 79.2% |
| **Operating income (loss)** | $900.0M | 18.3% |
| Income (loss) from equity investments, net | $14.0M | 0.3% |
| Interest income, net | $111.0M | 2.3% |
| Other non-operating income (loss), net | $132.0M | 2.7% |
| **Income (loss) before income taxes** | $1.2B | 23.5% |
| Income tax benefit (expense) | ($253.0M) | 5.1% |
| **Net income (loss)** | $904.0M | 18.4% |
| Basic (in USD per share) | $1 | 0.0% |
| Diluted (in USD per share) | $1 | 0.0% |
| Basic (in shares) | 1,061,000,000 |  |
| Diluted (in shares) | 1,068,000,000 |  |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2022 | $2.7B | $633.0M | $549.0M | $458.0M | $34.0M | $424.0M |
| FY2023 | $2.7B | $671.0M | $524.0M | $739.0M | $64.0M | $675.0M |
| FY2024 | $3.2B | $111.0M | $306.0M | $1.1B | $92.0M | $998.0M |
| FY2025 | $4.0B | $831.0M | $792.0M | $397.0M | $219.0M | $178.0M |
| FY2026 | $4.9B | $900.0M | $904.0M | $1.5B | $545.0M | $979.0M |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +22.8% (year before +23.9%): steady
- Operating income: +8.3% (year before +648.6%): slowing
- Net income: +14.1% (year before +158.8%): slowing
- Free cash flow: +450.0% (year before -82.2%): accelerating

## Key insights

### Research outgrew revenue, holding operating profit growth to 8.3%

R&D of $2.776B grew 34.0% against revenue growth of 22.8%, so operating income rose only 8.3% to $900M.

R&D was $2.776B in FY2026, more than triple operating income of $900M, and 57.8% of the $4.799B gross profit, up from 53.3% of gross profit a year earlier. As a share of revenue it rose 4.74 points to 56.4%. Selling, general and administrative costs grew a slower 13.3% to $1.115B, which softened the effect, but operating margin still fell 2.45 points to 18.3%, from 20.7%. _(from the filing)_
The direction is not new, the size is. In FY2025 R&D was $2.071B against operating income of $831M. This year R&D grew 34.0% while operating income grew 8.3%, so the gap between them widened. _(from the filing)_
Analysis: with cost of sales this small, R&D is where Arm's product is made, so it behaves more like a cost of goods than like overhead. Spending that runs ahead of revenue is a bet on designs that will be licensed and later earn royalties. Any return arrives in later years, so one year's operating margin says little on its own about whether the bet is working. _(analysis)_

### SoftBank and Arm China supplied most of the growth

Related-party revenue reached $1.499B from $823M, lifting its share of revenue from 20.5% to 30.5%.

Revenue from related parties rose to $1.499B from $823M. Revenue from unrelated customers rose to $3.421B from $3.184B, so its share of total revenue fell to 69.5% from 79.5%. The two related channels the filing names are entities under common control with SoftBank, $704.4M or 14.3% of revenue, and IP licensing tied to Arm China, $790.6M or 16.1% of revenue. _(from the filing)_
The SoftBank revenue comes from a Consulting Agreement under which Arm provides "technical consultancy and advisory services" and licensing. The filing records a current contract asset from a SoftBank affiliate, meaning revenue recognized before it was paid, and says one statement of work was restructured into a fixed payment due in the following fiscal year. _(from the filing)_
Analysis: revenue from the controlling shareholder is revenue, but its price is not set in an open market and its continuation depends on one party's plans. The broader test of the year's growth is whether customers outside SoftBank and Arm China carry more of the increase in later periods. _(analysis)_

### A tax charge offset the gains below operating profit

Pre-tax income rose 60.7% on non-operating gains, but a $253M tax charge left net income of $904M, level with operating income.

Income before taxes was $1.157B, well above operating income of $900M. Three lines below operating income lifted it: net interest income of $111M, other non-operating income of $132M against $10M a year earlier, and a $14M gain from equity investments against a $237M loss. _(from the filing)_
Taxes then moved the other way. Net income of $904M equals pre-tax income less a $253M tax charge, 21.9% of pre-tax income. A year earlier the same line was a $72M credit, which lifted net income to $792M from pre-tax income of $720M. So net income grew 14.1% while pre-tax income grew 60.7%, and diluted earnings per share rose to $0.85 from $0.75. _(from the filing)_
Caveat: the tax line is labeled benefit (expense) in the source data. The arithmetic of the income statement shows a charge this year and a credit last year, and that is how it is read here. _(analysis)_
Analysis: the filing excerpt records that Arm received proceeds for its minority stake in Ampere when SoftBank's acquisition of Ampere closed, but it does not tie those proceeds to a specific line. Treating the non-operating gains as recurring would be an assumption. Operating income, up 8.3%, is the cleaner measure of the year. _(analysis)_

### Cash flow recovered while capital spending kept multiplying

Operating cash flow was $1.524B against $397M, but capital spending rose to $545M from $219M and took 35.8% of it.

Operating cash flow of $1.524B compared with $397M the prior year, and was 1.69 times net income of $904M. Free cash flow reached $979M against $178M, a 19.9% margin on revenue. _(from the filing)_
Capital spending was $545M, 11.1% of revenue, against $219M in FY2025 and $34M in FY2022, 16 times that level. It took 35.8% of operating cash flow, down from more than half in FY2025, because operating cash recovered faster than spending grew. _(from the filing)_
Analysis: for a company that sells designs rather than chips, capital spending of this size is unusual, and the excerpt supplied here does not say what it buys. Free cash flow holds only while operating cash grows faster than that spending; FY2025, with free cash flow of $178M on operating cash flow of $397M, shows the other case. Part of this year's SoftBank revenue also sits in a contract asset, booked but not yet paid in cash. _(analysis)_

### Competitive edge

- **Delivering one more design costs Arm almost nothing** Cost of sales stayed at $121M while revenue rose to $4.92B from $4.007B, leaving a 97.5% gross margin.
- **Each design earns a fee, then royalties per chip** Royalties of $2.613B, 53.1% of revenue, come from chips built on designs licensed earlier, beside $2.307B of license and other revenue.

### What to watch

- **The controlling shareholder is also a major customer** SoftBank controls the board and, through a Consulting Agreement, supplied $704.4M of revenue, 14.3% of the total.
- **Most of Arm's shares secure SoftBank's margin loan** SoftBank pledged most of its Arm shares against a margin loan; a default could let lenders foreclose and change who controls Arm.
- **Arm China pays on figures it reports itself** IP licensing tied to Arm China was $790.6M, 16.1% of revenue, from an entity Arm does not control and that reports its own sales.

## Investor view

**Arm keeps 97.5% of revenue after cost of sales, then spends most of what is left on research**

### How it makes money

Arm sells chip designs, not chips, and is paid for them in two ways. License and other revenue, the fees customers pay for access to its designs, was $2.307B, 46.9% of revenue. Royalty revenue, paid on chips that use those designs, was $2.613B, 53.1% of revenue. Together they made $4.92B of revenue in FY2026. _(from the filing)_
Delivering a design costs almost nothing once it exists. Cost of sales was $121M against $4.92B of revenue, a 97.5% gross margin. The real cost of the business sits in operating expenses: research and development of $2.776B and selling, general and administrative costs of $1.115B, which left operating income of $900M, an 18.3% operating margin. _(from the filing)_
License revenue arrives on two clocks. Of the $2.307B in license and other revenue, $1.227B was recognized at a point in time, 24.9% of total revenue, and $1.08B over time, 22.0% of total revenue. Royalties follow the shipments of chips built on designs licensed earlier. _(from the filing)_
Nearly a third of revenue comes from related parties: $1.499B, 30.5% of revenue, against $3.421B from unrelated customers. Within it, $704.4M came from entities under common control with SoftBank, Arm's controlling shareholder, under a Consulting Agreement for "technical consultancy and advisory services". Related-party IP licensing revenue of $790.6M, 16.1% of revenue, matches the share the filing attributes to its relationship with Arm China, which sublicenses Arm's IP to customers in the PRC. _(from the filing)_

### What shifted

Revenue rose 22.8% to $4.92B from $4.007B. License and other revenue grew faster, up 25.5%, than royalty revenue, up 20.5%, so licenses gained 1.0 point of the mix to 46.9%. Cost of sales stayed at $121M in both years, lifting gross margin to 97.5%. _(from the filing)_
Research spending outran revenue. R&D rose 34.0% to $2.776B, 56.4% of revenue, up 4.74 points. Selling, general and administrative costs rose only 13.3% to $1.115B, and their share fell 1.89 points to 22.7%. The net effect: operating income grew 8.3% to $900M, and operating margin fell 2.45 points to 18.3%. _(from the filing)_
Growth leaned on related parties. Related-party revenue rose to $1.499B from $823M, while revenue from unrelated customers rose to $3.421B from $3.184B. The filing ties the SoftBank part to the Consulting Agreement, under which revenue from licensing and servicing arrangements was $704.4M this year, and says one statement of work was restructured into a fixed payment due in the following fiscal year. _(from the filing)_
Net income of $904M, up 14.1%, ended slightly above operating income of $900M. Three items below the operating line did that: an income tax benefit of $253M against a $72M expense a year earlier, other non-operating income of $132M against $10M, and a $14M gain from equity investments against a $237M loss. Income before taxes rose 60.7% to $1.157B. Diluted earnings per share were $0.85 against $0.75. _(from the filing)_
Cash flow recovered. Operating cash flow was $1.524B against $397M a year earlier, and free cash flow $979M against $178M, a 19.9% free cash flow margin. Capital spending kept climbing, to $545M from $219M, 11.1% of revenue, up from $34M in FY2022. _(from the filing)_

### Risks in the filing

Arm is a controlled company. SoftBank Group beneficially owns a majority of its shares and, under the Shareholder Governance Agreement, can designate most board candidates, must consent to larger new share incentive plans, and is consulted before Arm publishes earnings. The filing names the risk that "SoftBank Group's interests may conflict with our own interests and those of holders of our ADSs". _(from the filing)_
SoftBank subsidiaries borrowed under a margin loan secured by a pledge of most of Arm's shares. If the loan is not repaid or another default occurs, the lenders may foreclose on those shares and take ownership of them. The filing states that such a foreclosure "could cause a change of control of us", and Arm has agreed to facilitate it. _(from the filing)_
Arm reaches the PRC market through Arm China, which it does not control: it holds only a small indirect non-voting interest, and the filing says neither Arm nor SoftBank Group controls Arm China's operations. Arm China's payments are determined from financial information Arm China itself provides, and Arm must indemnify Arm China and its PRC sublicensees if Arm's IP is found to infringe a third party's. _(from the filing)_
The numbers already show the exposure behind the first and third risks. The two related channels, SoftBank entities and the licensing tied to Arm China, together make up close to a third of revenue, and they supplied most of this year's growth. The governance and reporting risks the filing names therefore bear directly on the revenue line, not only on the share register. _(analysis)_

## Founder view: mechanisms

### Design once, get paid twice

Arm builds a design once and sells access to it many times. Each customer pays a fee to license the design, then a royalty on every chip it ships that uses it, often for years. The engineering cost is spent before the first sale, and serving one more licensee costs close to nothing, so almost every extra dollar of revenue drops to gross profit. _(analysis)_

### Research is the real cost of goods

With cost of sales this small, Arm's gross margin says little about its economics. The product is produced in the R&D budget: every new architecture, core and design that future licenses and royalties depend on. That spending runs ahead of the revenue it eventually earns, so a year of heavy investment shows up as margin pressure long before it shows up as royalties. _(analysis)_

### The controlling shareholder is also a customer

SoftBank controls Arm and also pays it, through a Consulting Agreement, for technical advisory work and licensing tied to SoftBank's own projects. Revenue from an owner can fund new work early, but its price is not set by an open market, so the filing routes such deals through audit committee and board review under a related party policy. _(analysis)_

### A local licensee opens a market you cannot serve directly

Arm reaches PRC customers through Arm China, which licenses Arm's IP under an IP license agreement and sublicenses it locally. Arm holds only a small indirect non-voting stake, does not control Arm China's operations, and is paid on the basis of figures Arm China reports. Access comes at the price of control and visibility. _(analysis)_

## Member research

Signed-in members read, on the page: what Arm's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- Arm 20-F for the period to 2026-03-31: https://www.sec.gov/Archives/edgar/data/1973239/000197323926000097/ (2026-05-26)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-02 · as of 2026-11-02