By Max A. Cherney and Arsheeya Bajwa
(Reuters) -Chip architecture provider Arm Holdings is investing in developing its own chips, CEO Rene Haas said on Wednesday, marking a major shift to its model of licensing its blueprints to other companies.
Arm also issued quarterly forecasts that failed to satisfy investors who have sent the company’s stock surging in recent months on expectations it will become a key player in artificial intelligence. Arm shares slumped around 8% in extended trading on Wednesday.
The plan to invest more heavily in developing its own chips marks a departure from Arm’s long-time business of supplying intellectual property to companies ranging from Nvidia to Amazon.com, which already design their own chips. Finished chips are the “physical embodiment” of a product Arm already sells called Compute Sub Systems (CSS), Haas said.
“We are consciously deciding to invest more heavily — is the possibility of going beyond (designs) and building something, building chiplets or even possible solutions,” Haas said in an interview with Reuters.
Chiplets are smaller, modular versions of a larger chip. Chiplets perform specific functions, and designers will stitch several together to form a complete processor.
To build up the necessary staff to make chiplets and other finished chips, Arm has been recruiting from its customers and competing against them for deals, Reuters has reported.
Haas declined to provide a timeframe in which the company’s investments in the new strategy would translate into profit, or give specifics about potential new products that are part of the initiative. But, Haas said that Arm would look at chiplets, “a physical chip, a board, a system, all of the above.”
In recent months, chip companies have begun to focus more effort on building the necessary server hardware, or server rack, around a chip. Nvidia sells its NV72 rack systems, and Advanced Micro Devices acquired server builder ZT Systems to build system-level products.
This expansion of its business could put Arm in competition with some of its customers, who design finished chips and chiplets for their own products.
The company forecast second-quarter profit slightly below estimates on Wednesday, as global trade tensions threaten to hit demand for Arm in its mainstay smartphone market.
The company’s chip technology powers nearly every smartphone in the world, and its tame forecast underscores uncertainty faced by global manufacturers and their suppliers resulting from U.S. President Donald Trump’s tariff policies.
UK-based Arm forecast adjusted per-share profit between 29 cents and 37 cents for the fiscal second quarter, the midpoint of which is below analysts’ average estimate of 36 cents per share, according to LSEG data.
The company generates revenue through licensing deals for its intellectual property and a royalty charged for each chip sold that uses its technology.
Smartphones remain Arm’s biggest stronghold. Morningstar analysts expect Arm to continue as the dominant architecture provider in smartphone processors, where it has a 99% market share.
Global trade tensions, however, cloud the outlook for the market.
Uncertainty fueled by tariff volatility and ongoing macroeconomic challenges has tapered end-market demand, with global smartphone shipments increasing just 1% in the April-to-June period, according to International Data Corporation.
The company expects current-quarter revenue between $1.01 billion and $1.11 billion, in line with estimates of $1.06 billion.
The company reported first-quarter sales of $1.05 billion, coming in just shy of estimates of $1.06 billion. Adjusted profit of 35 cents per share was in line with estimates.
It has also made attempts to diversify into the booming data center market, where customers such as Amazon’s cloud unit use its technology.
(Reporting by Max A. Cherney in San Francisco and Arsheeya Bajwa in Bengaluru; Editing by Alan Barona and Nia Williams)
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