July 30 (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 ( NVDA )

to Amazon.com ( AMZN ), 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 ( NVDA ) sells its NV72 rack systems, and

Advanced Micro Devices ( AMD ) 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 ( AMZN ) cloud

unit use its technology.