LONDON Strong results and a bullish tone from chip designer ARM (ARM.L) were drowned out by a warning of faltering consumer demand from a key customer, sending its red-hot shares down nearly 9 percent.
ARM shares, up 120 percent since the start of the year, fell to their lowest in nearly two months after a statement overnight from Texas Instruments TXN.N that end-demand for chips could be weakening.
Cambridge-based ARM has been growing more quickly than the sector as its architecture, already ubiquitous in mobile phones, including Apple's (AAPL.O) iPhone, makes inroads into other electronic devices like toys.
Analysts said strong licence growth had helped it beat expectations on the revenue line, but the weaker dollar could cause a pause in earnings momentum.
Broker Execution Noble also said ARM would not be immune to a slowdown.
"While ARM has a great business model and remains well placed to outperform the broader semiconductor industry, it is ultimately a play on the semiconductor market and dependent on the end-consumer demand," it said.
ARM Chief Executive Warren East said the company had not only benefited from growth in smartphones and mobile computers, but had also gained share in markets like digital TV and microcontrollers.
"Our partners are also starting to develop chips in new markets for ARM, such as servers and laptops, creating longer-term opportunities," he said.
ARM reported a 60-percent rise in pretax profit to 38.8 million pounds on revenue of 100.4 million pounds, equating to earnings per share of 2.08 pence.
Analysts were expecting revenues of 97.2 million pounds, pretax profit of 38.0 million pounds and earnings per share of 2.07 pence, according to a company-supplied poll of 22 brokers.
Shares in ARM were 6.1 percent lower at 365.4 pence by 2:49 p.m., underperforming a 0.5 percent fall in the index of European technology stocks .SX8P.
ARM licences its architecture to chipmakers like Samsung (005930.KS) and Toshiba (6104.T) for an initial fee and receives a royalty on each chip shipped in devices, including Apple's iPad tablet computer.
Some 1.5 billion chips using ARM's architecture were shipped in the quarter.
But ARM reports royalty revenue a quarter in arrears and has less visibility on end-demand than its customers.
Finance Director Tim Score said the company signed 22 processor licences in the quarter, and its order backlog was up 10 percent quarter-on-quarter.
"We expect this momentum to drive further sequential revenue growth in the fourth quarter," Score said on a conference call.
However, he said it was still to early to say whether the normal seasonal uptick in the fourth quarter would come through this year.
Mark Davis at Panmure Gordon said the risk for the next few quarters was on the consumer side.
"Trading on 44 times this year's and 38 times next year's consensus numbers we think the shares are simply too rich in light of the short-term potential risk to royalties," he said.
Score said a major semiconductor maker signed an architecture licence in the quarter for server applications -- a sector dominated by Intel's (INTC.O) chips. He did not give further details.
"(Servers) are a longer-term category to drive our growth," he said, adding that servers based on ARM's architecture would be on the market within five years.
(Editing by Julie Crust, Karen Foster and Sitaraman Shankar)