Pity microchip designer ARM Holdings (NASDAQ:ARMHY). About a year ago, I took the company to task for overpaying in its bid to acquire chip designer Artisan. But as it turns out, according to ARM's latest earnings release, not only did ARM overpay for Artisan -- it didn't even get what it bargained for. Upon learning of this news, the market promptly sliced 10%, or $300 million, off of ARM's market cap.

But I'm getting ahead of myself. Bad actual news first. Bad potential news later.

Over the first three quarters of 2005, ARM produced respectable growth in sales; its earnings results are a bit more complex. Year over year, the first nine months of 2005 saw ARM increase its sales by 52% to £169.5 million. Unfortunately, profits growth utterly failed to keep pace, rising just 23% to £28.9 million. The primary culprits in this appear to have been the need to amortize "intangibles" (presumably, goodwill from the pricey Artisan buy) and expense stock option grants, which combined to add £19.3 million to ARM's operating costs and weighed down its operating margins (which came in at 19.9% versus last year's stand-alone ARM operating margins of 25.2%).

Speaking of which, share dilution hurt ARM's results further. For U.S. investors holding ARM American Depositary Receipts, earnings per ADR declined year over year from $0.12 to $0.11.

On the forecasting front, ARM advised that by the end of the three months remaining in this fiscal year, the company expects to have annual grown revenues only toward the low end of its previously forecasted 15% to 20% improvement. It seems that disappointing sales results from its new Artisan unit bear most of the blame for dragging results down. Whereas ARM proper grew its licensing revenue at a healthy 21% clip in comparison to the year-ago quarter, Artisan's performance was positively anemic at less than 3% growth.

Sidenote: ARM's Artisan unit counts IBM (NYSE:IBM) and Texas Instruments (NYSE:TXN) among its customers. One thing a Fool might want to consider is whether Artisan's lackluster sales might foreshadow similarly unhappy results for Artisan customers who aren't feeling the need to license more of its products.

Get a better hand(le) on ARM's business with these recent Foolish articles:

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Fool contributor Rich Smith does not own shares in any company mentioned in this article. ARM Holdings is, however, a Motley Fool Stock Advisor recommendation . Try a 30-day free trial.