ARM Holdings, whose chip technology powers Apple’s iPhone, says demand for smartphones will pick up in the second half after a disappointing end to 2013 resulted in first-quarter profit rising less than in previous years.

Sales of top-end smartphones, a market dominated by Apple and Samsung, were lower than predicted over Christmas, leading to worries that the market was becoming saturated.

ARM’s chief financial officer Tim Score said there were signs that demand was picking up for smartphones from the low-end to the top, where Samsung has just launched its Galaxy S5 flagship and Apple is expected to unveil a new iPhone later this year.

The British company posted a 9 per cent rise in pretax profit to £97.1 million, broadly in line with forecasts, up 16 per cent. In comparison, a year ago adjusted pretax profit jumped 44 per cent. Royalty payments, which ARM receives a quarter in arrears on every chip that contains its technology, rose by an underlying 8 per cent year on year, about a quarter of the growth it was seeing at the same time last year.

Cambridge-based ARM said royalties were affected by an inventory correction as manufacturers used up components they had stockpiled because of weaker customer demand, particularly in mobile and consumer electronics.

Taiwan Semiconductor Manufacturing Co Ltd (TSMC), the world’s largest contract chip producer which drives more than half of ARM’s processor royalties, according to Deutsche Bank analysts, said last week it was targeting record revenue in the second quarter.

In the longer term, growth in companies licensing ARM’s technology for uses ranging from networking equipment to microcontrollers in appliances like dishwashers would also drive royalty growth, Mr Score said. Processor licensing revenue rose 38 per cent in the quarter to $111.6 million. – (Reuters)