* Q1 pretax profit up 9 pct, broadly in line
* Sees smartphone demand improving in second half
* Shares down 3 pct (Adds CFO comments, analyst reaction, shares)
By Paul Sandle
LONDON, April 23 (Reuters) - ARM Holdings, whose chip technology powers Apple's iPhone, said demand for smartphones would 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 during the Christmas holiday season, leading to worries that the market was becoming saturated.
But 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 percent rise in pretax profit to 97.1 million pounds ($163.36 million), broadly in line with market forecasts, on revenue collected in dollars of $305.2 million, up 16 percent. In comparison, a year ago adjusted pretax profit jumped 44 percent.
Royalty payments, which ARM receives a quarter in arrears on every chip that contains its technology, rose by an underlying 8 percent 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.
"There has been an inventory correction in smartphones, that looks to be unwinding," Score told reporters on Wednesday. "We saw TSMC showing very strong guidance for their second quarter, which will inform our Q3 royalties."
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, he said. Processor licensing revenue rose 38 percent in the quarter to $111.6 million.
Shares in ARM were trading down 3 percent at 951 pence at 0907 GMT, around the same level they were at in September.
Analyst Julian Yates at Investec, who has a "buy" rating on ARM's shares, said the indications were for second-quarter royalties to be broadly flat on the first quarter, but he was forecasting a 28 percent rise in the second half.
"We expect sentiment to improve as the market gains confidence around ARM delivering this pick-up, based on improving trends from the semi-conductor industry which we have already started to see," he said.
(For a related story: BREAKINGVIEWS-ARM offers a non-alarming mini-disappointment, click on ) ($1 = 0.5944 British pounds) (Editing by Susan Fenton)