Arm Holdings, the designer of chips for leading smartphones, beat analyst expectations with full-year profits up 20 per cent as it benefited from the growing number of devices – from water pipes to energy meters – connected to the internet.

A presentation to investors by chief executive Warren East was dominated by talk of the ‘post-PC’ era, in which the market for internet-enabled devices will spread into areas such as security and healthcare.

The latest generation of connected devices use embedded chips, also known as microcontrollers, which accounted for 28 per cent of Arm’s shipments in the last quarter. The company holds about 30 per cent of the market.

The chips, used in everything from security systems to smart energy meters, yield lower margins than the flagship processors used in tablets and smartphones by Apple and Samsung, but they have the potential to ship in much higher volumes.

“We know there are Arm-based devices out there in water pipes being used to detect when there are leaks. When these things get connected rather than sending a man to read them, things will get really interesting,” Mr East told the Financial Times on Tuesday.

He said in 2012 there were currently 1.6bn connected devices, three-quarters of which employed an Arm design. He expects this market to grow to 4bn devices by 2017, but acknowledged that competition would be fierce.

“That fantastic market opportunity is attractive to everybody, not just Arm and we need to make investments to make sure our technology is thoroughly competitive.”

In order to counter the threat of competition, Arm has increased its research and development spending. The company employed an extra 276 people in 2012, bringing the total to 2,392. Mr East said 80 per cent of the new hires went to R&D.

Arm said it was also spending more on defensive patent acquisitions.

“As our tech becomes more prevalent clearly we are exposed to a wider range of technologies and therefore a wider range of people’s patents, so that’s why we need to invest in patent risk mitigation,” Mr East said.

Arm reported revenues of £577m in 2012, up from £492 in 2011. Pre-tax profit was up to £277m, an increase of 20 per cent. Earnings per share rose 18 per cent to 14.7p.

The company forecast revenues of $246m for the first quarter of 2013, an increase of 18 per cent year on year.

Licensing revenue, a key indicator of the health of Arm’s business, was up 28 per cent year on year in dollar terms, beating the analyst consensus forecast by 18 percentage points. The company’s order backlog was up 25 per cent from the previous quarter.

Shares in Arm closed up 4.26 per cent at 930p.

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