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HTC Between a Rock and a Hard Place

TAIPEI ( TheStreet) -- HTC (HTCKF), once a global rising star in smartphones, has forecast a lack of profit this quarter as its market share remains squeezed by both the high and low end following marketing and cost-containment problems.

The Taiwanese company says when it reported earnings last week that it expects profits between zero and an 8% loss this quarter. Profits have hovered around 1% since the final three months of last year as its smartphones struggle for attention despite a massive marketing effort.

After logging 93% revenue growth in 2010, HTC also reported second-quarter income of NT$70.7 billion (US$2.34 billion), a year-on-year decline of 83%.

"I saw them getting squeezed, but I still saw them being profitable," says John Brebeck, senior adviser with Quantum International in Taipei. "When the news first came out, our whole office started talking about it, saying it's so sad. There are so few blue-chips in Taiwan, and this was one."

HTC declined comment but acknowledged soft spots in a July 30 earnings statement.

"Our overall gross margin has been impacted by the relatively higher cost structure, lack of economy of scale and certain provisions needed to facilitate the clearance of aging products in the channel," the statement says, also noting improvement in management efficiency. "Actions have been taken and we expect to see improvement" in the fourth quarter.

But financials are under pressure because HTC's flagship One model has not sold well enough to recoup costs, analysts argue.

"Sales didn't meet their expectations. They spent a lot of money on marketing and on R&D but the return didn't meet their target," says C.K. Lu, smartphone analyst with market research firm Gartner in Taipei. "At the high end, the lifetime of a new smartphone is only a quarter. (The One) is comparable to Apple (AAPL) and Samsung, but it's not better."

Global smartphone shipments totaled 230 million in the second quarter, according to market research firm Strategy Analytics. They are on track to break a billion this year, making it harder for a single developer to stand out.
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