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.

At the same time, mainland Chinese rivals such as Lenovo and Huawei are making solid models, denting HTC's middle-market (US$150-$450) smartphone sales, Lu said. HTC will take an estimated 2013 world market share of 3%-4%.

The 16-year-old smartphone maker that got its start in contract manufacturing for bigger name foreign firms also faces supply-chain obstacles for high-end parts, a tough retraining of workers to make new lines of smartphones and lost income from developing high-end components if they don't sell, some analysts fear.

Expect little change this year for lack of any known new products, says Wilson Mao, smartphone analyst with Taipei-based market research firm TrendForce. "This year's odds are pretty low," Mao said. "I can't see any new models through" the fourth quarter.

HTC says it will start from this week buying back its own shares, a move to support share prices that have fallen because of the forecast for a possible loss this quarter. The company plans to repurchase 15 million shares through Oct. 4, according to Taiwanese media.

HTC would buy shares for NT$140 to NT$290. They were worth NT$153 as of Monday, about 1.5 times higher than book value. If the firm with 852 million shares buys another round, the move may indicate HTC's confidence in its long-term performance, Brebeck said.

HTC says it has gained market share in Taiwan and shored up its reputation in Japan, Hong Kong, mainland China and South Asia. The One model has outpaced HTC's "hero products" in the first half of last year and helped earn brand awareness, the company statement says.

"With the help of HTC One, we have regained superphone marketshare across major markets including China," it says. "We also have plans underway to launch a range of innovative and competitive mid-tier products in the coming months. We hope to regain momentum and market share in these segments" in the fourth quarter.

At the time of publication the author had no position in any of the stocks mentioned.

Ralph Jennings is on LinkedIn.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

If you liked this article you might like

Sony Takes Off Gloves in VR Battle With New PlayStation Headset

Sony Takes Off Gloves in VR Battle With New PlayStation Headset

How a Smartphone Superstar Lost Power

How a Smartphone Superstar Lost Power

Acacia Research (ACTG) Stock Falling Today on Patent Case Decision

Acacia Research (ACTG) Stock Falling Today on Patent Case Decision

High-End Google Tablet: Power Surge for Smartphone Developer HTC?

High-End Google Tablet: Power Surge for Smartphone Developer HTC?