HTC: the One is selling better than last year's hero products, but next quarter may see a loss

HTC's unaudited results for Q2 2013 showed a sign of hope, but in today's call for the Q3 guidance, the Taiwanese company expects next quarter's revenue to be in the range of $1.67 billion to $2 billion, with an operating profit of anything from $0 down to... well, a margin of -minus 8 percent, which would equate to a horrible loss. This is also a notable drop from last year's $2.4 billion revenue and $168 million operating profit.

CEO Peter Chou blames this decline on the higher cost structure (bill of materials and operating costs) and the clearance of aged inventory in the channel, but he hopes that Q3 will be the bottom in terms of HTC's profitability. CFO Chialin Chang added that his team has a few actions in place to help restore the company to profitability very soon.

Despite the gloomy forecast, the executives re-emphasized the popularity and strong momentum of HTC's latest flagship. Without providing specific details, Chou said the One "has been performing very well" in China, the US and EMEA. For China in particular, this quarter HTC claims to have gained market share in the local high-end segment, which is defined by HTC as anything above the CN¥4,000 ($650) category. From there, HTC will come down and grab share in the CN¥3,000 ($490), CN¥2,000 ($330; Xiaomi Phone 2S territory) and CN¥1,500 ($245) domains.

"Our strategy is we want to have good market share in the high-end smartphone [market], especially in a market like China, I think fewer suppliers can enter into that segment," said Chou. "HTC is one company who are able do that, so we will continue to strengthen our position in that area. We definitely don't want to limit our segment, but we want to make sure we are a strong player in the high-end segment."

Chang followed up by comparing the phone's sales performance with that of last year's counterparts.

"If you compare the HTC One -- in terms of sell-out, in terms of our internal data -- to the combined hero products we had over the same period last year, it's actually performed better," said the CFO, who was likely referring to the One X and One S.

Chou also teased an upcoming series of mid-tier products due end of Q3 and early Q4, which should help HTC regain market share in this segment next quarter. This will go alongside the One mini, which Chou said is shipping at the end of this month -- so maybe literally tomorrow.

Lastly, Chou vows to continue to retain HTC's best talents. The exec plans to do so partly by launching a new employee incentive program that will somehow reward his key folks, "so that we can continue to push our innovative products, the best products to the market."

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HTC reports 2013 recond-quarter results

Taipei, Taiwan – July 30, 2013 – HTC Corporation (the Company, TWSE: 2498), a global leader in mobile innovation and design, today announced consolidated results for the Company and its subsidiaries for the second quarter of 2013.

2Q 2013 Results
HTC posted quarterly revenue of NT$70.7 billion, with gross margin of 23.2 % and operating margin of 1.5%. Net profit and EPS were NT$1.25 billion and NT$1.50, respectively.

"My leadership team continues to focus on execution," said Peter Chou, CEO of HTC. "We are seeing expected results as we fill the channels and meet demand for the new HTC One. As we broaden our focus to include a new member of the HTC One family, the recently announced One mini, we are looking forward to delivering great products and results in 2H."

HTC announced key appointments, including Jack Yang to president of South Asia, Sirpa Ikola to senior director of marketing for South Asia, and Lorain Wong to vice president of global PR.

As manufacturing ramped up, the US saw sequential growth in 2Q, as well as expansion in retail channels. EMEA saw renewed strength in major Western European markets and emerging countries.

Progress was observed across Asia. HTC gained market share in Taiwan, showing an improved presence in Hong Kong and warm reception of its products by consumers in Japan. In China, sales of HTC's high-end models improved, while competition at the mid-tier and affordable intensified. In South Asia, the improvement of key operator relationships provides optimism about the region.

3Q 2013 Outlook
The Company's outlook for the second quarter of 2013 is as follows:

3Q revenue is expected to be in the range of NT$50bn to NT$60bn
Gross profit margin is expected to be in the range of 18% to 21%
Operating margin is expected to be in the range of 0% to -8%
The new HTC One has performed well in the market, better than that of our hero products for the same period last year. We aim to extend the momentum as we enter into the second half of 2013. The new HTC One has also helped the company establish strong brand awareness and received numerous accolades as the world's best smart phone. With the help of HTC One, we have regained superphone market share across major markets including China.

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 Q4. This will address our challenge of mid-tier products competiveness

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. Actions have been taken and we expect to see improvement in Q4

We are also optimizing our organization, including the improvement of management efficiency and effectiveness.

People, innovations, and technology are the core assets of HTC. We will continue to invest in innovations and technology, as well as retaining and rewarding our best talents. We look forward to a brighter future for HTC and continue to delight our customers with the best and most exciting products