Thu, Aug 01, 2013 - Page 13 News List

HTC expected to post first-ever operating loss in Q3

By Helen Ku  /  Staff reporter

HTC Corp (宏達電) shares closed down by the daily limit yesterday after the company sounded an alert that it might report its first-ever operating loss this quarter and several brokerages reduced their target prices on the stock to below NT$100.

HTC stock fell to an eight-year low of NT$159.5 yesterday, closing down 6.73 percent and underperforming the benchmark TAIEX, which fell 0.68 percent.

On Tuesday, the company told investors in a conference call that its third-quarter operating margin could fall to between zero percent and minus-8 percent from 1.5 percent last quarter.

While gross margin rebounded to 23.2 percent last quarter from 20.3 percent in the first quarter, it was forecast to fall to somewhere between 18 percent and 21 percent this quarter, HTC said.

Third-quarter sales were expected to decrease sequentially by between 14.3 percent and 28.6 percent to a range of NT$50 billion (US$1.7 billion) to NT$60 billion from NT$70 billion, it added.

“While market expectations have been lowered substantially in the past couple of months, we would like to point out that the projected operating loss in the third quarter is much worse than market expectations,” Kevin Chang (張凱偉), a Taipei-based analyst at Citigroup Global Markets Inc, said in a report.

Citing analysts’ consensus estimates for HTC’s operating margin this quarter — about 2 percent to 3 percent — Chang said he expects the market to react “very negatively” to the smartphone maker’s third-quarter guidance.

Constrained by more limited resources to conduct aggressive, but expensive, marketing approaches, HTC is unable to keep up with Samsung Electronics Co in the race to boost sales of high-end smartphones, Chang said.

With HTC expected to become “the biggest victim of weak demand for high-end models,” Chang forecast that the Taoyuan-based company would see monthly shipments of its new “One” flagship model fall to between 700,000 and 800,000 units, from the 1.2 million units seen in previous months.

He predicted HTC would post a NT$2.2 billion operating loss this quarter from NT$1.1 billion operating profit last quarter, with earnings per share falling to losses of NT$2 from profits of NT$1.5 in the second quarter.

“We believe HTC will continue to strain to break even for an extended period,” Chang said. “With high-end demand slowing and Apple Inc’s big-screen iPhone likely to come out the middle of next year, the year ahead could get even tougher for HTC,” he added.

SinoPac Securities Co (永豐金證券) said in a separate report that HTC’s estimated operating loss for the quarter might be “just the beginning” of a series of structural issues the smartphone vendor will have to tackle.

“Since the new One flagship phone can only offer a limited boost to HTC’s net profit, the chances that it will make a turnaround with new mid-end or entry-level products are slimmer,” SinoPac said.

While HTC forecast that its sales performance and profitability would pick up in the fourth quarter with the launch of new mid-range and entry-level devices, UBS Securities analyst Arthur Hsieh (謝宗文) said he expects the company will continue to post losses during the October-to-December period because “it’s too late for HTC to address the mid-tier market.”

“We think HTC could turn profitable simply by spending less on marketing, but that is unlikely to be a valid long-term solution because then it could lose its brand presence in the intensely competitive sector, which in turn could decrease shipments volume,” Hsieh said.

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