HTC's Q1 outlook stinks: Is Q2 rebound theory wrong?

Summary:HTC is betting that new products in March can "normalize" its profit margins. The reality may be that HTC's glory days may be gone forever as Samsung and Apple run away from the smartphone pack.

HTC announced weak fourth quarter financial results and a worse than expected outlook for the three months ending March 31. Meanwhile, it's unclear whether new products can get HTC back on firm ground anytime soon.

The fourth quarter results weren't a surprise. HTC telegraphed poor results weeks ago. The first quarter outlook was a bit of a stunner and the magnitude of the shortfall makes HTC's argument for a second quarter surge dicey.

HTC's big theory is that new products in March will save its bacon. These products will result in a second quarter surge that will put HTC back into the race against Samsung and Apple.

First, let's get the HTC results out of the way. The first quarter went down like this:

But it was the outlook that raised eyebrows. HTC projected first quarter revenue between NT$65 billion and NT$70 billion "due to a product transition." Margins and pricing are expected to erode to 25 percent for gross margins and operating margins of 7.5 percent.

Analysts were $NT89.6 billion in revenue for the first quarter.

Also see: CNET:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               HTC disappoints with financial results, forecast

The catch is that HTC expects margins to normalize once it launches new products. In addition, the HTC brand and design will bring momentum back. Indeed, HTC has three new models coming in March---Ville, Edge and Primo) and HTC is trying to ship as many as possible before a new Samsung Galaxy and Apple iPhone hit the markets in May and July, respectively.

Macquarie analyst Daniel Chang highlighted the risks with HTC's second quarter surge theory.

HTC believes its poor 1Q12 margin is temporary and margin will recover to its “normal” cycle in 2Q12. We believe the guidance is a bit optimistic due to ongoing severe competition and product mix change. Although we agree that 2Q12 margin will recover due to improved scale on new models shipment, we disagree that HTC is able to see its operating profit margin back to 2011 level or 15%.

The issue is that HTC will struggle to win a feature race and maintain costs. The second quarter devices may just get HTC back in the game. That position is a far cry from victory.

Related:

Topics: HTC

About

Larry Dignan is Editor in Chief of ZDNet and SmartPlanet as well as Editorial Director of ZDNet's sister site TechRepublic. He was most recently Executive Editor of News and Blogs at ZDNet. Prior to that he was executive news editor at eWeek and news editor at Baseline. He also served as the East Coast news editor and finance editor at CN... Full Bio

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