HTC warns of Q3 loss from One's high cost structure

HTC warns of Q3 loss from One's high cost structure

Summary: Taiwan phonemaker forecasts a possible operating loss ahead with sales dropping 30 percent and margins eroded by the high cost of making its flagship smartphone HTC One.

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Taiwanese phonemaker HTC has warned it might slip into an operating loss for the third quarter amid rising costs and growing competition.

In an earnings call on Tuesday, the company said it was facing gross margin challenges due to the high cost structure of its flagship smartphone HTC One. For the third quarter ending September, it forecasts an operating margin of 0 percent to negative 8 percent, compared with 1.5 percent in Q2 and 7 percent in the previous year.

"The HTC One cost structure is high, we have expected it to improve but it is not where we want it to be," said Peter Chou, HTC's CEO, in the call. He added there was a lack of overall economic scale which led to "a lot of overhead".

"The HTC One cost structure is high, we have expected it to improve but it is not where we want it to be."

Peter Chou, CEO of HTC

The chief executive said the company was taking action to improve profitability with two main potential sources of cost reduction being building materials and improving optimization of operations.

"We are hoping Q3 is our bottom," said Chou, adding he expected to see improvements and maybe a return to profitability in the final quarter.

When pressed for more details, the CEO said: "We are hoping to have breakeven if not even better, but cost structure is something quite complicated. Today the manufacturing cost is not our biggest challenge, we are actually quite efficient."

Added cost pressures could also come from its continued investments, including a new employee incentive program to retain and attract talent highlighted during the call.

HTC
HTC expects revenue and operating margin to worsen in Q3, which it hopes will be its "bottom".

Falling sales, rising competition

Amid intensifying competition especially in the mid-market segment, Q3 sales are expected to dip by as much as 30 percent, with revenue forecast to come in between NT$50 billion (US$1.6 billion) and NT$60 billion (US$2 billion). However, HTC pointed out its new range of mid-tier products would help "plug the holes".

According to Chou, HTC's main strategy will be to aim for "good" marketshare in the high-end smartphone market especially in China, where fewer players could be break into. "HTC is one company that can do that," he noted.

"Of course we want to leverage the brand awareness, preference in some of our top product markets, to address some of mid to affordable range of product, we definitely don't want to limit ourselves to any particular segment," the CEO added.

In its Q2 results released earlier this month, net income fell 83 percent last quarter to NT$1.25 billion (US$41 million). This was on the back of a 22 percent dip in revenue to NT$70.7 billion (US$2.3 billion).

In Q1, HTC posted its most dismal quarterly profit in nearly a decade with a US$2.85 million profit--down 98 percent year on year--hit by the delayed launch of its flagship device HTC One due to a shortage of camera components.

Topics: Smartphones, Hardware, HTC

About

Loves caption contests, leisurely strolls along supermarket aisles and watching How It's Made. Ryan has covered finance, politics, tech and sports for TV, radio and print. He is also co-author of best seller "Profit from the Panic". Ryan is an editor at ZDNet's Asia/Singapore office.

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4 comments
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  • Killer low cost hardware

    HTC is focussing too much on the high end of the market. They need a budget Windows Phone and Android device.

    The HTC 8S is too expensive for a device that's basically a Lumia 520 but costs twice as much.
    Dreyer Smit
  • Stop annoying the Android Community

    While the HTC One is a good phone (yeah a little pricey) they lost my patronage when they stopped working with the Android ROM development community.

    Yes, we get it that HTC is in the business to sell phones, not cater to the Android ROM Developers. However, it wouldn't hurt to talk with us to find out what features we'd like to see in an HTC Phone (Return of the removable battery and adding additional SD card memory would be nice). We users and the Developers that power us long after HTC and the Carriers forget about us are a wonderful resource for a phone manufacturer to tap, as we're in the field day to day and can give insight to features that appeal to not only the power user, but John/Jane Public as well.
    John Priest
  • HTC lost me on the Evo 4g

    The phone had a nice big screen for the time, but was an absolute piece of garbage with a battery that would drop from 100% to 85% within minutes of unplugging the charger. The Video recording was awful at the native 1280x720 resolution (skipped frames, stuttering). The photo/camera was "ok" in daylight, but terrible after about 3pm. Adding to this (not HTC's fault) but Sprint's 4G service (coverage) in south florida was god awful. To top it off, HTC then came out a year later with a new Evo and ... believe it or not, called it the Evo 4G. I jumped ship back to an iPhone 4s, and not onto an S3 which for me truly is the first phone I felt like I didn't need to upgrade 6 months after I bought it.
    ErKnHo
  • HAVE HAD 3 HTC phones and...

    The first was my first Android phone the HERO and it was fantastic. I then watched my wife get the original EVO (Easily their best phone until the current One), and I made the mistake at that time of getting the first Samsung Galaxy phone with the slide out keyboard...what a turd that was. Next I moved into the HTC EVO 3D which was decent on day one but got progressively buggy and crappier with every Android OS update ( like my Galaxy prior). By the time last summer when I got my Samsung Galaxy Nexus I had a bad taste of both Samsung and HTC in my mouth. I loved that phone but hated it on the crap network that Sprint is. Over a year of false promises about how the 4G LTE will be up and running by XMas (which is still the Sprint company line they are towing over a year later with my nee ONE), and here I am with a great device and piss poor service. I hope they can pull it together because if the ONE is the glimpse of HTC future then Hallelujah...
    chrisco1967