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

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.
Written by Ryan Huang, Contributor

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 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.

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