HTC profit lags forecasts, faces challenges in third quarter

Taiwan smartphone maker HTC Corp (2498.TW) saw profit more than halve in the second quarter after European sales disappointed and phones destined for the U.S. market were held up by customs inspections.

The profit fall came on the same day that archrival Samsung Electronics (005930.KS) posted record second-quarter earnings, driven by runaway sales of its Galaxy smartphone [ID:nL3E8I54F4], indicating the size of the challenge facing HTC as it looks to recover market share.

HTC is betting on its new One series of phones to regain market share lost to Samsung and Apple Inc (AAPL.O). HTC, whose sales have grown four-fold since 2010, was battered in the second half last year by the popularity of the iPhone and Galaxy models.

HTC's chief executive, Peter Chou, said in an interview last month that the company will launch other new models in the second half of this year.

But some analysts predict HTC will be upstaged by strong sales of the Galaxy S III and the latest iPhone, which is expected to launch in the fourth quarter.

"In the high-end market, there are Samsung and Apple. In the low-end market, even though HTC wants to gain traction in China, its phones are price uncompetitive," said KGI Securities analyst, Richard Ko.

"HTC's scale and margin are a lot lower compared to Samsung and Apple. It will see much pressure in the short to medium term," Ko said, adding he expected HTC to see limited growth in the second half.

HTC will be further pressured by a sales slowdown faced by the entire industry as the eurozone crisis continues to dampen global consumer sentiment.

"We may not see a traditional high season in the third quarter," said Peter Liao, an analyst at Nomura Securities. "Companies are not seeing strong pull-in and operators are feeling conservative towards giving subsidies."

HTC confirmed a news report on Friday that it has not renewed the contracts of some workers hired during the high season for its production line. The number affected is not more than 1,000, it said.

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HTC's unaudited April-June net profit was T$7.4 billion ($247.7 million), the company said, down from T$17.52 billion in the same period a year earlier, but up from T$4.47 billion in the January-March quarter. It did not elaborate.

Earnings had been expected to drop to T$8.25 billion, according to a Thomson Reuters I/B/E/S survey of 21 analysts.

Second-quarter revenue was T$91 billion, improving from T$67.79 billion in the previous quarter.

Last month, HTC cut its second-quarter revenue target by more than 13 percent to T$91 billion and cut its operating margin forecast by 2 percentage points to 9 percent, but kept its gross margin target at 27 percent.

HTC cited the poor economic situation in Europe that was hurting consumer demand, as well as delays to shipments of new phones to the United States due to a requirement for customs inspections after it lost a patent dispute with Apple.

In a separate statement on Friday, HTC said consolidated sales for June were T$30 billion, down 33.4 percent from the same month a year earlier and unchanged from May.

HTC shares closed down 5.15 percent at T$322 before the earnings were released, while the broader market .TWII fell 0.26 percent. The company has a market value of around $11.4 billion.

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