HTC Margin Forecast Misses Estimates Amid One Handset Costs

HTC Corp. forecast weaker-than-expected profit margins as it boosts spending to reverse shrinking sales and contracting market share.

Second-quarter gross margin will be 22 percent to 24 percent, lagging the 24.6 percent average of 19 analyst estimates compiled by Bloomberg. Operating profit will be about half the average of estimates, while sales outlook was in line.

HTC’s new One handset, meant to challenge Samsung Electronics Co.’s Galaxy S4, marks a “watershed moment” for the company as its first franchise product offered simultaneously through U.S. operators, President Peter Chou said in an interview last month. Shipment delays caused by production problems pushed back its release, forcing sales and profit last quarter to miss estimates.

“HTC One demand is good, but it’s not going to propel sales of other products or ensure momentum through to the end of the year,” said Dennis Chan, who rates the stock sell at Yuanta Financial Holding Co. in Taipei. “Meanwhile, the high cost of the phone, bad yields, and competitive pricing all play a part in keeping margins below expectations.”

Operating Margin

Revenue will be about NT$70 billion ($2.37 billion) this quarter, the Taoyuan, Taiwan-based company said in a statement today. That’s in line with the NT$69.7 billion average of 20 analyst estimates compiled by Bloomberg and 23 percent less than a year earlier.

Operating margin will be 1 percent to 3 percent, implying an expectation for operating profit of NT$700 million to NT$2.1 billion, compared with the NT$3.69 billion average of 18 analyst estimates compiled by Bloomberg. Gross margin was 20.3 percent in the first quarter and operating margin was 0.1 percent, the company said.

HTC fell 2 percent to NT$295 in Taipei trading today before the earnings were announced. The company said yesterday it will pay a dividend of NT$2 cash per share for last year, the lowest in a decade and 95 percent less than the NT$40 a share it paid a year earlier.

A delay in shipments of HTC One was caused by less-than-expected manufacturing capacity for the device’s camera, Benjamin Ho, the company’s marketing chief, said March 25.

The supplier situation has “greatly improved,” while margins may improve in the third quarter, Chou said during an investors’ conference call today.

Some marketing costs were pushed back to the second quarter, Chief Financial Officer Chang Chialin said.

Net income dropped 98 percent last quarter to a record low NT$85 million, while operating profit slumped 99 percent to NT$43.4 million, the company said April 9.

Made with a thin aluminum case, HTC One includes an UltraPixel camera, full high-definition screen and front-facing speakers. HTC, whose global smartphone share climbed to 10.7 percent in the second quarter of 2011, had less than 4.2 percent in the first quarter, researcher IDC said April 25.

Before it's here, it's on the Bloomberg Terminal.