Business Watch: HTC struggling to maintain its early promise

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As manufacturer warns of third quarter revenue revenue fall of 23 per cent and limited growth in that period, Dominic White reckons more cost cuts will have to be made

Fresh evidence has come out this fortnight of the emerging oligopoly between Apple and Samsung in the smartphone market.

We’ve already seen Nokia and Research In Motion (RIM), the maker of the BlackBerry, suffer dramatic (possibly even fatal), falls in market share thanks to the repeated successes of the two biggest players.

Now HTC, the world’s number five smartphone maker, is really starting to hurt too.

The Taiwanese manufacturer has predicted a sharp fall in third-quarter revenue and predicted that it will only grow in China for that period.

“China will continue to see growth in the third quarter, while other markets will have different degrees of decline,” chief financial officer Chialin Chang declared at a conference for institutional investors.

“Europe, Middle East and Africa will face challenges because of macro softness and competition,” he added.

Concern for HTC
HTC’s travails may not be as worrying as those of Nokia or RIM, both of which face a genuine fight for their survival thanks to being outmanoeuvred. But it is a concerning development for HTC, which was until recently one of the notoriously fickle sector’s rising stars.

The most worrying news for HTC shareholders is that it’s starting to look like a trend.

In its first quarter, the company suffered a 70 per cent drop in net income, its steepest fall in a decade.

Then profit more than halved in the second quarter after European sales came in lower than expectations and US customs officials delayed handsets destined for that market.

By way of contrast, on that same day, South Korea’s Samsung was busy posting record profits spurred by its smartphone sales.

IDC says HTC’s share of the world’s smartphone market has almost halved in a year from to 5.7 per cent from 10.7 per cent.

A couple of years ago, of course, HTC was on a roll, as its move from white-label phone maker to own-branded manufacturer started to pay dividends.

Its shares soared and sales quadrupled in just 18 months as it struck a chord with mass-market consumers across the globe.

But it hasn’t managed to maintain that remarkable growth spurt because of the relentless competition and innovation from Apple and Samsung.

As a result its shares are now trading close to their lowest point in nearly three years.

It’s not as if HTC’s phones are particularly unattractive, either. The new suite of One phones (pictured) it launched in April have received strong reviews thanks to their impressive camera and music capabilities.

But analysts say it lacks the marketing firepower of its larger rivals and packs less of a punch with retailers and networks as a result.

Some networks in the US cut the price of its handsets soon after launch, which analysts at stockbroker Bernstein put down to the fact that Samsung and Apple spend up to six times as much as HTC on marketing and general expenses.

Bad signal
Rival broker Nomura wrote in a note to clients that moves by US and Chinese networks to cut prices less than three months after the devices’ launch were “a bad signal as, in the past, HTC has been able to sell 6-12 months before price cuts.”

Bernstein did note that HTC’s margins have held up okay – unlike those of Nokia and RIM, which is reassuring news.

And the booming Chinese market is giving it a much-needed boost. Its market share there has already doubled to six per cent this year.

But Nomura stressed that rivalry is about to get more ferocious in China with the arrival of the new iPhone 5.

Meanwhile, Europe and the US continue to be a headache and HTC has shut offices in Brazil and South Korea, where Samsung and fellow local LG dominate the market.

It is forecasting a fall of as much as 23 per cent in total revenue, which explains why it is cutting costs and has sold half of the 50 per cent stake it acquired in technology group Beats only last year.

With such pressure on the top line, expect more cost cuts to shore up the bottom line.

The UK prepay market continues to look weak but that should not last for long, according to Carphone Warehouse.

Right now there just aren’t enough reasonably priced prepaid smartphones out there, according to Europe’s biggest mobile retailer.

As a result punters are choosing to stay on contract or move from prepay to a contract to secure a natty gadget for next to nothing.

But the good news, if Carphone’s chief executive Roger Taylor is right, is that the prepay market is about to take a turn for the better.

“I’m quietly optimistic at this stage that the ingredients appear to be lining up for a much better prepay market this year,” he told Reuters.

Taylor suggested that both the handset manufacturers and the network operators (which need to stump up the requisite subsidies) were both on board.

He predicted that prepay smartphones priced at around £50 to £80 were coming on the market for the ‘back-to-school’ season, with Nokia and LG in the frame.

Carphone fillip
It would be some more welcome good news for Carphone, which managed to record better-than-expected first-quarter sales.

While sales across Europe fell by two per cent in the three months to the end of June, analysts had forecast a slump of 5.5 per cent – some had even predicted a seven per cent tumble. Shares in the company got a much-needed fillip from that news.

Finally, former Vodafone UK chief Gavin Darby is waiting to hear what size payout he will get as a result of his former employer’s £1 billion acquisition of Cable & Wireless Worldwide (CWW).

Darby will leave in October and is being replaced as CWW chief executive by Nick Jeffery, chief executive of Vodafone’s global enterprise unit, who has been with the mobile giant for eight years.

Darby will reportedly get a basic pay-off of a year’s salary and is in talks to see how many of the four million shares he was entitled to under an incentive scheme will vest.

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