HTC had seemed somewhat immune from the handset downturn, especially with its focus on smartphones and its early Android moves, and as recently as last week, its CEO Peter Chou said it expected double-digit percentage growth in phone shipments this year. But it has now made a radical U-turn in its outlook, reflecting a mixture of its own over-optimism and some product delays, but also some of the risks that face all handset players in the current climate.
The Taiwanese vendor said on an analyst conference call that it now expected revenue for this year to fall by a "low to mid-single digit percentage", indicating a negative swing of probably 15 percentage points on its previous forecasts. Revenue last year rose 29% to NT$152.56bn ($4.65bn). The most immediate reasons given were delays in unspecified products, and "unexpected slowdowns" in unit shipments, with China a particular disappointment.
This was concerning, especially as Chou announced in May that HTC would be the first supplier to launch an Android phone for China Mobile, a customized version of the Magic (co-developed with close China Mobile partner Vodafone). HTC at that time set a goal of doubling sales to China this year, from 800,000 units in 2008, relying mainly on Windows and white label models, plus the first Android sales. This forecast now looks likely to be significantly reduced.
"Our momentum in the second half of this year may not be as strong as we initially thought it would be," Chou said during the call, even though in its recently announced second quarter results, HTC beat analyst forecasts with a net profit of $197.1m. At the time, the company did not provide guidance, but said it expected full year shipments to be 20% higher than it had previously predicted because of the strength of its smartphones. Now HTC expects third quarter revenues to be between NT$34bn ($1.04bn) and NT$36bn ($1.1bn), with gross margin around 32.5%, up from 32% in the second quarter. The average selling price of HTC's phones fell to US$358 in the second quarter, from $364 in the first quarter and $381 a year before.
These figures and Chou's comments indicated that HTC is facing the same problems as larger firms trying to strike a profitable balance between the margins of smartphones and the market share of bigger product categories. Its much vaunted headstart in Android will soon be snatched away as Motorola, Samsung and Sony Ericsson launch in time for the holiday season, and so the cost of maintaining its differentiation in smartphones will rise, even as average selling prices fall, with HTC's push to compete in the emerging market for mass market smartphones.
"The number of mid-tier smartphones we're pushing out this year will gradually increase, which will push down revenue," said Chou, who also said HTC would increase its operating budget to about 15% this year, up from 13.5% in 2008, to try to compete with smartphone specialists like Apple and giants like Nokia. It could also become more and more dependent on Android, if Windows Mobile's problems as a platform persist - just as the Android space itself becomes overcrowded. HTC is the world's largest maker of Microsoft phones. And if companies from the PC sector, accustomed to lower margins than the smartphone makers, move into Android, HTC's challenges will mount.