HTC turns tables on Samsung in Q2

As Korean leader issues shock warning of 24.5% drop in operating profit, HTC turns in 80% leap in net income

By Caroline Gabriel

After a long period of being relentlessly overshadowed by Samsung each quarter, HTC has finally turned the tables. While the Korean market leader issued a shock warning of almost 25% operating profit decline for the second quarter, its smaller Taiwanese rival ended a three-quarter string of losses and turned in an 80% year-on-year leap in net income.

Samsung had indicated that this could be a tough quarter amid intensifying smartphone competition, as well as ongoing challenges in its TV business. However, the scale of its forecast operating profit decline - 24.5% down from the year-ago quarter - surprised analysts. This was the third quarter of falling operating income in succession.

Guidance on sales figures remained unchanged from its April estimate - consolidated Q2 sales should be KRW52 trillion ($51.4bn), down from KRW57.5 trillion last year, with operating profit of KRW7.2 trillion ($7.1bn). Samsung blamed the weakness on a strong Korean won - at a six-year high against the dollar - and a decline in smartphone and tablet shipments. In addition, it has incurred additional marketing expense to reduce inventory.

The company added to its comments, saying that profits were being hit by increased competition at the low end, not just from Chinese vendors but from European manufacturers. And it also sees slow growth in the handset market as a whole, though it expects a rebound later in the year.

The telecoms unit, which includes the handsets and generates more than 70% of earnings, is likely to see operating profit of KRW5.1 trillion, down from a record KRW6.7 trillion in Q313, on sales of KRW31 trillion, analysts estimate. Samsung will publish the official results and divisional breakdown later in the month. IBK Securities calculates that the vendor's total smartphone shipments fell to 78m units in Q2, from 87.5m in Q1.

The display unit is also under pressure, and pundits predict it will see a 76% drop in operating profit in Q2, to KRW270bn, although analysts expect some improvement in the consumer electronics business, which includes TVs and home appliances. And the chip division is expected to double its profit to about KRW2.1 trillion.

New products and demand for displays will drive better results in the third quarter, Samsung said in its statement. "Samsung earnings will rebound in the third quarter, largely driven by explosive demand for 4G smartphones in China," Claire Kim, an analyst at Daishin Securities, told Bloomberg. "If Samsung can maintain at least 20% market share in that segment, it will see higher smartphone sales during the quarter when the significant impact from Apple's new devices isn't yet expected."

Such comments indicate the huge importance of China, the world's largest smartphone market, to all vendors, and Q2 is seasonally weak there. But of course, Samsung also faces non-seasonal pressures, such as the increasingly impact of Chinese manufacturers like Lenovo and Xiaomi.

Meanwhile, HTC just beat market estimates with its Q2 results, and delivered one stand-out figure, an 80% year-on-year leap in net profit to NT$2.26bn (US$75.6m), ahead of the NT$2.09bn predicted by analysts. HTC also posted an operating profit of NT$2.43bn after three successive quarters in the red on this front. But revenue fell to NT$65.06bn, only just within the company's guidance range of NT$65bn to NT$70bn.

The profits rise vindicated CFO Chang Chialin's pledge, made in May, that the new flagship smartphone, the HTC One M8, would propel its vendor back to profit in the June quarter. The M8's sales are still rising after its launch in March and CEO Peter Chou said it had achieved "positive customer response". However, the profits improvement is also down to the ongoing cost reduction program as well as major efforts to address the supply chain issues and component shortages that dogged recent HTC launches. Chou said: "We have dramatically improved our operational efficiency and supply chain readiness to ensure immediate availability on the launch day."

Back to blog