Commentary: HTC gets a wakeup call as it is forced to lower revenue guidance for 2009

The price of HTC (High Tech Computer) shares dropped steeply for three consecutive trading sessions closing at NT$328 (US$10.03) on the Taiwan Stock Exchange (TSE) on August 5 after the company lowered its revenue guidance for 2009.

At an online investors conference held on July 31, HTC CEO Peter Chou said that HTC revenues for 2009 are expected to decline 1-5% from the 2008 level, compared to an originally guided growth of 10%. The company posted revenues of NT$152.5 billion in 2008.

Chou also said HTC handset shipments for 2009 will stay flat or grow a mere 1-5% from 2008 levels. Based on the 12 million handsets HTC shipped in 2008; this means HTC's handset shipments are unlikely to surpass 12.6 million units in 2009.

But has HTC share price already hit the bottom? Probably not yet. Bhavin Shah, head of Asia Pacific technology research at JP Morgan, has downgraded HTC shares to 'underweight' and also lowered the target price for the handset vendor to NT$250.

Other international institutional investors have also given the same or similar ratings, with Citigroup Global Markets Asia and Goldman Sachs shaving their target prices for HTC to NT$300 and NT$295, respectively, as cited by the Chinese-language Commercial Times.

For the lowered revenue guidance, Chou cited reasons including a faster-than-expected decline in ODM orders, a slow pick-in in demand for 3G handsets in the China market, and lackluster demand for Android-powered smartphones.

But this is unlikely to be completely true since China revenues and ODM orders contribute only around 5% each to HTC's total revenues. Also there has recently been a proliferation of Android-powered models indicating growing popularity for the Google phones.

More likely HTC underestimated the strength and competitiveness of rival vendors given that it has dominated the Windows Mobile-based smartphone segment for several years, and was the spearhead in the development of Android-powered handsets, industry sources in Taiwan have commended.

HTC's share in the high-end smartphone segment has been eroded by strong offerings from rival vendors such as Apple and RIM (Research in Motion) as well as Palm.

Meanwhile, Korea-based Samsung Electronics and LG Electronics (LGE) have been working together to eat away at HTC's mid- to entry-level smartphone market share.

The strong offerings from rival vendors have left carriers worldwide with more devices to choose from, which has not only pushed HTC to reduce its prices, but also weakened its bargaining power, the sources noted.

The situation may continue to worsen as most carriers are waiting for the launch of Windows Mobile 7-based smartphones in 2010, instead of picking up those running on Windows Mobile 6.5 now, the sources added.

As a result, the lowered revenue guidance, the first for HTC since its listing on the TSE more than six years ago, should serve as a wakeup call for the Taiwan-based handset vendor that it needs to improve its brand image as well as its competitiveness in the global smartphone market.

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