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7/30/2013
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HTC Warns Of Q3 Loss

Inventory costs, market slowdown seen as factors in company's ongoing struggles.

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HTC revised its guidance for the third quarter, and the news isn't good. Revenues have collapsed as much as 30% on slowing sales of the HTC One, its flagship smartphone. Further, the company has been hammered by inventory costs. HTC warned that the company will likely record a loss for the quarter, its first since going public in 2001.

Supply chain problems appear to be one of HTC's biggest thorns. The One smartphone is a high-end device made of premium materials. Because HTC can't match the volumes of its competitors, especially Samsung, it had to pay more for raw materials and manufacturing runs. Additionally, a shortage of camera components earlier this year delayed the One's launch. Had the device launched on time, it would have beat Samsung's Galaxy S4 to the market by a full month. Instead, both devices reached store shelves within days of one another.

"Scale is one of our challenges and we recognize that," said HTC CEO Peter Chou. "We have more mid-tier products coming later this year, and this product portfolio will help us return to momentum." HTC hasn't had positive momentum since 2010. Chou didn't provide specifics about the new devices, but did say that its financials will continue to be crunched. "We still see overall margin challenges. We had expected the cost structure [for the HTC One] to be improving. However, the improvement is not where we want it to be because of the lack of the overall economic scale."

[ For more on HTC's recent challenges, see HTC, Samsung Smartphone Plans: Not Enough Wow? ]

Another problem facing HTC: a slowdown in the high-end smartphone market. The HTC One shoots for class-leading competitors such as the Apple iPhone, Samsung Galaxy S4, Nokia Lumia 1020, and other top-tier hardware. Sales of high-end devices have historically been strong but are starting to lose some steam. HTC has produced few other models this year. Only one device, the One Mini, is a contender for the mid-market, but it won't be available until later this quarter. HTC doesn't have any entry-level devices in the market right now, which is where a lot of the industry's volume comes from.

Analysts believe sales of the HTC One peaked early, in May, and have since begun to slow rapidly. The device went on sale in mid-April. It's unclear if the HTC One Mini, a smaller version of the flagship device, will reach the market in time to have any impact on HTC's third-quarter financials.

Today's lowered guidance follows a spate of executive departures at the company several months ago, and changes to its international and U.S. leadership teams. CEO Chou has lost a lot of credibility in recent months but has said he won't leave the firm, despite earlier promises to hand over the reins if he can't turn the company around. His ongoing turnaround plan has fallen flat for more than a year. With a pending loss ahead, HTC's investors are probably asking just how long Chou should remain at the helm.

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