Taiwan smartphone maker HTC Corp expects to post much lower-than-expected revenue in the first quarter, underscoring analyst views that it will face another weak quarter and an uphill struggle to prove to investors it still retains its innovative touch.

HTC said on Monday it sees a drop in revenue of as much as 36 percent in the first quarter to between T$65 billion and T$70 billion ($2.20-2.37 billion), from T$101.42 billion in the previous three months, as it prepares to launch new models, but said its difficulties were short term.

The world's No.5 smartphone maker by shipments is widely expected to roll out four models later this month at the Barcelona Mobile World Congress, including an ultra-slim type, currently codenamed the HTC Ville, and one that uses advanced quad-core chips.

The challenge for HTC, which was once the standard bearer of the Android operating system but dropped one place in world rankings last quarter, is to make such devices stand out in an increasingly competitive marketplace, analysts say.

It can be turned around, says Melissa Chau, Singapore-based research manager for IDC, speaking before the company gave its first quarter revenue guidance. But the problem remains the same: How are they going to differentiate?

The software, and increasingly the hardware, have become commoditized, forcing HTC to hunt for new ways to stand out as it scrambles to compete with Apple Inc's iconic iPhone and Samsung Electronics' Galaxy range.

Meanwhile Samsung ambitiously created new segments from the high-end, with models such as its large-screen Galaxy Note, down to Android phones costing less than $200, as well as leveraging its marketing and retail networks to promote its products.

Former contract maker HTC had a fairytale ride in 2010 and early 2011, when its shares more than tripled in the 14 months to April 2011 and sales grew four-fold in 1- years as consumers snapped up its innovative phones with their distinctive large clock numerals.

But an equally rapid fall from grace saw its stock become the worst performer among global smartphone companies last year, down 42 percent.

HTC shares have climbed 15 percent since the beginning of this year, above the main TAIEX share index's 9 percent rise, as investors see value in the company and consider its stock oversold in previous weeks.


The Q1 revenue forecast was well below that in a poll of 19 analysts by Thomson Reuters I/B/E/S, which had forecast HTC would see T$89.64 billion ($3.04 billion) in revenue this quarter.

Adding to the disappointing guidance, HTC reported on Monday a 52.6 percent drop in sales in January from a year earlier to T$16.62 billion; the figure was also down 37 percent from the previous month.

HTC may squeeze all the bad apples in the first quarter that's why the guidance is so low, and then the margins will be back to normal levels after, said Mike Fang, a fund manager at Paradigm Asset Management.

The stock fell more than 5 percent on Monday, before the company released its guidance.

Fang expected there would be more selling pressure on HTC's shares on Tuesday but it would only be short term, as foreign investors seem to be quite optimistic on HTC's new models.

Still, HTC will not go back to high margins it used to see before, he said.

HTC said on Monday it expected gross margin and operating margin to come in at around 25 percent and 7.5 percent, respectively, down from 27.12 percent and 12.71 percent in the previous quarter.

Chief Financial Officer Winston Yung told an investor conference call that he expected margins to normalize in the second quarter, to levels seen in the first three quarters last year, when its product transition is over. Gross margin was at 28.01-29.25 percent, while operating margin was at 14.86-15.81 percent during Jan-Sept in 2011.

Revenue from the United States was worse than expected due to competition from Samsung and Apple, as well as disappointing sales from fourth generation LTE (Long Term Evolution) phones, according to Yung, while declines in sales from Europe were small and business in Asia was outstanding.

But Yung said the company had no plan to change its strategy by going into low-end markets and embarking on price competition in order to expand.

HTC will announce four new smartphones at the Mobile World Congress on February 26, according to Barclays Capital. The HTC Ville will feature a 4.3-inch AMOLED display and an 8-megapixel camera and run on the latest version of Android, 4.0.

Other reported models include a high-end design codenamed the Edge that uses a quad-core CPU, boosting processing speeds, as well as a couple of mid-range smartphones.

Improved designs and performance and an absence of new models from Samsung and Apple in the quarter will provide HTC some room to make up its lost market share, analysts said.

Marc Einstein, Tokyo-based Industry Manager for Mobile and Wireless Communications for Frost and Sullivan, said HTC wasn't the only device maker with questions over its future, but said that in a growing market there was still space. The smartphone industry is so fast moving, I wouldn't count them out.

($1 = 29.5300 Taiwan dollars)

(Additional reporting by Jeremy Wagstaff; Editing by Jonathan Standing and Alex Richardson)