A steady ascent can be followed by a rapid decline. Peter Chou, chief executive of HTC, knows that only too well. Earnings at his Taiwanese mobile phone company grew more than fivefold in the six years before 2011. But yesterday, when HTC reported results for the fourth quarter of 2012, it announced the lowest quarterly net income since 2004. That puts full-year earnings on track for a three-quarters drop from their peak in 2011. The question is why HTC’s shares have rallied by a half over the past two months.
Perhaps investors, fatigued by HTC’s continued fall, have jumped in on snippets of good news. The company is about to launch two big-screen smartphones. And in November, it finally settled more than 12 lawsuits with Apple– the companies have now signed 10-year licensing agreements for each others’ patents. The hope is that legal expenses should ease and HTC’s US performance should improve. US operators have been avoiding the group because of the legal risk and its market share in the country has halved over the past year.
Yet that good news looks more than priced in. HTC’s shares have historically picked up less than a fifth in the three months ahead of new launches. And its agreement with Apple could drive up royalty fees. Nomura notes that it can cost as much as $24 per unit on an Android smartphone to use some of Apple’s patented technologies – something that HTC can ill-afford. The operating margin plummeted to 1 per cent in the fourth quarter from 13 per cent a year ago and remains well below Apple’s 30 per cent.