Back to list

Challenges face HTC despite settlement with Apple: brokerages

2012/11/12 13:55:55

Taipei, Nov. 12 (CNA) Taiwanese smartphone maker HTC Corp. still needs to address fundamental challenges in the coming quarters despite its patent settlement with rival Apple Inc., foreign brokerages said Monday.

HTC and Apple announced a day earlier that they have agreed to settle their global patent disputes through the dismissal of all current lawsuits and a 10-year license agreement, ending a legal battle that has been running since March 2010.

The license extends to current and future patents held by both parties, the two smartphone makers said in a joint statement.

Daniel Chang, an analyst at Macquarie Capital Securities Ltd.'s Taiwan branch, said that while settling the lawsuit is good news for HTC, investors should understand that HTC's collapse of market share and profitability in the past year or two were not due to Apple's lawsuits.

HTC has been struggling to differentiate its products, and suffers from weak branding, rising costs due to competition and falling customer loyalty, especially in the U.S. and Europe, Chang wrote in a note to clients.

"HTC needs to resolve these issues in those markets quickly. Otherwise, as the smartphone penetration in developed market matures, the profit pie will shrink rapidly as bargaining power shifts to carriers," he said.

Although Chang did not know how much HTC would pay Apple for royalties, he said the license fees are unlikely to cause substantial damage to HTC's financials.

Macquarie maintained a "underperform" rating and target price of NT$150 (US$5.18) for HTC.

British bank Barclays Plc expected HTC's settlement with Apple to be a short-term share price catalyst because HTC has now removed the largest overhang in its legal disputes and should now be able to focus on product competition.

However, the structural issues that HTC are facing have not changed in terms of its lost market share in the U.S. and the intensifying competition in China's smartphone market, the bank said.

Unless HTC and Apple build further business relationships or cooperation in mobile devices, Barclays believed the settlement remains a non-event in terms of HTC's fundamentals.

Barclays kept an "underweight" rating on HTC and a target price of NT$175.

Goldman Sachs believed the settlement removes one of the greatest overhangs on the stock and eliminates the possibility that HTC will be shut out of the U.S. market.

"We believe that by being able to access Apple's patent portfolio, HTC will be able to release part of its engineering resources that have been tied up with work-around solutions," said Robert Yen, a Taipei-based analyst at Goldman Sachs.

That would potentially allow HTC to offer smartphone products better than those of its Android peers in terms of features and user experience, which would help the company to gain market share, Yen said.

Goldman Sachs remained "neutral" on HTC given its concerns over whether HTC's execution as well as sales and marketing bottlenecks can really drive the recovery of the company from a low base against competition.

Morgan Stanley said the settlement does help HTC reduce time and resources spent on patent litigation and releases another window of opportunity for HTC to fight back for market share in the U.S. market by focusing on competition from other Android camps, especially Samsung Electronics Co.

The next two quarters are critical for HTC, and its upcoming HTC DLX phone for U.S. carrier Verizon Wireless will be the first product to monitor closely to see if the company could reverse its fortunes, the U.S. brokerage said.

Morgan Stanley held its target price of NT$175 for HTC while maintaining an "underweight" rating.

Germany's Deutsche Bank AG said the settlement would prevent HTC from putting too many resources into lawsuits, which consume both time and money.

However, the bank suggested investors to wait for more positive developments on the market's acceptance of HTC's new products and its strategies to defy the intensified competition in the smartphone industry.

Despite HTC's new product launch in the fourth quarter of 2012, Deutsche Bank expected the company's revenue growth momentum in the current quarter to remain weak due to the intensified competition.

The German bank rated "hold" on HTC and kept its target price of NT$200.

Shares of HTC rose 7 percent, the maximum permitted daily increase, to close at NT$241.5, while the benchmark weighted index ended down 0.35 percent.

(By Jeffrey Wu)