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Executives

Sally Kuo – IR

Chia-Lin Chang – CFO

Analysts

Arthur Hsieh – UBS

Richard Kramer – Arete Research

Robert Yen – Goldman Sachs

Jean-Louis – SGJI

Alvin Kwock – JP Morgan

HTC Corporation (OTC:HTCKF) Q4 2013 Earnings Call February 10, 2014 2:00 AM ET

Operator

Welcome everyone to HTC’s 2013 Fourth Quarter Results Conference Call and Webcast in English. Today with us, we have CFO Mr. Chia-Lin Chang; Vice President of Finance Mr. Edward Wang; and Investor Relations Ms. Sally Kuo. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question-and-answer session for investors and analysts. Please follow the instructions given at that time if you would like to ask a question.

For your information, this conference call is now being broadcasted live over the internet. Webcast replay and English transcript will be available within an hour after the conference is finished. A Chinese translated transcript will be available within a week after the call is finished. Please visit www.htc.com under the Investors section.

And now, I would like to introduce Ms. Sally Kuo, Investor Relations. Ms. Kuo, you may begin.

Sally Kuo

Thank you, operator. Good morning, good afternoon and good evening, ladies and gentlemen. Welcome to HTC’s 2013 fourth quarter analysts call. This is Sally Kuo Investor Relations at HTC. The event is now being broadcasted live via HTC’s website at www.htc.com. If you are joining us through the dial-in line, your call is now being placed on mute. As this conference is being broadcasted to our investors around the world, we will conduct this call in English only.

The format for today’s call will be as follows. First, I will have to summarize our operations for the fourth quarter of 2013, followed by our guidance for the first quarter of 2014. Afterwards, HTC’s CFO, Mr. Chia-Lin Chang will lead the Q&A session.

Before we begin, I would like to draw your attention to the disclaimer statement on Page 2 of the presentation slide. Please note that this presentation contains forward-looking statements. These statements are based on our current expectations. Actual results may differ materially from our expectations, and the company undertakes no obligation to update these forward-looking statements going forward.

Please turn to Page 3, for the fourth quarter 2013 overview. Fourth quarter – in Page 3, you can see our fourth quarter financial highlights. Our revenue in fourth quarter came in at NT$42.9 billion, with gross margin of 17.8% and operating margin of negative 3.7%. Net profit was NT$0.31 billion or EPS at NT$0.38 per share.

In our product innovation. In China, HTC signed a strategic partnership agreement with China Mobile to become one of its first TD-LTE devices providers. And we also launched a mid-range HTC Desire 700 dual sim, HTC Desire 601 and HTC Desire 500 across Europe, Asia and Middle East, providing unique HTC Zoe, HTC BoomSound and HTC BlinkFeed experience at affordable prices.

We also unveiled award-winning HTC One in a sophisticated new color, Champaign Gold. It will be available across Europe and Asia with a number of partners

We also introduced 4G-LTE version of the two flagships devices; HTC One and HTC Butterfly s in Taiwan with three major operators, reiterated HTC’s leadership in communication technology in 4G era.

Turn to Page 4. You will see other business update. We launched The Most Beautiful Smartphone campaign through an interactive outdoor billboard at Times Square in New York City, boosting digital engagement with consumers and activation through the holiday sales season.

The Ultimate Smartphone Photo Booth consisted of 130 HTC One phones shooting from 540 degrees of actions and toured across major cities in the United States, showing off the vivid and true-to-life image captured by HTC’s groundbreaking UltraPixel Camera. The video received more than five million views on YouTube alone.

HTC also signed a patent and technology collaboration agreement with Nokia and settled all pending patent litigation between two companies. The full terms of the agreement are confidential.

And let’s turn to Page 5. It will give you an overview on our revenue and operating profit. And Page 6 is an overview on our gross margin and operating margins. On Page 7 and 8 were financial overview for unaudited income statement and balance sheet.

On Page 9 is our guidance for the first quarter of 2014. Our revenue is expected to be in the range of NT$34 billion to NT$36 billion. Our gross margin is expected to be at 21.75%, plus or minus 0.25%. Our EPS guidance is expected to be in the range of negative NT$2.6 to negative NT$2.1.

This wraps up the content of our presentation. And now I would like to turn the podium to HTC’s CFO, Mr. Chia-Lin Chang. Operator, please start the Q&A session.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Kindly leave the time to investors and analysts. For media, please contact HTC PR team after this call if any questions. (Operator Instructions) Okay. The first question is from Arthur Hsieh, UBS. Go ahead please.

Arthur Hsieh – UBS

Hi, thanks for taking my question. This is Arthur from UBS. My first question is with regard to the first quarter margin guidance. I think you are indicating a potential margin improvement, especially after the fourth quarter weakness. What could be driving the first quarter gross margin improvement?

Chia-Lin Chang

Yes. Thank you, Arthur. First of all, welcome everybody coming back from the Chinese New Year. So Happy New Year to everyone.

Arthur, in terms of your question, let me just give you a background on quarter four. Quarter four, our margin on a gross margin side is slightly below what we initially guided. It came in at around 17.8%. Just let me give you some explanation behind this number. We actually took a one-time warranty related charge. That is equivalent roughly about 2%. So we added up, we had about 19.8%. And obviously as we talk about from quarter-to-quarter, each quarter we had various degree – the inventory adjustment related to our provision, we intend to do from a cost prudent perspective.

With that background, let me talk about the quarter one. Quarter one, the margins came in what we projected as. It’s going to come in higher than quarter four for two main reasons. One, due to the product mix. Second, we would not have a kind of one-time adjustment like we had in quarter four, adding a little bit more to our inventory adjustment in terms from a prudent perspective here, it will be less in this quarter compared to last quarter. So those result into a higher margin forecast.

Arthur Hsieh – UBS

Sorry, could you further elaborate? In terms of the product mix, could you suggest that the contribution from the new products will account for meaningful percentage in the first quarter? And secondly, in terms of the warranty policy, after this adjustment, could you remind us what is warranty expense ratio in terms of provision through the overall sales. It did change from the previous level?

Chia-Lin Chang

We would not – we do not comment on how we sort of adjust given this is sensitive information for competitive reason there. We’ll continue to maintain the kind of warranty ratio here. It’s just the end of last year here as we look at the overall picture, we decide to make some small adjustment resulting in the quarter four. So that’s number one.

Number two, on the product mix, I’ll talk more when question comes and asks of some of the products I’ll be able to cover more on that. But so far it’s coming with a product mix. In the coming quarters – in the coming months here, we’re going to gradually have more and more new product coming out, which I’ll elaborate a little bit later, that is related to both.

Arthur Hsieh – UBS

All right. My second question is with regard to the OpEx. In the first quarter – I think as well as in the fourth quarter of last year, I think it’s been in the range like NT$9 billion to NT$10 billion. So I am wondering is it the level that management is comfortable, that’s the right scale of the operation. And going forward, that’s probably the lowest level that should maintain the overall scale of the business?

Chia-Lin Chang

Yes, so Arthur let me answer in the following way. I think we are comfortable with the current OpEx level, and then we are not – we’re maintaining the OpEx level for growth, we’ll not going into retrenching. I had to be very clear on that. And then we are comfortable with this current infrastructure and operating model resulting in an operating expense, position us for a better growth.

Arthur Hsieh – UBS

Thank you. And my last question is more of a full-year kind of outlook. I know you don’t really provide full-year guidance, but would you give us some idea about the potential upside from this year, given that you’re pretty much offset the downside in the expense. So what could be driving the recovery for this year?

Chia-Lin Chang

Let me provide the following way here. First of all, obviously the whole year of 2014 is a very poor looking statement. So we need to be careful when making that statement. So I’ll refer to as, Sally, just said in the beginning about all the disclaimers. With that said, I want to highlight a couple of things. One, we believe this quarter one will be the lowest quarter that we’ll see. We’re seeing a sequential increase in the coming quarters for 2014.

Number two, we believe 2014, we’re going to see, both the revenue and profitability growth.

Number three, I don’t want to make full adjustment into second quarter specifically, but given where we are and a lot of people have questioned here, we expect we’re going to be profitable in second quarter. We also expect not only the revenue growth here, we expect 2014 will be a profitable year for HTC.

And if I want to elaborate a little bit more just to anticipate some of the question coming from that, I’ll say the following. One, I believe we have a lot more robust portfolio outside the flagship. So our mid-end and also the affordable part of it will be stronger, compared to the same time last year when we got into 2013. And this portfolio as we in sort of communicating were quite a lot of the major operators in terms of carriers or channel partners are very excited about our product line up.

In fact, we already communicated, in the entire 2014 what we intent to do. So all we need to do is to deliver. So that’s on the product portfolio side.

Number two, on the flagship side. I would not be able to give you specific timing here. I just urge the team to – everybody to tune in for the excitement in the coming days and weeks.

On the M8, that’s codename for last year our flagship product. We had year-on-year growth on our flagship product in 2013 versus 2012 as I indicated in previous earning call. We end to tap into the momentum, hopefully look for the incremental growth going into 2014. More importantly, our flagship product readiness is a lot better compared to last year. We feel a lot more comfortable in terms of the overall delivery time to market and everything, that kind of readiness. We feel comfortable and confident. That’s the second point I will highlight.

The third point I’ll highlight here. We believe we will have an exciting campaign, a marketing campaign. We’ll be able to communicate better with end-consumer here. We’ll be able to run a better campaign compared to we had last year. So we look forward to that.

With all the combination resulting, our belief is that we should have a better 2014 in terms of revenue and profitability. So I’ll just stop here.

Arthur Hsieh – UBS

Thank you. Looking forward to the better portfolio. That’s it from my end.

Chia-Lin Chang

Thank you.

Operator

The next question is from Richard Kramer, Arete Research. Please ask your question.

Richard Kramer – Arete Research

Hi, thanks very much. Two questions. One is, you’ve made a major commitment over the years to Microsoft, but this didn’t really seem to bear much fruit in terms of market share. Do your full-year numbers for 2013 include any platform support payments from Microsoft that might go away if you didn’t keep up that commitment in 2014? And looking out at 2014 now, do you think you are going to continue supporting Microsoft, now that they own Nokia, and will you consider using another OS if it was supported by – in a particular local market or by a particular operator?

Chia-Lin Chang

Okay, Richard, you can go on with the second question. I’ll answer [indiscernible].

Richard Kramer – Arete Research

Okay. The other question I have is – there are just two other, simple ones. One is last year, you put a lot of emphasis on marketing BlinkFeed and BoomSound and things like that and talked at Mobile World Congress about being more targeted with your marketing. Are you going to take the same approach with your flagship products this year, i.e. try to develop your own sub-brands or will you take another approach? And then the third question is really, what are you going to do with the cash that you have? It’s now roughly 50% of your market cap. Are there any plans to do anything other than to pay a normal dividend that you usually do?

Chia-Lin Chang

Okay, thanks Richard. Let me answer your question regarding the Microsoft platform and specific platform you talk about and also the Nokia. Obviously this is a pretty sensitive topic, so it’s probably not appropriate for me to comment on the specifics here, but I want to just say something so we head into right direction here.

HTC and Microsoft, going back in the old days if you recall our first smartphone – if I recall, there is a base on the Microsoft platform here. So HTC has traditionally being maintaining a very good relationship and working model with Microsoft. And if you recall, our U.S. headquarter also based in Seattle there. So people there, know each other very well.

In terms of question into 2014 here, we do not see the kind of relationship we have with Microsoft changed with their acquisition or eventual acquisition of Nokia. We’ll continue to maintain that kind of the working relationship with Microsoft. In terms of what’s going to come out of that kind of partnership and working together, I will not be able to comment at this point.

And on your second question in terms of cash level and then I’ll relate to the sub-brand as we talk about here. In terms of cash level here, we are comfortable with our current cash level in terms of the working capital and other cash needs. We do feel like this current cash level is required. We won’t leverage it for growth.

I understand when you say the cash level currently is a certain percentage up rough market cap, I would see on a long-term we want to create shareholder value. And in that process, hopefully our share price will increase resulting to an increased market cap. So that kind of ratio actually varies.

We don’t have intention to keep out, the so-called the special dividend and special payout at this point in time. We believe we can use that cash to better create shareholder value by growing the company. That’s the second point I want to answer.

The third one in terms, when we talk about the BoomSound and BlinkFeed, I don’t have the data with me in terms of the how many – on the BlinkFeed side, how many page view been done, but a super majority of HTC user use the BlinkFeed and there is a certain percentage that use on a monthly basis. The number is actually pretty exciting. And the BlinkFeed, it’s an information gathering. It’s not just information gathering, you’re socializing a lot of stuff. And those who are our partners who want to work with us in leveraging that from the Front Page BlinkFeed thing. That will continue on. It’s one of the HTC’s competitive strengths from the user experience perspective.

And BoomSound, as I talk about it, last year when we finished our investment – eventual divestment of our investment into Beats, we talked about it. BoomSound is going to be our continue promotion in terms of how it provides user the kind of sound quality experience. And we believe with the combination of hardware and software, we can provide a very unique user experience on the sound as part of it.

And if I can elaborate on the Zoe side, in terms of the camera experience, the people on a call using HTC phone hopefully enjoy that. That will continue. So on the BoomSound, on the BlinkFeed, on the Zoe, that’s the kind of – I wouldn’t call a sub-brand product feature we name it so people can recognize, this is HTC unique in relation that will continue on.

Richard Kramer – Arete Research

Okay. And just to clarify, did you get Microsoft platform support payments the same way Nokia did last year? And will you consider doing any other OS other than Microsoft and android? Do you have the R&D resources to do a third operating system?

Chia-Lin Chang

See, I don’t know what the Nokia support you referred to, so it’s probably not appropriate to comment on. I won’t be able to comment specifically anything we have whether there is or not with Microsoft, expect what I just commented before. That’s number two.

The third thing here is, we’re happy we have so far in terms of the platform we’re working on, historical at this point here and given the current status here. In the future, it’s very hard to comment on, sort of future looking, especially this is – like you refer to, but we’re happy where we are today.

Richard Kramer – Arete Research

Okay, thank you.

Chia-Lin Chang

Thank you, Richard.

Operator

The next question is from Robert Yen, Goldman Sachs. Go ahead please.

Robert Yen – Goldman Sachs

Chia-Lin, thanks for taking my question.

Chia-Lin Chang

Hi, Robert.

Robert Yen – Goldman Sachs

Yes, hi. I have two quick questions. First, it’s related to the Nokia settlement. Apparently, this is a very important segment for HTC, but I just hoping to get some good clarity, if this settlement or the cross licensing stay with Nokia after the Microsoft acquisition or actually the agreement will actually go over to Microsoft going forward?

Chia-Lin Chang

I think the – first of all, I need to be careful answer your question in terms of Nokia settlement, because I would not be able to comment anything beyond what we disclosed in the regulatory filing. And just to say a small joke, our general counsel, the in-house counsels are generally making sure I don’t comment beyond that.

But I will say the following. First of all, I have in front of my desk here a couple of sort of news reports about lot of speculation here. So I hope I can just stop that speculation by saying that, we believe this agreement and this is not a licensing agreement, I do make it clear, it’s a technology collaboration agreement. So if you refer to the press release or the regulatory filing. We can get into more details with our legal counsel to talk about it.

It would not have material financial impact. And when I meant material financial impact, I don’t use the word loosely, I used very carefully when it comes to this setting here. So I just want to make sure that we don’t have that kind of wild speculation as I read some of the report here, because we don’t believe that it will have a material impact on that.

Second thing here. It’s my understanding is it’s our agreement with Nokia, the company.

Robert Yen – Goldman Sachs

Let me ask in another way. Can you give us guidance for any potential prediction, you would not be under attack by either Nokia or Microsoft going forward. Is that a correct understanding?

Chia-Lin Chang

I would not – we would not be attacked by Microsoft. This is agreement with Nokia.

Robert Yen – Goldman Sachs

But you cannot comment why that this agreement will transfer to Microsoft when Microsoft acquired Nokia [indiscernible].

Chia-Lin Chang

No, I just said this is agreement with Nokia.

Robert Yen – Goldman Sachs

Okay.

Chia-Lin Chang

My understanding is it’s probably not appropriate for me to comment on a specific deal. My understanding on Microsoft impending purchase – impending the completion of purchase of Nokia is about the Nokia handsets.

Robert Yen – Goldman Sachs

Yes.

Chia-Lin Chang

Yes.

Robert Yen – Goldman Sachs

Okay, understood. My second question is, earlier you commented on the expectation that HTC hopes to see sequential growth for the entire 2014 and first quarter being the bottom [ph]. If I remember correctly, you also made some of the comment in early part of 2013, expecting 2013 to be a sequential growth year or in the first quarter of 2013 to be the bottom [ph] apparently that didn’t happened. So I just want to know if there is any better visibility or confidence you see this year that makes you more – that confidence being giving this kind of guidance versus last year?

Chia-Lin Chang

Yes. So let me answer your question, and hopefully finish on the Nokia part. Let me answer your questions here. If I recall correctly here, we can go back to look at the script what exactly I said. I don’t remember, and I don’t recall I said back in quarter one 2013, I said that would be a bottom and we’re looking for the increase.

What I did say in 2013 here is I hope – at that time, I hope we want to have what we aim for is a sequential revenue growth, that’s what I said. We can go back and correct exactly what I’ve said.

Looking into 2014, I believe this is the first time I said we believe quarter one is our bottom. Obviously everything is a forward-looking in that. I do believe that we, outside our flagship which we had a good traction in 2013, we hope we can increase incrementally in 2014. I do believe – and this is my own on the field experience as well working with different operator and channel partners and customers.

I do believe we have a good portfolio positioned us for 2014, despite the intensified competition which we all know. Every market have their own individual characteristic, but I do believe our portfolio would suit us [ph] for 2014.

Let me give you more color. I think beyond first quarter, into the second quarter – I think into second quarter, outside our, we call it M7, basically our flagship in 2013, probably majority of the revenue contribution all coming from the new product. I will believe these new products should be competitive. So I’ll give you these two data points.

Robert Yen – Goldman Sachs

Thank you very much. I don’t have further questions.

Chia-Lin Chang

Thank you, Robert.

Operator

The next question is from Jean-Louis, SGJI. Please ask your question.

Jean-Louis – SGJI

Thank you. Louis Lafayeedney. Hello. Just a couple of quick questions for me. I just want to pick up on something that has been reported in the press about wearable electronics that perhaps HTC is thinking about manufacturing or producing by the end of the year. Can you give us any comments on any product that you are thinking about producing outside of smartphones? Thank you.

Chia-Lin Chang

Right. Maybe comment on this, because I know there is a press report. It’s coming out of the interview our chairman did and I happen to be there. So I heard it. So I want to give people the context. In that context, the question was asked in the following way. Basically the question was asked to our chairman that whether she expects – whether people would expect a HTC wearable product during the Christmas shopping season in 2014?

And our chairman’s answer was yes. So that was the context, and that was the response. Let me just elaborate more on your question. It’s our chairman and also our CEO’s vision together. What they are seeing is a future smart city or smart world. In that smart city or smart world, there is going to be different buckets or different categories of products. They are going to play their roles fitting this world as smart devices. And wearable is part of it.

I won’t be able to give you specific timing, except just what we talk about in that context and the response, in when exactly we’re going to introduce, is it wearable, what type of wearable in there, but I want to give you that line of context in which how we see things not hopefully [indiscernible] direction in how we think about the kind of, smart devices, quote, unquote for a lack of better word, we’re going to introduce beyond the smartphones. So I’ll only comment on this without giving specifics.

Jean-Louis – SGJI

Okay, thank you. I think that’s pretty clear.

Chia-Lin Chang

Thank you.

Jean-Louis – SGJI

Okay. Just my second question then. On just the OpEx side of things, just looking at the GPM guidance you’ve given, and the kind of jump into Q1, so the jump Q-on-Q irrespective of that 2 percentage point warranty expense. Just looking in the terms of marketing cost, considering research development and administration costs, are you looking this year to restructure the company at all, such that we may see some cost savings out of your OpEx, either on the administrative side or perhaps somewhere overseas in your sales personnel etcetera?

Chia-Lin Chang

I want to say – comment on a few things here. First of all, I want to reiterate what I just said here on OpEx. We’re comfortable where we are on the OpEx level. In there, just to be clear we did not – at least I can say that very clearly, since I got on-board about back in April 2012, we did not make any R&D cut. We may do efficiency here and there. We are – R&D as I said, it’s the soul of the company. We’re very proud of it. It’s one of our major competitive strengths here. So we continue to do well in R&D and do the right investment in position for growth. So that, I want to say it very clearly.

On our G&A side, a big chunk of it unfortunately I won’t be able to tell you specific, but big chunk of it related to legal expenses. If we had less and less kind of the legal entanglement, then that would – you may see some incremental saving in that due to the saving in legal expenses, but that’s very hard to update.

On the sales and marketing side here, I’ll separate out in sales as well as on the marketing side. And on the sales side, we’re also very happy with where we are. And I also want to emphasize again, that we do not make really so-called cut on the sales marketing infrastructure there. We may do efficiency here and there but we’re comfortable – we’re very proud of our team, their capability and talent globally, not just in Taiwan on the selling side. So we don’t anticipate any major changes on that.

On the marketing side, which is a big bulk of it here, there is question being asked how we see the budget in 2014 versus 2013. I want to comment, that’s now how we see things. How we see things here is say for every million we spend in there, or every $10 million spend in the marketing, exactly what we plan to do, we want to make sure that we spend more effectively and efficiently. So that’s what we’re going to make sure that we get the optimal level in that.

So overall, again we’re not looking for cut. We’re happy where we are. We’ve positioned this for growth, not for the retrenchment. So I want to be clear.

Jean-Louis – SGJI

Thank you very much. That’s all from me.

Chia-Lin Chang

Thank you.

Operator

Your next question is from Alvin Kwock, JP Morgan. Go ahead please.

Alvin Kwock – JP Morgan

Hi, Chia-Lin, and hi everyone. I’ve got a couple of questions. First of all, it seems – I remember HTC launched a number of models that are using different chipset platforms back in December. And there are multiple reports talking about you guys potentially looking for outsourcing partner on the ODM or on the EMF [ph] level as well. I know this probably haven’t come out – there are probably not a whole lot models for these, but just based on the practice in the market and also the models that have started to use this approach. I would like to ask, how this would change your – impact your gross margin. How this would impact your operating expenses and also working capital? This is my first question.

Chia-Lin Chang

Right. So couple of questions combined into one question there. But let me answer in the following way. First of all, HTC also with Qualcomm going back in early days and Peter is a very good friend with the CEO of Qualcomm. So we have a personal relations and also institutional relationship. That’s a very strong partnership. It will continue work well between these two companies there. That’s what I want to highlight.

With that said, we are open to any platform we think will provide a good experience for consumer that will allow us to grow for various purpose there. Now we’re open to that. Whether in a Qualcomm chipset or other potential chipset here, as we said a few times here, also our chairman also made comment in the past that we’re open to that.

Then coming to your second question in terms of the outsourcing [indiscernible] it’s a somewhat similar question coming together. I’ll first make a statement. We think manufacturing is a very important part of HTC competitive strengths. Without manufacturing, we can allow making sure the overall product, not just readiness, the quality, time to market is actually quite important.

The handover from the R&D to the manufacturing is actually going to enable us quite a few advantages. So that’s important to us. With that said also, that we’re open to any potential outsourcing. Obviously, this is very loosely said, because there is a different way of outsourcing in terms of owing site [ph], truly the small manufacturing site or the combination of various format.

We’re open to that platform, because that enable us more flexibility as we position us to grow in volume. So then we can shuffle [ph] different flexibility that will give us advantage. So I’ll just comment on this.

Alvin Kwock – JP Morgan

Yes. How would this flexibility show up in terms of the financial metrics – in terms of gross margin, operating expenses and working capital? I just wonder.

Chia-Lin Chang

I don’t see – basically, it’s all about capacity and flexibility. I personally don’t see that with the outsourcing etcetera, that would materially impact on how we adjust or think about our working capital. That’s one.

Second thing, when you say in terms of product margins here, I don’t see frankly that material difference between manufactured in-house or manufacturing outside or different types of outsourcing as you loosely say. I think this is more about – to me, when I see it, it’s more about flexibility. It’s not just we’re doing this to reduce cost or saving. Totally either one we do either in-house or outside, we can continue it for the improvement in our savings here. But to me, it’s more on the flexibility and overall capacity, how we allocate our resources.

Alvin Kwock – JP Morgan

Got it. I got a second question with regards to accounting. I just wondered where do you guys typically book your IP licensing expenses, if there is any of them.

Chia-Lin Chang

You mean how we pay ITR?

Alvin Kwock – JP Morgan

Yes, exactly. So where do you book, is it under cost of goods sold items or is that anything that is put in the operating expenses item?

Chia-Lin Chang

No, it’s on the cost of goods sold.

Alvin Kwock – JP Morgan

Okay, got it. Yes, that’s the questions from me. Thank you.

Operator

The next question is from Robert Yen, Goldman Sachs. Go ahead please.

Robert Yen – Goldman Sachs

Yes, Chia-Lin. I just had one follow-up question, [indiscernible] one thing to have ask.

Chia-Lin Chang

Yes.

Robert Yen – Goldman Sachs

For the first quarter EPS guidance, can you talk about the one-off part of that guidance, because this seems to be much bigger than the operating loss?

Chia-Lin Chang

One-off, what? Sorry, what’s your question? One-off part of the…

Robert Yen – Goldman Sachs

The one-off – because the EPS loss or the loss per share seems to be bigger than your normal operating performance. So I just wonder if there is any one-off cost for the EPS guidance?

Chia-Lin Chang

I am not sure exactly the question here. You are saying the EPS – that the loss of EPS per share is higher than you expected?

Robert Yen – Goldman Sachs

The loss per share, yes, is higher than my expectations, but I don’t think it’s 100% driven by the core operating business or is that the reality?

Chia-Lin Chang

Okay. Again I think your question is that or probably it’s is not what you think, but I also just want to take advantage of you, since you asked a question to make the following statement here. Our quarter one revenue is light compared to quarter four. And I think it will be lighter compared to going into second quarter without making specific comment on that.

And with this relatively light revenue and with that kind of operating expense to talk about resulting into operating loss in that, and also the EPS. So the entire flow in that, I don’t think there is EQ [ph]. I don’t have any one-time data I did not mention. So it’s outside the normal operations. So that’s not the case. That’s not what you think it is. It’s just a normal operation there.

But I want to make comment on why the revenue is relatively light. It’s relating to what I just said. In fact going into second quarter, the majority of products and revenue contribution will be from new product, exception – the only exception would be the M7, the so-called the flagship product HTC One back in 2013, plus there is something smaller, the majority in that.

Why did I say that and why is it relevant to what your question, because in quarter one, we want to make sure as we position for 2014, the channel is healthier when they start making new orders and new products from HTC. So we want to make sure – obviously we don’t have in-house material concern, and making sure we don’t ship too much into it, and creating potential issue down the road. What we want to shipping in there is a competitive, especially on the mid-end. Flagship continues on, that’s no problem.

On top of the mid-end, we want to make sure we’re shipping in there is competitive on a price ratio perspective.

Robert Yen – Goldman Sachs

Understood, thanks. I have no further question.

Chia-Lin Chang

Thanks.

Operator

As a reminder, we are now in a Q&A session. (Operator Instructions) Your next question is from Jean-Louis, SGJI. Go ahead please. Mr. Louis, you’re on the line. Go ahead please.

Jean-Louis – SGJI

Hi. There appears to be no other questions, so I’ll just follow-up with one quick question if I may. Just looking ahead with your gross margin guidance of 21.75% of Q1 plus-minus, on revenue of NT$34 billion to NT$36 billion. You seem to have quite good visibility considering you’re only giving yourself a quarter percentage point of variation between that. So looking ahead for H1, and perhaps even into the H2 given your comments, sort of in the beginning of the call, what can we perhaps expect the gross margins can rise to if indeed your revenues continues to do well into Q2 and perhaps Q3 of 2014? Where do you – you know with your R&D progress and your flagship models coming out, where do you think we might be able to see the gross margin rise to potentially on the upside? Thank you.

Chia-Lin Chang

The reason we’re more clear, that obviously any forward-looking is not clear, so I want to just caution on that. The reason we’re coming with a narrow range, I think that’s what you’re referring to for quarter one is because what I just said that, we’re kind of clear on what we’re going to ship for the rest of the two months for quarter one. And just to give you more color relating to some of the previous question here, we also announced the January revenue. I’ll give you a monthly trend. February will be slightly down from January and picking up in March. And coming from the March into the rest of the second quarter here, hopefully we’re back to – into second quarter, we’re back to where HTC should be from a revenue perspective here.

Into the second quarter, it will be primarily in my view gross margin determined by the product mix. And given that this year, we will have, in addition to our flagship some other portfolio in the mid-end and affordable product, and there are various gross margins. So depending on their whole volume mix comes from some price tier that would determine your gross margin.

So I won’t be able to comment specifically second quarter gross margin or beyond. What I can say at this point here we hope we, at this level – and if we do well to make some improvement, but I don’t want to give that kind of indication at this point.

Jean-Louis – SGJI

Thank you very much.

Chia-Lin Chang

Thank you.

Operator

There is currently no question in line. I will pass the call back to CFO, Mr. Chia-Lin Chang for closing remarks. Mr. Chang, please proceed.

Chia-Lin Chang

Yes, thank you everyone. If there are no more question, I’ll pass onto the IR.

Sally Kuo

Thank you everyone for joining us today. And the webcast would replay right now and the transcript will be available within 24 hours. Thank you.

Operator

Thank you for your participation in HTC’s conference. There will be a webcast replay within an hour. Please visit www.htc.com under the Investors section. You may now disconnect. Good-bye.

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Source: HTC Management Discusses Q4 2013 Results - Earnings Call Transcript
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