HTC's (HTCKF) Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: HTC Corporation (HTCKF)

HTC Corporation (OTC:HTCKF) Q2 2014 Earnings Conference Call July 31, 2014 3:00 AM ET

Executives

Christine Chi - IR, Manager

Edward Wang - EVP, Finance

Chia-Lin Chang - CFO and President of Global Sales

Sally Kuo - IR

Analysts

Arthur Hsieh - UBS

Richard Kramer - Arete Research

John Lourie - FTJI

Mark Newman - Sanford Bernstein

Ann Lee - Nomura

Calvin Wong - Daiwa Capital Markets

Julie Tai - UBS

Operator

Welcome everyone to HTC’s 2014 Second Quarter Results Conference Call and Webcast in English. Today with us, we have CFO and President of Global Sales, Mr. Chia-Lin Chang; EVP of Finance, Mr. Edward Wang; and Manager of Investor Relations, Ms. Christine Chi and 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. And 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. Christine Chi, Manager of Investor Relations. Ms. Chi, you may begin.

Christine Chi

Okay. Thank you, Jason. Good morning, good afternoon and good evening, ladies and gentlemen. Welcome to HTC’s 2014 second quarter analysts call. This is Christine Chi, HTC’s IR Manager.

The event is now being broadcasted live via HTC’s Web site on www.htc.com. If you are joining us through dial-in lines, your call is now being placed on mute. As the conference is being broadcast by 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 operation of second quarter of 2014, followed by our guidance for the third quarter. Afterwards, our CFO, President of Global Sales, Mr. Chia-Lin Chang and EVP of Finance, Edward Wang will lead Q&A session.

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

If you have no questions, I may begin the overview for second quarter of 2014. Please turn on Page 3. Page 3, second quarter financial highlights, revenue for second quarter was 65.1 billion, with gross margin of 22.2% and operating margin of 3.7%. Net profit after tax was 2.3 billion or EPS of $2.74 per share. Business overview, HTC’s return to profitability has been driven by sales momentum of its HTC One (M8), HTC One Mini 2 and Desire 816 product around the world.

In the U.S., HTC One (M8) continues to impress the markets with availability through all four major operators. While across Europe the HTC One Mini 2 has extended the best-in-class HTC One (M8) experience in a more compact format, the HTC Desire franchise also experienced significant gains, led by the success of Desire 816. The HTC One (M8) and Desire 816 continued to dominate in Taiwan and for the first time, HTC ranked number one in both unit shares and value shares. Overall sales momentum was sound in China and India, as a result of well catered product portfolio to the very fast growing market.

Page 4, product innovations, adding to the HTC One family, HTC One (M8) brings the iconic signature look to a new level. With vertically curved, tapered sides, edge-to-edge display and lightweight unibody frame, a design enabled ultimate user experience to end-users. HTC One Mini further extended the best-in-class HTC One (M8) experience in a more compact format for ultimate user experience. HTC Dot View app available on Google Play for feature upgrades, wallpaper customizations, and functionality renewals.

A word in honor, HTC’s superior design and engineering capability continue to impress, with the HTC One (M8) and HTC Dot View case once again claiming the Gold Medal in Design and Innovation at the Computex d&i awards in June, organized by the Taiwan External Trade Development Council and iF, International Forum Design. Page 5, Page 5 gives the overview on revenues and operating profits. Revenue for second quarter came in at 65.1 billion, operating profit of 2.4 billion.

Page 6, Page 6 gives an overview on gross margin and operating margin. Gross margin for second quarter was 22.2% and operating margin for second quarter was 3.7%. Page seven and eight, were the financial overview for income statement and balance sheet, the guidance for third quarter 2014. Revenue is expected to be in a range of 42 billion to 47 billion. Gross profit margin is expected to be 22.5% to 23%. EPS is expected to be in the range of NT$0.05 to NT$0.65 per share. This wraps up the content of our presentation and now I would like to turn the podium to HTC’s CFO and President of Global Sales, Mr. Chia-Lin Chang. Moderator, 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 and we will leave the time to investors and analysts. For media, please contact HTC PR team after the call if any questions. (Operator Instructions) The first question comes from Arthur Hsieh from UBS. Please ask your question.

Arthur Hsieh - UBS

This is Arthur from UBS. I have a couple of questions. Thank you. I have a couple of questions, first is with regard to the gross margin guidance for the third quarter. It seems like level is relatively healthy compared with last year. Looked like it is even going have improvement but I think there is various news reports talking about the flagship model of the company, volume is coming down. Could you share with us how do you manage to maintain and even improve the gross margin in the coming quarter?

Chia-Lin Chang

You want to go to the rest of questions or you want to answer one-by-one?

Arthur Hsieh - UBS

I think one-by-one is good. Thank you.

Chia-Lin Chang

I think third quarter gross margin is similar to the second quarter I wouldn’t say it’s a big improvement actually it’s pretty much similar there. The reason I'm asking you do you want to ask separate question is so we can talk about, you can see guidance for third quarter revenue, there is a sequential decline over second quarter. It’s primarily coming out of two things, one, some of products after the initial excitement which is hype up demand in there, has settled at the low level but the good thing about it, it has stabilized. So, in order to maintain a good channel environment we decided to selling less for that. So, I don’t think it has anything to do with the gross margin for that specific part.

Second thing, Desire line product that given the shorter lifecycle, so in third quarter, we are probably going to have some sort of transition in certain parts of the world, so there is product transition period of the time. So, we are going to slowdown some of the products we are selling and then in preparation for ramp up the other type of products. So, combination of those plus some of the uncertainty there that’s why we have a guidance but on the gross margin side, I don’t believe it’s because selling less and has nothing to do with the gross margin on that part.

Arthur Hsieh - UBS

Thank you. So, would you be more specific about what are the regions that you consider as probably less relevant and you would try to manage through the transition?

Chia-Lin Chang

I am not sure I understand, you said regions less relevant manage the transition. Could you specify a little more?

Arthur Hsieh - UBS

Sure. I think you just mentioned for some of products that probably there was initial hype but you didn’t want to continue to push those models when the demand wasn’t that long lasting and therefore for certain regions, if I hear correctly, it sounds to me like you would like to reduce the overall marketing or may be the push and therefore you can still maintain the overall profitability. So, I am just wondering what would be the reasons that are more critical to the overall profitability and what are the regions that you would not waste the resources?

Chia-Lin Chang

I think that’s a separate question and I will just clarify also the first part of your question. Let me answer the overall question in terms of profitability. Basically almost all the countries, regions there, we are presence, they are key to us and if you think about some of the key regions there, I could just elaborate little more here. From the Great China area that we are in, from the India, we are in South Asia, the rest of Asia there and also in Australia, southern parts of Southeast Asia, in North America, as you guys know we have long history of having presence and also the entire EMEA. It’s important to me I can be more specific yes in certain areas like in LATAM. We probably have a less presence compared to other regions there.

In terms of profitability that’s a separate question there. Given the sequential guidance on the revenue decline, we need to adjust our resource appropriately to maintain a minimum profitability without impacting the overall continued brand equity investment in there and also the demand generation that we will need to adjust accordingly as a sensible prudent management. So that’s the answer to your second part of question as overall question. I want to just I want to be more clear on what I said in the beginning and why that has nothing to do with its margin. The margin obviously is a combination of product mix they can see still no product actually the major driver product actually had a similar margins. So you wouldn’t see a really big change in that. Quarter-over-quarter there is always a pressure for the cost down.

For the price, it goes in combination with cost down. So it’s a balance of those. What I want to -- I’d be clear what I said here is we in second quarter especially with the new product ramp-up, the initial ramp-up volume of the customers including the operator or channel partners they draw certain volume. And then at the initial hype and deactivation, the product may settle lower even though I said a stabilized level in our case. So we decided we need to make sure that the channel inventory is healthy going to the third quarter. And also in certain products and I will just be even more specific in certain Desire products that we are not going to manage transition in certain region in transition to a new product, because we think maintaining a strong and competitive Desire line is important to us. There is a combination of those leading to the revenue decline guidance. So I just want to clarify that.

Arthur Hsieh - UBS

Thank you. My next question is about China. Could you let us know how big is overall contribution coming from China? And with regard to the market demand there, I think yesterday, the semiconductor company blaming on their weaker third quarter outlook to the weakening demand in China, and the carriers there obviously, they are under pressure from the authorities to cut the subsidies. So, does that have any impact at all to the overall market demand going to the third quarter? That's the second question. Thank you.

Chia-Lin Chang

Right, I think the -- we can’t do a transition in China and also people paying close attention to HTC, they probably would agree and notice we have gone to I don’t think we have finished that kind of transition in China starting from the probably the beginning of 2013 after initial success in 2012. So we’ve gone through that kind of transition period. To us, we have experienced there is always a mix of things of what we do and the lesson learned and then success we have in China. The good thing about it here we have proven and also we are optimistic in certain product line we’re able to try by developed partner build a kind of product and also channel product as we able to drive continuing volume. In terms of your question about China demand, I don’t believe we are able to comment on whether we are seeing a slowdown in China demand. Our market share is just not sizeable to be able to say this is what we feel. What I comment about HTC is what I comment about industry. So I probably would refrain from commenting on that. But one thing what you said is actually correct that as you see on the news that the carrier strategy will lead to a environment in which you basically just need to sell your phone finding a natural way of creating a consumer pool without a help of subsidy to creating that. So that actually is a new environment for all the handset vendors participating in China and frankly speaking probably in the coming years it’s a trend globally as well.

Arthur Hsieh - UBS

Got it. So just to follow-up on that, do you need to make any adjustment to your overall sales marketing strategy on the back of these changes in this carrier subsidy approach going forward?

Chia-Lin Chang

I think the carrier subsidy basically we have been adjusting and also on an ongoing basis on the overall strategy in China and also globally as well since you talk about China I will just be more focused on China. In addition, we’re doing a very tactical thing month-over-month or on a quarterly basis. We continue to have a very strong in my view carrier relationship in all the major retailers in China. We also in certain parts of the provinces there we actually maintained a good relationship. The kind of carrier relationship not just about subsidy, I think it’s about the kind of trust they build enable to push the product and then you are able to draw the -- pull the consumer into using their networks, which I think is actually important and eventually it will be one-one situation. As you can see, some people notice that you are so called HTC One E8 in China it is call it [indiscernible] and the Fashion Addition of HTC One the one of the carrier is actually putting in the as we forecast live online there the World Cup may put us in up center on those. So its ability having that kind of trust and helping them creating more subscribers using a network and then the kind of mutual winning situation that will dictate the future in terms when it comes to vendor and carrier relationship.

Arthur Hsieh - UBS

My last question is about the working capital management. Second quarter last year, I think it was net negative three days. At the end of first quarter is about 12 days and at the end of the second quarter is about 14 days, if my calculation is correct. Does that mean that lengthening is a trend that could continue and what's driving the changes?

Chia-Lin Chang

You're talking about AR, you're talking about overall?

Arthur Hsieh - UBS

The overall working capital turnover.

Chia-Lin Chang

The overall working capital, I don’t know if there is a material difference in that. Let me look at it. What page you are looking at?

Arthur Hsieh - UBS

I'm using the number from Page 8, using this AR days, plus the inventory days and subtract the 80 days. So that lead to a negative number for second quarter last year and it was about 12 days for the first quarter and increased a bit to 14 days in the second quarter. So I was wondering whether that's the trend going forward, and what's driving the trend?

Chia-Lin Chang

I think the -- first of all, I would caution in terms of year-over-year, I don’t the we have established a pattern trend to say that. I don’t see a number calculation. But from the business perspective here, I haven't experienced a material change in that regard. We always have a pressure from customers to have more favorable to them, the credit terms, and also the payment terms. We actually always try to balance that. This time the year compared to same time last year, I don’t experience that big change in that regard. And I don’t experience the big change in the way we managed our internal inventory as well as the AP condition. Edward, do you have anything to comment?

Edward Wang

Not for this one.

Chia-Lin Chang

So that will be a comment but offline we can talk about some of your numbers there, but I don't believe there is a big material change.

Operator

Your next question comes from Richard Kramer from Arete Research; go ahead please.

Richard Kramer - Arete Research

I guess the first question is it looks like now the net cash is about 45% of your market cap and I'm just wondering in the context of what the comments you've just made about trying to sustain product momentum and making sure you didn't have inventory in the channel. Would you try another strategy where you would start to deploy this net cash and try to compete more aggressively in the channel? And I'm just wondering it looks like you've taken the strategy of conserving cash as opposed to going for sales based on your guidance next quarter and why don't you answer that and then I'll come with a follow-up question.

Chia-Lin Chang

Again, I wouldn't want to mix the sort of define existing cash into -- I understand what you're trying to say here, but to me, managing the P&L is actually quite key in addition to managing the volume and the total revenue. So we are doing practical things making sure that they will continue to see the incremental momentum in certain product lines under the constrain that managing overall P&L to us is important. So it’s not just a cash issue, those are the overall P&L issue. We think, we have since as some our leadership including our Chairperson and the CEO. They have said we have gone through some of the transitions regarding our program, I would say internally probably the around third quarter last year, that’s a big part of it in terms of our sales strategy as well as the overall product portfolio.

We account through it. We also learned our lesson along the way. We had some success. We had some lessons learned. We actually feel like the -- in addition we continue to have a flagship product that received the good attention award. We are able to expand it and create drivers. So overall we’re relatively optimistic, but we will continue deploy practically in terms of the incremental sales momentum. But we have put a large quantity of cash in order to basically -- in effect basically dropping the price in our core sales, I think it is under the constrain that we are managing a balanced P&L.

Richard Kramer - Arete Research

Okay. And then just in the context of that question and thinking about your market share and how crowded the smartphone space is, is there any other approach you could see its taking heading into 2015 with the pipeline and the product portfolio you're undoubtedly planning today that you could see sort of bumping up your market share, so that you effectively grab more “shelf space,” because the guidance seems to imply that you will lose some market share in third quarter and then obviously there's some very high profile launches taking a lot of market share and attention in fourth quarter. So, is there another approach you have planning as you mentioned the transition this quarter that we should look forward to that would try to reverse this relatively consistent low market share dynamic or is that just not, would you rather remain sort of a high-end premium niche and that's what we should be expecting from HTC?

Chia-Lin Chang

Yes, I think asked a very good question. First of all, we are not going to be a high-end only smartphone vendor, we used the high-end to all reset of our portfolio. And I can tell you that in addition to high-end and I’ll give you more specific more there, on the Desire line there, we have proven Desire 816 we can drive volume. And then that volume will continue and then we actually like to not see the -- in addition initially Desire 816 started out in a greater China and now extended to some part of big market in India in middle east in other parts of the what’s in Europe as well. So we able to drive volume, so looking in quarter four and looking into 2015 obviously too far way and this is very dynamic and very uncertain to competitive environment.

So we can’t comment beyond that, but certainly our intention is not -- our intention we care very much about market share with the constants about P&L, but we really care about market share as well. We think we have -- we think internally we have found a way to create “value” without being seen that it’s just purely expecting. In my view, people buy the -- in certain part of the world like I couldn’t generalize it. In certain parts of developed countries, there people buying a sold call more entry level phone there probably we can have some premium, at some premium pricing. But in other developing countries, it’s very competitive spec game. So we think we have figured out the path whether it’d be proven in the market remains to be seen.

But we’d figure out how to create value in certain segment there that hope we cannot create volume outside of just P&L just a flagship. Because in 2013 as you know, basically a pure flagship game for HTC which is not healthy in our view, we may extend it. So we encouraged by the [indiscernible] able to extend a mid-tier i.e. the Desire 816. We will go in down the past that we going to extend, expand to perform a little it. Again whether that the way work will be by proven the market that we’ll see in quarter four and also going in 2015, specially around that you’re going to see some products addition in the timeframe as going quarter four.

Richard Kramer - Arete Research

Thank you.

Chia-Lin Chang

I’ll comment on it here. We continue to push our M8. In the second half of year, we’re going to have new things making sure that we will continue to kick up the momentum for M8.

Operator

(Operator Instructions) And next question comes from John Lourie of FTJI. Go ahead please.

John Lourie - FTJI

Yes, thanks. This is John Lourie from FTJI. Thanks for taking the question. Just looking at your guidance, just even if we take the higher end of your guidance on both revenue and gross margin, something has got to happen I think at the operating levels. Could you please talk about what -- with perhaps efforts that you're making on your operating costs, whether it would be reduction in personnel or perhaps cost saving somewhere, in order to be able to achieve the profitability that you're forecasting for Q3? Thanks.

Chia-Lin Chang

So basically what we do is actually very simple. We maintain roughly the same R&D for long period of time. So people always question about the R&D. We have very consistent and efficient and very strong R&D. On G&A, mainly with some small saving, we're not doing any cost cutting in terms of human capital. We are not, just want to be clear. In the sale and marketing, the sales expenses there or some of the marketing expenses more related to a longer term or probably would streamline a little bit and making more tactical. So as a result once you’re making more tactical, you need to scale that portion with the sales accordingly and that’s how you’re going to manage your P&L. So it’s logic behind it.

John Lourie - FTJI

Okay, and just for the guidance on the revenue side. For me, I am positively surprised in terms of the revenue guidance and I'm thinking that considering, we are all expecting a very big launch from Apple in Q3 of this year, does your guidance imply that you are expecting somewhere to regain market share?

Chia-Lin Chang

I don’t think we’re expecting the regain of market share. I think that we just said in the beginning there we have as I guided the sequential revenue decline. I don’t know in the second quarter and third quarter in terms of overall smartphone size but we are looking for here as I said the rationale behind the third quarter guidance and we are looking for this transition third quarter into hopefully a sequential growth into quarter four that’s all.

Operator

The next question comes from Mark Newman, Sanford Bernstein. Go ahead please.

Mark Newman - Sanford Bernstein

Hi, thanks. Question on kind of high level strategy, what is the focus of HTC now more on trying to maintain share or even gain share or is it more on the profitability? And it seems like too recently you have been focused little bit more on trying to improve your profitability and clearly you had some success there. And I think Samsung has been trying to do the same and Apple has been trying to do same. They are more focused on trying to maintain margins rather than share and there seems to be huge competition from the Chinese and also LGE as well to some extent coming in. And so I think there is some change of strategy it seems like from Samsung to be little bit more now focused on share rather than margin based on that just based on what happened in last quarter then flushing out a lot of inventory. And so I am wondering what HTC is thinking about that and what is your preference in terms of the share versus profitability.

Chia-Lin Chang

Right, first of all, Mark, if you start calling HTC, welcome. To answer your question, I assume you meant because what you said in the beginning is slightly different what you said in the end. You said Samsung is working on improve the profitability or improve the market share, I think I may have misheard.

Mark Newman - Sanford Bernstein

I think that they have been trying to focus on both but it seems like until Q2 the emphasis seems to have been more on margin, that’s my opinion but this Q2 seems like they have changed their strategy and will try to flush out the inventory in order to get volume, try to focus more on volume and that seems to be more of a focus now, like that seems to be the recent change from them because of the huge competition particularly mid and low end.

Chia-Lin Chang

Right, so I think probably it’s not appropriate, I don’t know some of the competitors, so probably not appropriate for me to comment in terms of their strategy. For HTC, start gaining market share is important. As I said in answering Richard’s question. We have come to a transition period in 2013. We want to be seeing that we could gain market share in the top end and then we have to just prove it we can do the mid-tier, regain the market share in the mid-tier. So, now we want to have more balanced overall portfolio. I will comment a little bit in terms of entry level affordable and part of it we are also participating but I think for HTC probably mid-tier frankly it’s where we believe we have competitive strength obviously a lot of vendors probably would claim similarly.

However, having the market share, the volume drive to us, it’s going to be quite key and the under the constrain, we are not going to drive so materially into the red app in order to achieve market share, that’s probably not something we will do. We will take a more balanced approach, so that doesn’t necessarily mean that we are just only focused on P&L. We are willing to sacrifice the big margin in order to gain market share but overall in terms of gross profit, volume to us is as important. So, are you willing to scarify some of the gross margin in order to better gross profit. So, with that said, what I mean is we are probably not going to be able to sale, go through the mental hurdle then starts selling product at a loss unless I am cleaning out end of life inventory then that’s a different story. So, I hope that answer your question?

Mark Newman - Sanford Bernstein

Yes, that’s helpful, thanks. And then just quick follow-up, considering that and considering some of the huge volume of some of the Chinese players nowadays, would HTC consider some kind of tie-up with another player such as a Chinese player to increase, via some kind of joint venture or some kind of tie-up in order for you to gain more kind of scale and therefore cost advantage, all those great things Samsung has in its advantage?

Chia-Lin Chang

I think the answer is no, so I want to be clear without creating any speculation. And I can elaborate a little bit the rationale behind that. I think you talk about China, even China is very distinct presence unless you go into very sort of a below RMB1000 and then this becomes a bit murky. But, they have a very distinct presence on the brand. And in our view here, having a product to operate that creates volume that could evolve in it’s actually easier under your control. We can do everything right. We’re not seeing combining that, we are creating not much benefit as people may see sort of that intuitively. And costs, we’ve gone through our cost structure, our self practice, our product portfolio et cetera our design. I mean for us, just talk about for the benefit of people who on our call, the HTC strategy is going into the second half and also into 2015, in light of more still healthy growth that’s targeting more mature environment of smart phone.

What we intend to do is how we promote and then communicate better the consumer experience supported by two very important pillars. One is a very good competitive set in terms of hardware parameters, in terms of spike ratio. The other pillar is good design and that’s something that is actually important for HTC to support often that we think is a good consumer experience. So that’s our overall strategy. And I would believe is probably but we control all these factors and overall we have a very distinct culture in there, so people are very clear what they are doing and what’s their goal of the direction. So having that kind of combination I would say in my view is a not likely.

Operator

Ladies and gentlemen, we are now in question-and-answer session. (Operator Instructions) The next question comes from John Lourie, FTJI

John Lourie - FTJI

Yes, hi, it's John Lourie again. Just a question here on the non-HTC smartphone side of the business, what other efforts are you making to try and increase revenue and/or profits and in terms of non-HTC Smartphone? So, perhaps, for example, ODM business, wearables, tablets, or anything else that you are trying to establish in order to try and improve your revenue? Thank you.

Chia-Lin Chang

I don’t think we are considering all the end business. We are continuing to promote the demand, we are doing the -- when you sell assuming you are building products with vendors with customer’s name. So in that I don’t think we are doing that. In terms of products outside smartphone, I won’t be able to comment in. that is related a new product et cetera. That’s a bit sensitive to talk about it.

John Lourie - FTJI

But, sure you can say whether your strategy is to try and perhaps expand beyond smartphones. The shareholders want to know that kind of thing.

Chia-Lin Chang

The strategy to us is as simple. But first of all smartphone is still an entry point or platform, whatever you call it a portal for the majority of mobile internet. So smartphone is also important. Whether it eventually continues to be center of all connected devices remains to be same. And then also people probably would have a better concerns in the next few years beyond that nobody can judge. Beyond smartphone what we are seeing is our Chairperson and our CEO talked about it on various occasion there, we are seeing a world of a smart city, smartphone, smart home and smart society with connected devices there. So with that how do you see, what’s your vision and how do you design and promote your product along kind of the vision, it’s up to everybody’s thinking. So I won’t be able to comment on that. Longer term of course hopefully you see it is a new business driver outside traditional quote-unquote smartphone.

Operator

(Operator Instructions) The next question comes from Ann Lee, Nomura. Go ahead please.

Ann Lee - Nomura

Hi, Chia-Lin, I just had the one question. Because I remember last quarter, you mentioned that the second quarter's gross margin range, guidance, included some one-off impact from the inventory of adjustments. So [Audio Gap].

Chia-Lin Chang

I don’t think we have a second quarter of the impairment on the inventory adjustment.

Ann Lee - Nomura

Because I remember last quarter, I asked one question. I thought the second quarter gross margin because of a higher mix for new products. So theoretically, gross margins should go higher and then you gave that guidance because of some one-off issues. So I just want to confirm whether those issues existed?

Chia-Lin Chang

What is that issue existed? If we have a traditional way of just say, one of the questions being raised by Richard, he may deploy half of the things here to facilitate the sale in the channel. I don’t think it’s, if you meant the inventory, in-house or things -- I don’t believe it. But if you meant, there are some taxes things we may do just to facilitate the channel, so that’s probably a start becoming more normal course of business. I'm not sure it's specific thing. I think he referred to what you asked. We can go back and look at it and discuss off-line.

Ann Lee - Nomura

Okay, thank you.

Chia-Lin Chang

We can discuss off-line, I think we can look to talk about then it’s a different thing.

Operator

The next question comes from Calvin Wong, Daiwa; please ask your question.

Calvin Wong - Daiwa

Hi, Chia-Lin, I got a question regarding your focusing strategy into second half and beyond. You think so because the revenue scale becomes smaller right now. So I believe, we might have a less resource compared to like year ago. So well, I was wondering in terms of product, do you have specific focus on high-end or mid-to-low end, going to second half and beyond and [indiscernible] we will have more focus on mature market or emerging market?

Chia-Lin Chang

I think we have -- probably would not agree with your comment that we have resource. If you look at R&D resources related to the creation of a product, I actually feel like this year, we have put more into the product portfolio. It’s not about the number of models, it’s more about we want to create a model that drives models, so that’s different. So we put more time into making sure that the model we have created could drive models. So that’s one thing. I think you can see, if we have a situation related to revenue, we need to adjust our sales and marketing expenses, just tactically associated with it, as I commented earlier.

The second thing in terms of where we’re going to focus globally, I can comment a little bit on this. I think traditionally, if you look at history, at least you can see we started off in U.S. -- or U.S., Canada and North America, and then in Western Europe. We want to make sure that we continue to have a good and competitive presents in the U.S. and Western Europe, primarily in UK and Germany, plus other parts of the Western Europe. We also, in the last two years, seeing the emergence in terms of overall size and also our presence in other parts of the European countries, like some of the things we commented on it, the Russia, Middle East, the Eastern Europe, India. And China is different. China we wouldn’t call it a little country. It’s a very high potential, also very competitive environment there which you will continue to adjust, hopefully looking to that one. So these are the markets I would comment on those.

Operator

Your next question comes from Julie Tai, UBS; go ahead please.

Julie Tai - UBS

Hi, Chia-Lin. I just got a question from client. I am wondering if you could give us some guidance to the operating expenses that will be incurred into Q3, because from the past few quarters, our operating expenses have been quite volatile or quite differently quarter-by-quarter. So it is a bit difficult for us to gauge. So, could you share a bit of insight to that?

Chia-Lin Chang

Operating expenses, I will talk about it. On the G&A side, we will probably maintain similarly. There is a drop in that primarily, is probably due to a legal expenses, now probably I can tell you for certain. The R&D has been pretty stable, in the R&D expenses. Then on the sales and marketing where you see some changes there. As I said earlier that we wanted to adjust practically in association with the corresponding to the revenue, that’s how we see that. Because managing P&L is important for us. With that said, our goal is to high volume and we hope we are able to drive volume, potentially sacrificing a little bit gross margin, but although we can yield a better overall gross profit in that. But our goals are still under the P&L balance to drive volume. So I am clear on that.

Julie Tai - UBS

So is it fair to say that sales and marketing expenses will be somewhere around, let's say, 11% to 13% of the sales?

Chia-Lin Chang

Sales and marketing 11% to 13%, I won’t be able to comment specific on that. I know that’s what you comment on the analyst community perspective as well. I look at it slightly different. I look at the -- I think the sales portion probably pushed still maybe just probably some of the tactical marketing side. On marketing, basically we’re putting two size of marketing actually I would say that is three part of it, two parts actually related, one part is very related to longer term on the brand creation of those.

We will continue to build. Obviously that amount could be adjust it varies from quarter-to-quarter. And then on the quarter, you’re going to have some tactical part of it and also as we mentioned integration part here. That’s very relation to the short terms in terms of revenue, so we adjust accordingly. I won’t be able to comment there. I will stick to whatever 11% to 12% of the sales. That’s the one I look at, but in the end they’re related. Managing the overall P&L is the bottom line to meet, probably that the one thing, so we can deduct from that. Hope that’s answered your question.

Julie Tai - UBS

Okay thank you.

Chia-Lin Chang

And then I want to comment on one of your question, I think raise my hand, the question just gave me some of the tax on the in terms of the second quarter margin, and I think that basically you mentioned what I said. In second quarter, we try to clean up the 2013 from the materials. We’ll put probably maybe even more in second quarter and depends into the cleaning those. It’s part in the channel. So facilitate a better pipeline for the new part of the channel.

Operator

There is currently no question in line. I’ll pass the call back to CFO and President of Global Sales, Mr. Chia-Lin Chang for closing remarks.

Chia-Lin Chang

Thank you very much for joining the call today. And we’ll end the call now. Thank you.

Operator

Thank you. Ladies and gentlemen, 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 Investor section. You may now disconnect. Goodbye.

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