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Why it's not doom and gloom for HTC yet

Apple and Samsung Electronics may rule the smartphone world, but there's still room for a strong No. 3 player.

HTC CEO Peter Chou holds aloft the HTC Rezound.
HTC CEO Peter Chou shows off the HTC Rezound at an event last year.
Sarah Tew/CNET

It's a little too soon to write off HTC.

With Apple and Samsung Electronics cornering more than two-thirds of the industry's sales and nearly all of its profits, it's easy to dismiss every other handset manufacturer. That includes HTC, whose descent from industry darling to embattled company seemingly happened overnight.

The rapid reversal of fortunes have many skeptical about HTC's ability to make a comeback. But there's still a lot to like about the company. It remains profitable, even if those profits are in decline; it still has a recognizable brand and loyal base of customers; and as demonstrated by its One line of phones, it can still make a good product. Just as important, HTC stands in the way of the industry transforming into a handset duopoly run by Apple and Samsung.

"HTC remains the only contender to be a profitable No. 3 smartphone vendor in what we believe cannot become a two-supplier market," Pierre Ferragu, an analyst at Sanford Bernstein, said in a research note today.

It's easy to lump HTC in with the myriad of struggling players who have seen their own shares decline. Research in Motion, Nokia, LG Electronics, and Sony are among the once high-flying handset vendors hit by rough times. HTC, as with all of the other players, continues to face significant challenges, with Samsung's Galaxy S3 and Apple's next iPhone threatening to hog all of the limelight and with smartphone growth potentially slowing.

HTC warned earlier this month that it expects to post a profit of NT$7.4 billion ($247 million) and revenue of NT$91 billion ($30.4 million) for the quarter, with profit falling for the third consecutive time. CNET learned that HTC had to sell back part of its stake in Beats Electronics because it couldn't meet the financial obligations.

As Samsung extends its lead in the smartphone business, HTC saw its market share fall by nearly half to 5.7 percent in the second quarter, according to IDC.

That's partly because HTC has stumbled in its bid to get back to its former glory. Following a strong showing at Mobile World Congress in late February with the debut of its One series of smartphones, it was hit with a temporary product ban in the U.S., delaying the One X and Evo 4G LTE. Despite a push to simplify its product line, it was still forced to customize its phones, including the Evo 4G LTE as well as the Droid Incredible 4G LTE.

Reason for hope
There's still room for optimism. Ferragu calls HTC a high-risk, high-reward stock, with the potential for significant upside if the company successfully executes.

While the One X and Evo 4G LTE were delayed, both saw strong preorders and initial sales, suggesting HTC phones still can draw a crowd. Both phones also got positive reviews from the CNET team. The hardcore Android crowd may hate customized skins such as HTC Sense, but a lot of consumers like it because it strips out a lot of the complications still prevalent in Google's stock operating system.

"Software remains one of HTC's strong points," Ferragu said.

According to a survey taken by Sanford Bernstein, 42 percent of HTC customers select the brand for the quality and intuitiveness of its user experience, vs. 32 percent for Samsung, an indication of positive awareness of HTC's differentiated software.

While Apple and Samsung have HTC outgunned in the marketing department, likely spending four to six times as much on advertising, HTC's brand remain relatively strong.

"The strength of HTC's brand is clearly visible in the company's continued strong gross margin, compared to non-branded players or broken brands," Ferragu said.

HTC may be wounded now, but it could make a comeback with a little help from the carriers, which likewise are desperate to avoid tying their fortunes solely to Apple and Samsung. AT&T jumped on the One X bandwagon, while T-Mobile USA prominently sold the One S. Verizon Wireless is selling the Droid Incredible 4G LTE, and its chief marketing officer, Marni Walden, told CNET last year that the carrier would work with HTC to create more flagship products this year.

With much of the smartphone growth increasingly coming from the Asia-Pacific region, HTC, which is based in Taiwan, is poised to capitalize on that opportunity. The company, for instance, has a strong position in China in the midtier phone range. Most importantly, it will be able to keep its margins up because it focuses more on the middle and high-end range of phones, ignoring the more competitive and less competitive low-end market.

In the longer term, HTC can still grow sales by 18 percent and earnings by 24 percent between now and 2015, Ferragu said. He added he expects the company's global market share to stabilize at 7 percent after taking a dip this year.

"HTC remains well positioned in the fast growing smartphone market," Ferragu said, "benefiting from the traction of Android as well as a strong cost leadership, rapidly improving brand equity and technological leadership."