By Clare Jim
TAIPEI (Reuters) - Taiwanese smartphone maker HTC Corp will struggle to improve its margins this year as it increases marketing spend for its latest model in a bid to catch up to rivals Samsung Electronics Co Ltd and Apple Inc.
HTC on Thursday forecast strong sales of its flagship HTC One smartphone to lift second-quarter revenues by almost two-thirds to T$70 billion ($2.37 billion).
Operating margins were also expected to widen to between 1 and 3 percent from the previous quarter's 0.1 percent, as HTC spends more on a campaign to improve its brand image. HTC's third-quarter 2012 operating margins were 7 percent.
"We're improving the HTC marketing execution. It's the first time since HTC developed its brand that we are really integrating brand, product and marketing all together," HTC Chief Executive Peter Chou told an investor conference call.
He did not give specific figures but the company said in March its digital media marketing budget for the first half of this year would increase 250 percent year-on-year, while the budget for traditional media will double.
Investors, however, were cautious about the HTC One's longer-term prospects as both Apple and Samsung have much deeper pockets and are more established brands.
"Samsung basically cornered the whole supply chain. To me, HTC is more of a product story: good product, higher stock price," said Hong Kong-based portfolio manager Michiel Van Voorst, who manages $1.2 billion in Asian equities for Robeco.
"I think investors will be a bit more reluctant now to price the stock at earnings that have not yet materialized," added Van Voorst, who substantially cut his holdings in HTC late last year after the company repeatedly missed profit forecasts.
The HTC One, currently available in five countries including China, runs a version of Google Inc's Android software that allows users to customize their homescreen.
Research firm Daiwa Capital, in a recent report, said HTC One was one of the top-five best selling smartphones offered by U.S. carriers and that it was out of stock at some operators and retailers in Britain, Germany and Taiwan.
KGI Securities analyst Richard Ko believes this popularity may be short-lived.
"While we think HTC's shipments will rebound strongly in Q2, we also think Samsung and other second tier players will continue to exert pressure on HTC," he said. "We remain cautious because of HTC's execution capability and long-term structural weaknesses."
Delays in the full launch of the HTC One due to a shortage of a camera component led HTC to report a record-low net profit in the previous quarter.
Future sales volumes were also thrown into doubt after rival Nokia Oyj won a court injunction last week that would prevent HTC from using microphone components made by STMicroelectronics NV in HTC One phones.
HTC has said it does not expect the decision to have any immediate impact on sales, and that it will find other suppliers once its inventory of STMicroelectronics microphones runs out.
HTC was the world's 10th-biggest smartphone maker by shipments in the fourth quarter, according to IT research firm Gartner, jostling in a crowded field behind Samsung and Apple.
Shares in HTC have slipped 1.8 percent this year, underperforming the broader market's 5.6 percent rise. On Thursday, HTC shares closed down 2 percent compared to a 0.43 percent rise in the main share index.
(Corrects timing of when fund manger cut holding in paragraph 8)
(Additional reporting by Jonathan Gordon; Editing by Miral Fahmy)