HTC Investors

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Convening of an investor conference concerning Q4 08 Business Review

1.Date of the investor/press conference:2009/02/06

2.Location of the investor/press conference:Conference call

3.Financial and business related information:
THE Y08 BUSINESS REVIEW:
(1)HTC successfully introduced Touch Diamond series products and the first Android-based phone – G1 in 2008, both of which led the industry trend changes in the user interface and mobile internet experience respectively.
(2)The management has executed Y08 business strategy and objectives well, resulting in solid operational performance measured by financial objectives,technology leadership, brand value creation and recognition and expense control.
(3)The corporate culture has evolved to customer first on top of the innovative aspiration. The adoptive working environment attracts and integrates international talents to excel the HTC experience in the daily operations to cement the brand value.
(4)Strong business growth in Y08. Annual revenue reached NT$152.6 billion, representing a 28.7% YoY growth rate. The non ODM business YoY growth was over 40%.
(5)On pre-bonus basis, the annual GPM and OPEX ratio was 33.6% and 9.8%* respectively, both of which are in line with the annual guidance provided.The NPAT was NT$34.2 billion, increased by 18.4% YoY.
(6)On post-bonus basis, the annual GPM and OPEX ratio was 33.2% and 13.4%*.

*The annual PSP adjustment was shown as net impact of NT$65 million in OPEX based on CPA’s opinion which was different from the accounting treatment mentioned in last conference call.

THE 4th Q 08’ BUSINESS REVIEW:
(1)The 4th Q revenue was NT$47.4 billion, up 25.1% sequentially and 21.4% YoY, slightly below the NT$48 billion guidance. The shortfall was caused by clients’ inventory adjustment in December.
(2)The 4th Q GPM pre-bonus was 30.1% (post-bonus:29.8%), in line with the guidance provided. The quarterly average euro € exchange rate against NT$ is 43.15, in line with the guidance assumption.
(3)The 4th Q OPEX ratio pre-bonus was 8.2% (post-bonus:11.5%), better than the guidance of 8.7%*, due to rationalization of expenses.

*The OPEX ratio pre-bonus excluding the PSP adjustment.

BUSINESS ENVIRONMENT:
(1)The global economic weakened rapidly since the 4th Q resulting low business visibility. The channels including operators and distributors are undertaking aggressive inventory trim down. This situation will carry into the 1st Q affecting the overall handset shipment including the smart phone segment.
(2)Smart phone devices with Touch function prevail the market which confirms HTC’s vision and highlights HTC’s advantageous position to ride this industry trend. The converging devices market is likely to grow in Y09.The consumer will select products offering value differentiations within the lesser disposal budget.

Y09 BUSINESS OBJECTIVES:
(1)Business Objectives
a.Business Growth : Annual revenue expects to grow by double digit. Balance the market share gain with gross margin maintenance.
b.Product Strategy: Focus on innovation and execution to enhance product proposition and keep up the differentiation. Expand product diversity to offer customers more choices.
c.OPEX : OPEX spending expects to balance with supporting business growth and cost control. Annual OPEX ratio expects to maintain around 13.5%* of revenue, based on post bonus basis.
(2)Business Strategy: THE HTC BRAND EXPERIENCE
a.Business goal: Grow the long term shareholder value.
b.Brand building: Execute on HTC brand experience to every customer contact points and focus on simplicity, innovation and WOW factors.
c.Actions to the weak economic environment: Grow business through differentiated products and continue to strengthen long term core competence with prudent approach in brand building, operational efficiency and investment activities. Tighter risk management in internal control points as well as supply chain. Expense rationalization has been implemented since the 4th Q last year.

*The OPEX ratio will be affected by pre-bonus net operating margin, due to the impact of employee bonus adjustment.

MANAGEMENT INTITIATIVES:
(1)The management will propose to the board to maintain high dividend payout policy, no lower than the cash dividend payout amount of NT$20 billion for Y2009 and Y2010. This is subject to the approval in the next board meeting in Feb.
(2)The employee bonus appropriation rate will be the same as that of Y08, 18% of net profit after taxes, prior to this employee bonus adjustment.
(3)The outstanding common shares number is 745,393,856 shares, post the cancelation of the 10 million treasury share buyback.
(4)A few products will be introduced in the Mobile World Congress in Barcelona in mid Feb.
(5)Joey Cheng will join HTC as the IR Director to provide more comprehensive IR coverage.
(6)The board approved to buy two land sites adjacent to HTC Taoyuan HQ to build supporting facilities to provide better working environment, both of which encompass 55,545 m2. The total purchase amount is NT$1,147.5 million.
(7)The Shanghai plant begun production and will provide the incremental capacity needs to meet business growth.

4th Q ‘08 P&L – PRE-EMPLOYEE BONUS:
(NT$ Bil.)
4Q 07
3Q 08
4Q 08*4
QOQ
YOY
Y08*4
YOY
REVENUES
39.01
37.86
47.38
25.1%
21.4%
152.56
28.7%
GROSS PROFIT
13.93*1
13.09
14.28
9.2%
2.5%
51.29
27.6%
RSGA EXPENSE
3.48*1
4.35*2
3.88
-10.8%
11.3%
14.94
54.9%
NOP
10.45
8.71*2
10.42
19.7%
-0.2%
36.39
19.2%
NPBT
10.87
9.18
10.70
16.6%
-1.5%
37.72
17.3%
NPAT
9.99
8.27
9.86
19.3%
-1.3%
34.25
18.4%
GPM(%)
35.7%
34.6%
30.1%
33.6%
RSGA RATIO(%)
8.9%
11.5%
8.2%
9.8%
EPS*3
17.42
10.94
13.07
45.41

*1Warranty service and inventory scrap were recognized as OPEX and non-operating expenses respectively before 2008. NT$2.6 billion in Q407 was adjusted into COGS.
*2Excluded 2 adjustments of NT$0.24billion for accounting entry adjustment and PSP expenses in 3Q08, the RSGA expense is NT$4.10billion whereas RSGA% is 10.8% and NOP is NT$8.95billion.
*3The EPS was calculated based on the outstanding shares at the time.
*4The numbers were reviewed by CPA and subject to the board approval.

4th Q ‘08 P&L – POST-EMPLOYEE BONUS (EB):
(NT$ Bil.)
4Q 07
3Q 08
4Q 08 * 4
QOQ
YOY
Y08 * 4
YOY
REVENUES
39.01
37.86
47.38
25.1%
21.4%
152.56
28.7%
(EB ADJ in COGS)
0.26
0.16
0.18
20.5%
-29.1%
0.64
-15.1%
GROSS PROFIT
13.67 * 1
12.93
14.10
9.0%
3.1%
50.64
26.5%
(EB ADJ in RSGA)
2.24
1.32
1.58
19.3%
-29.3%
5.49
-14.8%
RSGA EXPENSE
5.72 * 1
5.67 * 2
5.46
-3.8%
-4.6%
20.43
27.0%
NOP
7.95
7.23*2
8.66
19.8%
8.9%
30.26
29.6%
NPBT
8.37
7.70
8.94
16.1%
6.8%
31.59
26.6%
NPAT
7.54
6.99
8.09
15.8%
7.3%
28.64
31.7%
ADJ GPM(%)
35.0%
34.2%
29.8%
33.2%
ADJ RSGA RATIO(%)
14.7%
15.0%
11.5%
13.4%
ADJ EPS*3
13.16
9.25
10.73
37.97

*1Warranty service and inventory scrap were recognized as OPEX and non-operating expenses respectively before 2008.  NT$2.6 billion in Q407 was adjusted into COGS.
*2Excluded 2 adjustments of NT$0.24billion for accounting entry adjustment and PSP expenses in 3Q08, the RSGA expense is NT$5.43billion whereas RSGA% is 14.3% and NOP is NT$7.47billion.
*3The EPS was calculated based on the outstanding shares at the time.
*4The numbers were reviewed by CPA  and subject to the board approval.

4th Q ‘08 P&L (CONSOLIDATED):
(NT$ Bil.)
4Q 07
3Q 08
4Q 08*3
QOQ
YOY
Y08*3
YOY
REVENUES
38.75
37.63
47.07
25.1%
21.5%
152.35
28.9%
(EB ADJ in COGS)
0.26
0.16
0.18
12.5%
-30.8%
0.64
-15.1%
GROSS PROFIT
13.74* 1
13.04
14.18
8.8%
3.2%
50.99
28.5%
(EB ADJ in RSGA)
2.24
1.32
1.58
19.7%
-29.5%
5.49
-14.8%
RSGA EXPENSE
5.71* 1
5.65
5.31
-6.0%
-7.1%
20.65
27.3%
NOP
8.02
7.39
8.88
20.1%
10.6%
30.35
29.3%
NPBT
8.45
7.73
8.97
16.1%
6.1%
31.74
26.8%
NPAT
7.54
6.99
8.09
15.8%
7.3%
28.64
31.7%
ADJ GPM(%)
35.5%
34.6%
30.1%
33.5%
ADJ RSGA RATIO(%)
14.7%
15.0%
11.3%
13.6%
ADJ EPS*2
13.16
9.25
10.73
37.97

*1Warranty service and inventory scrap were recognized as OPEX and non-operating expenses respectively before 2008.  NT$1.3billion in Q407 was adjusted into COGS.
*2The EPS was calculated based on the outstanding shares at the time.
*3The numbers were reviewed by CPA and subject to the board approval.

4th Q ‘08 KEY FINANCIALS:
(NT$ Bil.)
Dec 31, 07
Sep 30, 08
Dec 31, 08*
QOQ
YOY
CASH
55.04
63.94
61.83
-3.3%
12.3%
AR
19.48
21.55
29.80
38.3%
52.9%
INVENTORY
6.12
7.88
7.42
-5.8%
21.2%
NET WORTH
56.08
56.00
60.66
8.3%
8.2%
INVENTORY PROVISON
0.92
1.48
1.62
10.0%
77.2%
AR PROVISION
0.27
0.54
0.55
2.1%
103.0%
WARRANTY PROVISION
3.47
4.86
5.23
7.6%
50.6%

*The numbers above were reviewed by CPA and subject to the board approval.
 
4th Q ‘08 KEY FINANCIALS (CONSOLIDATED):
(NT$ Bil.)
Dec 31, 07
Sep 30, 08
Dec 31, 08*
QOQ
YOY
CASH
56.49
66.33
64.24
-3.2%
13.7%
AR
19.47
21.21
29.45
38.9%
51.3%
INVENTORY
7.24
8.47
8.25
-2.6%
14.0%
NET WORTH
56.08
56.00
60.66
8.3%
8.2%
INVENTORY PROVISON
1.12
2.07
1.91
-7.9%
70.1%
AR PROVISION
0.28
0.61
0.58
-5.7%
108.1%
WARRANTY PROVISION
3.47
4.85
5.23
7.8%
50.7%
 
*The numbers above were reviewed by CPA and subject to the board approval.

THE 1st Q 09’ BUSINESS OUTLOOK:
(1)Due to the world economic slowdown and low business visibility, the 1st Q revenue is expected to be around NT$33 billion, a low-single digit YOY growth rate. Sales momentum is likely to pick up in the 2nd quarter when new products are introduced to the market.
(2)The GPM, net of the warrant provision reserve and the extra inventory write down adjustment, is expected to be around 30%* based on post employee bonus adjustment.
(3)EU business model will change to commission basis from cost-plus basis under the advice from tax counsel. As a result, the SG&A expenses will increase slightly.
(4)Interest income will be impacted by the declining interest  rate. The Y08 average interest rate is around 2.1% vs. current 0.3%. Interest income in the 1st Q will decline to NT$ 100 million.
(5)Around NT$ 0.6 billion extra aged inventory provision write down. The warranty provision reserves was reversed by around NT$ 0.6 billion.
(6)The OPEX ratio (post-bonus) will increase to around 15%* due to lower revenue. The actual pre-bonus OPEX spending stays at the same level as that of the 4th Q Y08 and will support the new product launch events for the shipment in the 2nd Q.
(7)The operating profit margin expects to be around 15%*.

*Starting from this conference call, all margins will be under post-bonusbases.

4.Any other matters that need to be specified:None