SMARTPHONES: Coolpad Losses Mount as Sales Plunge

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Bottom line: Coolpad’s latest loss forecast shows it is struggling due to intense competition, and will need to sell more of itself to LeEco in the next 6 months to keep funding its operations.

Coolpad falls sharply into the red

The woes continue to mount for former smartphone high-flyer Coolpad (HKEx: 2369), which has just announced a profit warning that will see it drop sharply into the red in the first half of this year. The move was almost inevitable due to the overheated state of China’s smartphone market, as Coolpad finally ran out of tricks to hide its mounting losses. The company did admit its sales were plunging in its last earnings report for the year 2015, even as its profit quadrupled that year. But this latest profit warning for the first half of 2016 shows the company is now squarely in the loss column.

This latest announcement casts even more doubt on the future of Coolpad, which was one of China’s earlier companies to embrace a trend that has seen the country become the world’s largest smartphone market. But many companies quickly joined the trend over the last 3 years, leading to intense competition that has already claimed several component manufacturers and at least 1 mid-sized brand as victims.

According to its new profit warning, Coolpad expects to post a net loss of HK$2.05 billion ($263 million) for the first half of this year, compared with a profit of HK$2.8 billion a year earlier. (company announcement; Chinese article) It’s worth noting that Coolpad posted a full-year profit of just HK$2.3 billion for all of last year, or well below its first-half profit, in a tacit admission that it fell into the loss column in the second half of 2015.

In the new warning, Coolpad also said it would post a 40 percent drop in sales for the first half of this year, meaning it may be struggling with a large volume of unsold inventory. But the drop isn’t completely unexpected, since it continues trends from 2015 when Coolpad’s overall revenue slid 41 percent for the year.

Complex Animal

Coolpad has become a complex animal over the past year and a half, so it’s difficult to tell how much of its rapidly plunging fortunes is due to company-specific issues and how much stems from broader market conditions. Coolpad thought it had found an important strategic partner to guarantee its future when it signed a major joint venture agreement with security software maker Qihoo 360 (NYSE: QIHU) at the end of 2014. But that marriage later soured after Coolpad signed another major strategic tie-up with online video superstar LeEco (Shenzhen: 300104), formerly known as LeTV.

Coolpad paid a heavy price for its divorce from Qihoo, which is probably at least partly behind its big loss for the first half of this year. But it was also clear the company was rapidly running out of money, leading to rumors last month that it might get completely acquired by the cash-rich LeEco, which was aggressively expanding into smartphones.

Those rumors were quashed when the 2 sides announced that LeEco would simply boost its influence by raising its Coolpad stake to about 29 percent, making it Coolpad’s largest individual stakeholder. (previous post) That move gave Coolpad some desperately needed cash, though not really enough to fund its operations for more than a few months. This latest loss forecast, together with plunging sales, shows Coolpad will probably need more funding in the next 6 months, leaving it with few options other than to sell more of itself to LeEco.

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