HTC Q4 – Phoenix free zone.

Happy New Year and best wishes for 2014.

HTC’s results offer little hope of a recovery.

• HTC reported Q4 results that missed expectations as it looks like gross margins were once again under pressure.
• Q4 Revenues / Operating loss were NT$42.9bn / NT$1.6bn compared to guidance of NT$40-45bn and less than NT$1.5bn.
• This compares unfavourably to RFM forecasts of NT$44bn in revenues and an operating loss of NT$1.1bn.
• Net income was also well adrift at NT$0.3bn compared to consensus at $0.7bn and RFM at $1.4bn.
• Issues below the operating line relating to tax and HTC’s sale of its position in Beats Audio make comparison at the net income level opaque.
• It looks very much like the miss at the operating level was due to HTC being forced to cut prices in order to maintain market share.
• The real issue with HTC remains unchanged.
• It has nothing with which to compete against the other Android makers other than hardware design.
• The glory days when HTC had a huge advantage in radio integration and user interface design are long gone as these edges have been competed away.
• What is left is a race to the bottom competing in hardware specification and design which is in itself, becoming more and more commoditised.
• Celebrity endorsements are not creating the required buzz and desire for the products leaving the outlook very bleak indeed.
• HTC must either find a way to differentiate itself in the ecosystem or resign itself to a much lower, long term margin outlook.
• An ecosystem strategy will put it up against Google and Microsoft and focusing on hardware will leave it at the mercy of the Chinese.
• Almost all of its competitors are better financed and are currently willing to take very low margins in order to gain market share.
• Hence, I suspect that without a stroke of genius, HTC’s days as a handset maker are numbered leaving it in a similar plight to BlackBerry.
• BlackBerry does have some assets that are worth having (patent portfolio, real estate and BBM) meaning that if forced I would prefer BlackBerry to HTC.
• However, I would prefer cash to both of them.