HTC – No respite.

HTC has lost its edge and there is no sign of its return.

• From its financial forecasts to the leaked products it is due to release, it looks very much as if 2014E will compound the agonies of 2013.
• In Q1 14E revenues / EPS are expected to be NT$34bn-NT$36bn and a loss of NT$2.10 to NT$2.60 compared to consensus at NT$39.3bn and a loss of NT$0.88.
• Furthermore, the new flagship device (M8), which I assume it plans to launch at MWC in two weeks’ time, has leaked.
• Unfortunately, it looks exactly the same as the old product the HTC One.
• The similarities are striking both in the user interface as well as the look and feel of the device meaning that potential buyers will be struggling to see why they should pay more to own the same phone.
• HTC’s problems can all be condensed into one sentence: HTC had a great edge which has been competed away.
• Back in the early days HTC had three big advantages:
  • First: It could integrate software and hardware together in such a way that the radio performance of the device was far superior to almost all its competitors.
  • Second: It was able design nicer looking and sleeker devices than its competitors.
  • Third: It developed its own look and feel in the user interface that was reasonably popular.
• All three of these advantages have since been competed away leaving HTC with no way to compete other than form factor and price.
• This problem is now further compounded by HTC’s lack of scale.
• Selling handsets is a scale game where fixed R&D and marketing budgets are required meaning that a certain number of phones need to be sold to keep ones head above water.
• Hence, the bigger you are, the more you can spend and still make a good return.
• HTC is currently in a death spiral where it cuts resources and loses market share meaning that it has to cut again and again.
• Something radical needs to happen to break the vicious downwards spiral that will result in HTC exiting the market unless it is broken.
• This will have to take the form of either a forced acquisition by a rival or strategy change where a ramp up in investments in order to break the cycle is made.
• Either way, in the short-term, it looks like revenues will continue to decline and losses continue to rack-up.
• HTC currently has just 1.8% market share of the smartphone down from 8.8% 4 years ago and there seems to be nothing on the horizon that will halt this slide.
• I am currently forecasting that its market share will bottom out at 1% but this is not sustainable.
• Slower market growth will mean tougher competition which will mean further margin pressure and I fear that without a miracle, the end is in sight.
• The shares have a lot of further downward potential.