HTC Q2 – The spiral

One quarter does not make a recovery.

• HTC reported good Q2 results as cuts to marketing expenses allowed profitability to make up for weak sales.
• Q2A revenues / net income were NT$65.1bn / NT$2.26bn compared to consensus at NT$66.9bn / NT$2.06bn.
• This was well adrift of the company’s own forecast of revenues at NT$65bn-NT$70bn.
• This quarter saw the first shipments of its flagship product, the M8, which really drove revenues in April.
• Unfortunately it was unable to sustain the momentum and revenues started declining again in May and June.
• The appeal of this product appears to have been much shorter than anticipated which is why revenues have fallen short of forecasts.
• The bigger problem is that profitability has been achieved at the expense of marketing.
• This is not trimming waste and becoming more efficient, it represents a substantial cut into the muscle of the business.
• From now on, HTC will have less resources with which to market its products and consequently it will ship fewer devices
• This is extremely worrying as it paints the picture of a company in a vicious circle of decline.
• Resources are cut to stem losses resulting in lower sales and so resources have to be cut again and so on.
• The M8 is a great product but it is in a market filled with great products from companies with much greater resources with which to market their wares.
• Hence, unless HTC can come with something that clearly differentiates its devices from the competition, then the outlook is very bleak.
• Hardware is no longer a differentiator meaning that the difference has to be made in the ecosystem.
• HTC makes Android devices where Google has complete control and Microsoft devices where Microsoft owns the ecosystem.
• Hence, HTC has no way to differentiate itself as its competitive edge has long since been commoditised.
• Consequently, I expect that HTC will not make it as a handset vendor as it is shipping commoditised products against bigger and stronger competitors.
• We may see the occasional bounce, as we have this quarter, but the long term trend remains inexorably downwards.
• Google remains the only company to consider among the players trying to wring a living from Android.