HTC Q4 14A – Skin of teeth

Costs in line with sales allow HTC to survive

• HTC reported its first YoY growth in 4 years but the figures show that it is still only just hanging on by the skin of its teeth.
• Q4 14A Revenues / EBIT were NT$47.9bn / NT$180m (US$1,500m / US$6m) compared to consensus at NT$45bn / LOSS NT$30.4m.
• Revenues were up 11.6% YoY and slightly beat the guided range of NT$43bn-NT$47bn.
• This development points to a gain in market share over Q3 14A and Q4 13A but market share is now so low (1.6%) that small movements make a big difference.
• For example, RFM research indicates that in Q414A HTC gained just 0.2% of share over Q314A.
• Adjustments in inventory or other minor market variations are more than enough to account for this change and so it is too early to say whether HTC has turned the corner.
• However, the good news is that the cost base is now in line with this level of shipments which has now been pretty stable for 5 quarters.
• This means that the scramble to cut costs as revenues fall is now over and the focus can now move to its future strategy.
• Unfortunately, the outlook in this regard is not great.
• HTC was once one of the best companies at writing software for smartphones but over the last 5 years that edge has been competed away.
• What is left is a company that has nothing with which to differentiate its products from the rest of the Android hoard.
• I have doubts whether branching out into cameras and other consumer electronics is likely to solve the problem.
• Consequently, I can’t see how HTC can earn anything more than commodity margins on the products that it sells.
• By bringing its cost base under control, HTC has staved off the immediate threat of collapse but its outlook remains pretty bleak.