We tend to focus on the wrong numbers, but even the right ones don't look so good
HTC this week announced unaudited Q1 headline numbers, with sales of NT$42.8 billion, or about US$1.43 billion. Unaudited operating income was NT$43 milllion, which means the company is pretty much at breakeven.
Don’t be fooled into the headlines some people are writing about HTC’s results. I saw one sensationalizing on the idea that earnings collapsed 98 percent year over year. Honestly? Who cares. That’s not what matters. Fact is that HTC has been in financial difficulty for a while.
Let me put some fictitious numbers together to make this crystal clear.
Say you have a company with $1 million in sales, and at its peak, you brought in $100k in profit. That’s a 10 percent profit margin. Say things get tough, and you now bring in only $10,000 in profit on the same million dollars. That’s 1 percent profit margin.
If, after shrinking from 10 percent to 1 percent profit margin, you have another bad year and deliver only 0.1 percent profit margin, it is correct to say profit just fell another 90 percent. But it doesn’t matter. It’s still a tiny 0.9 percentage point change in overall profitability. It is the wrong number to look at.
So instead, let’s look at HTC’s revenue. This is what I think matters much more. And revenue dropped (year over year) from NT$67.8 billion to NT$42.8 billion. That’s a 37 percent drop in top-line sales. Ouch. And that comes on the back of a drop of 35 percent the year before. This is the real problem. Without sales, your profit margin just doesn’t matter. But with strong sales, if you can solve the profit margin problem you’re back in business.
From left, HTC's Peter Chou, Facebook's Mark Zuckerberg and AT&T's Ralph de la Vega, with the HTC First and Facebook Home
HTC’s revenues are struggling because it doesn’t have a hit product driving huge numbers. The new HTC One was delayed, and hasn’t even hit the U.S. market yet. That'll change starting next week, and that gives HTC nearly a full quarter of availability during Q2. Also in Q2, the HTC First -- the vaunted "Facebook phone" -- hits AT&T this Friday. Will Facebook Home and a subsidized $99 price tag be enough to boost HTC’s fortunes in Q2? I hope so. I’d love to see Samsung face more competition.
Worth keeping in the back of your mind is that HTC's Droid DNA hit Verizon in late November, and there’s always a ton of stuff released in China that we don’t have much visibility on. But obviously those things are not making enough of a difference to sales.
Right now I think investors need to pay attention to HTC’s top line, not its profitability. It needs to show a recovery in sales. Only then do we need to worry about the possibility of improving margins. HTC needs a hit.