Peter Chou

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.

Peter Chou, Mark Zuckerberg and Ralph de la Vega
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.

 
There are 30 comments

HTC is still my favorite manufacturer. The phones feel premium. Only thing keeping me from their phones besides Verizon putting all their crap on it are the updates. HTC really needs to focus on keeping the software current. Also if they put more internal storage or an sd card slot, removable battery, and boost marketing they might grab some Samsung customers away. Samsung markets the galaxy line to the extreme and the product name gets out there.

wicketr says:

I think that was the original motivation around the "One" series. They have finally reduced the number of phones they are putting out, which will allow them to throw more developers at updating those devices.

Having their developers try to maintain about 40+ different phone configurations over a 2-3 year lifespan is damn near impossible for a small outfit like HTC. Unless HTC royally screws the pooch here, the One will be supported for at least the life of the contract. All eyes are going to be on this device as their turn around device. If they can't support this baby, they are definitely going under long term.

frettfreak says:

I 100% agree. Updates are the only reason I am not buying a one. Hell. They couldn't even launch a new phone with the latest and greatest and my one s on tmo is still waiting for an official jellybean update. I love htc hardware but at least for me that is secondary cause I am going to cover it up with a case anyway.

mwara244 says:

I love the new look and build of the new One, but sense sucks and you're lucky to get an update in a single year. If the one came with stock android I would buy it. HTC not releasing a stock android device is stupid, they could save time and money by letting google do the updates and just building good hardware, well except for the lame 4MP camera.

I bet if HTC made a stock android device it would sell big.

znc62511 says:

You guys realize that updates has nothing to do with their sales, none of my friends or family know which brand updates their phones quicker or even care about it. It doesnt even matter to me , I have XDA. Its more about marketing and having the same phone on all carriers so that its "cool" and has accesories and cases. I hear all the time , " I got the new galaxy or " I got the iphone". Most people dont care about a removable battery or memory card slot either, most people reading on this site might care, but I can tell you "normal" people dont even know if their phone has oa memory card slot or not and dont take the battery out of their samsung phones ever. So maybe if they added these features and updated quicker sales would increase by .01% and you a few others would buy.

icenija says:

HTC always seems to produce hits they just don't advertise correctly, especially here in the states. If HTC had the commercials Samsung produced then we wouldn't be having this conversation at all. I like the Samsung commercials just like the next person but I prefer HTC phones especially when the commercials show features the HTC phone can do but no one knows about it.

Dirtman16 says:

This exactly. I have yet to see (or at least notice) an HTC One commercial on television or the web.

They need to risk a profit loss in order to get that phone in front of people's eyes (i.e. commercials during prime time shows for non-tech viewers and during live sporting events). Folks just don't know about it.

Jeff Kibuule says:

The HTC One X was available on one carrier, the Galaxy S3 on 6+ in the United States. That's not a marketing problem, that's a distribution problem. And that one carrier it was on was a carrier where 90% of all smartphones sold are iPhones!

And I also feel that the US online press has some influence on what is "cool" in the rest of the world. And there was little point for them to talk about a phone only available on one carrier that frequently.

SpookDroid says:

I think you just hit a very good point: Problem is sales. I was hyped by the Butterfly/DNA, it came out, made some noise, and then quietly went away. HTC One's turn, it's making noise, it's being delayed, it's suddenly going back to an obscure corner.

But about your point, sales. I'm considering buying this phone (my contract is up this year), but I want to compare it, hands-on, with a Galaxy S4. Designwise, HTC is great, but you know what? Even if the HTC One blows my mind, there's always the burning question in the back of my mind: and what if the company flops? They've been troubled for YEARS, and things just keep getting worse and worse. Sammy, on the other side, is solid, and you can bet it's not going away anytime soon.

HTC need to stop being 'quietly brilliant' and start taking action. They're doing a bit (at least they got rid of the tagline), but it's still not enough. Convince us that if we buy your phone we'll get support for it's lifespan and won't see a struggling company just drop support because it can't afford it or just completely disappear from the face of the Earth.

sjcdal says:

I thought briefly about HTC failing when it was brought up to me by a good friend.

But really, should that be a worry when I am proving that a phone is not a long term investment....after all, with Sprint doing away with the once-a-year upgrade option for their "prime" customers I am about to lay down $600+ after taxes and fees for an unsubsidized phone to replace my perfectly good EVO-LTE that is barely a year into it's life. Updates are critical, but my reservation for a launch day ONE shows how far I am willing to go to keep current on hardware and software and quality design.

I have a new Samsung Note 10.1 and like the Samsung device just fine. But the ONE is clearly a better industrial design vs. another plastic Samsung "S" device. HTC has earned my money once again...at least in this round.

Gekko says:

Chou needs to go.

aaronius says:

So do you, with your constant HTC hate in EVERY FUCKING THREAD. Why don't you take your own advice from a day or 2 ago and just commit seppuku. Save us all from your constant idiocy.

i have always loved the feel of htc phones. i shop hardware and software. ever since the htc 710s! But i dont think the fb phone will save them. Nor the ONE, even though i will end up getting it. they need more of a line.

lekky says:

While I agree that revenue is also important, I can't agree with your statement that profit isn't. Especially as the two are intrinsically linked. In HTC's case, profit and revenue will go up when sales improve, as they have both reduced with poor sales.

You are missing the point of what I wrote.  Of course profit matters.  But it's absolutely stupid to write headlines about HTC profit falling 98 percent when they have already collapsed.  The important metric right now is revenue.

dswatson83 says:

I used to be an HTC guy and switched to Samsung. I thought HTC was stupid to be putting out all of these exclusive phones on different carriers and they as a result were often slow to update. It looks like they are changing that slightly now with the One. People want a popular phone and ton of accessories and unless you market to all carriers, it will not happen. Plus they made huge mistakes with the Evo 3D and other phones. I hope they come back. The key to success for them is going to be fewer, nicer phones, frequent updates to win back trust, and wide adopt-ability.

_X_ says:

Great article you hit the nail on the head. The only thing in would disagree on is the lineup argument, last year HTC had a pretty good line up same with this year, what HTC seems to suffer from is poor execution and limited selection.

Samsung has always made the same exact product on all carriers(look did change a little on the first SGS). HTC carrier exclusive are now no longer sweet deals they are the death of a platform.

olorin says:

Revenue matters, especially when talking market share. But, revenue without profit is a sign of a failing and/or inefficient company. Stockholders won't accept that combination for long.

Legobricke says:

Problem is also keeping customers loyal... The fast updates to the HTC Droid Incredible had me sold... I loved the phone... Enough to jump into an HTC Rezound... Yet the updates to that phone have been horrible... So, as much as I want an HTC One,I may jump ship. The lack of a Verizon phone and battery (not switchable) and no SD card really bother me. And then there is the question of updates!

ChrisFricke says:

Updates don't matter. Specs don't even matter. Mindshare matters. Marketing matters. Messaging matters. Packaging matters. HTC has great products with no vision as to how to deliver them. They need to do what Apple and Samsung has done - convince millions of people that they have the bestest shiny widget ever. Whether it is or isn't is irrelevant.

They seemed to start down that path with the "One" series last year but quickly lost focus and released dozens of different devices all over the world with no cohesion whatsoever. They've started over with the "One" again but they're already releasing offshoot devices (FB phone) that don't add to the collective message of "Buy the HTC ONE".

The worst enemy to HTC is HTC.

jaymars says:

Correct on all points.

crxssi says:

BINGO. Everyone here SHOULD know that it is a decent device PLUS marketing and multi-carrier availability that is the recipe for success.

And fewer models means better support, better marketing opportunity, and more accessories. But we heard the "less models" business before from HTC.... The HTC One X and Evo LTE (a mod but the same phone) were supposed to be "the" phones for HTC. They claimed they would greatly reduce the number of phones and would push those primarily.

It didn't happen. Instead, they kept releasing other "versions" of the One, with different CPU's, different screens, different chipsets (and this in addition to non-"One" models). Then produced a totally different thing again for Verizon.

They haven't even finished introducing us to the "One" (Non-X, Non-V, Non-S, Non-whatever) and they are already releasing the "First"! What are we supposed to believe?

Your exactly right that sales is the issue. Also, the sales issue is even more important as they will just not be able to compete in future product development without increased market share/sales to fund development.

The net income issues are just a result of failure on the top line, and would quickly correct with additional revenues.

There is hope - if the one is as good as we are being told - they have a great product that is for many the only alternative to samsung. I bet there is a good percentage of Samsung users looking for an alternative to their samsung that they have had for the last few years. The facebook phone may also be popular with certain audiences.

So - if the One is for real and they can get them produced in volume, they have a real shot boosting their revenues and market share signficantly.

I do worry a bit that they will have some issue with the One and have to release a refresh. What do they call that? They have already used One x and One etc. Maybe the 2?

Ry says:

They're still not losing money. But that time is probably coming soon.

franky_402 says:

What HTC needs is marketing to get the one out there, I love the build quality of my HTC phones but every time I mention the HTC one to someone 98% of the time they look at me like a deer in headlights, followed by the new s4 is coming out, its got hover feature, etc.. no one has any idea about the one yet the galaxy and note series are about as well known as an iphone, that's probably because everyone and their grandmother has seen a commercial or ten about them. So basically the sole problem for Mr Chou is marketing, fix that and fix your revenue issues, after all your phones are very nice

Gator352 says:

I'm a Samsung (GS3) user but was/am considering the "ONE" and GS4 for my next phone. HTC's financial status and lack of updates have me worried, but a possible looming war on the Korean peninsula has me stymied about the GS4. I guess I'll go poop now and see what happens...

tre flip says:

HMMMM Maybe they should come out with good products and theyll make some money. I got the dna thinking that they finally made a solid product. So after 5 replacement phones i went back to the king SAMSUNG. I dont see the company being aroud for to much longer and they wont be missed.

Jayq330 says:

Just keep making HTC one quality phones with great cameras, front speakers & all that & I think they'll do very good..... I think what they need most of all is all around better advertising, if I didn't know any better if think they'd have none at all.

toddjy says:

As long as they're making profit, they're still okay. If they're losing money, then we can worry.

And as far as I'm concerned, the smaller the profit margin, the more I want to buy their stuff. Cause they don't have their you-know-what up my you-know-where, and trying to convince me it's a good thing like Apple does.

kmarx says:

I have no interest in HTC One. If it had a MicroSD slot maybe, but not in the US version. In the Chinese version it does. If Chou was really trying to be innovative he a would have kept the removable storage and battery. I think HTC is sinking their own ship with HTC One.