HTC reported its Q4 results yesterday, and it seems pretty clear that things are going to get worse before they (hopefully) get better. Sales were down 41% compared to the year ago quarter, coming in at US $2 billion. Profitability is essentially gone, given the operating margin of 1%.
HTC’s gross margins were 23% in the quarter. That’s down from 27.1% last year, telling us that pricing pressure is still working against HTC. Given how strong Samsung is in the Android space, it has to be hard to compete. Samsung makes so many of its own parts, from processors to screens to memory. And Samsung is really the only Android manufacturer with so much control over its supply chain. This makes it tough for anyone else to compete on hardware alone, which HTC has to do.
The quad-core HTC Butterfly (Droid DNA) and the Windows Phone 8X/8S weren’t enough to fix the pressure on HTC’s income statement, clearly. It's really never been a question of whether or not HTC makes great phones. Of course they do. But do you really want to compete against Samsung as directly as HTC does? Apple has its own platform. So does BlackBerry, which is amidst its own turnaround. But Android? It’s purely a Samsung game as far as the volume and profits are concerned.
For the upcoming quarter, HTC expects things to get worse. Gross margin is expected to slide as low as 21%, which compares to 25% in the year ago quarter. But could things improve in Q2? Possibly -- HTC has a big launch in the pipeline, with announcement events scheduled in London and New York City for Feb. 19. This is the year when HTC needs to hit a home run, and if they do we may see it reflected in their numbers by the June quarter.
If you’re wondering whether HTC is likely to stick around in this market, putting up a fight and helping keep phone prices down for the rest of us, fear not. They’re hovering on the brink of break even, so it’s not like they are burning cash. And their balance sheet, while not stellar, has enough padding to keep them going here. In US equivalent dollars, they’ve got $1.8 billion in cash.
Another health measure of the balance sheet is called the current ratio. This is a ratio of assets that can be turned into cash within a year (such as cash, inventories, accounts receivables), compared to liabilities that must be settled for cash within a year (such as accounts payables and short term debt). Anything above 1.0 means there is no imminent crisis. HTC’s ratio is 1.1, which isn’t awful, but they don’t have the balance sheet flexibility to do anything crazy.
How can HTC get more profitable? I don’t think it’s going to happen by competing purely on hardware. Sound off in the comments if you have any bright ideas for the CEO.