Stock Talk: HTC's problem is getting worse

Late last week, HTC posted its Q2 results for 2012, and they weren’t pretty. Profits are down 60 percent year over year.  But perhaps the most visible sign of decline comes from revenue. After all, consumers don’t necessarily know if a company makes money based on what it sells. But if HTC sells fewer phones, it’s a highly visible change. And that’s exactly what has been happening. HTC revenues dropped by more than 25 percent in Q2.

This week the Taiwanese manufacturer posted results for July, and sales were down by 45 percent. This is worrisome because it suggests HTC’s revenue woes are accelerating, not easing.

The problems faced by HTC are serious. With Android having gained so much market share over the last couple of years, the only way to explain HTC’s performance is a loss of consumer appeal. When people think about Android, the brand that comes to mind is clearly Samsung.  The smartphone market, at the high end, has essentially consolidated around Apple's iPhone and Samsung's Galaxy families. Then, waiting to duke it out for a slice of the action will be Microsoft/Nokia and the Windows Phone 8 Lumia phones, along with Research in Motion’s BlackBerry 10 (neither of which have hit the market).

At least RIM and Microsoft/Nokia are competing with their own platforms, so it’s not a straight-up fight on hardware. HTC essentially has to fight Samsung while using the same operating system and a much weaker supply chain than the Korean giant, which can supply itself with come of the necessary components. HTC doesn't have that option.

HTC isn’t saying how many phones it shipped this year in Q2, but analysts are pegging the number somewhere less than 10 million.  Compare this to Samsung, who shipped more than 52 million smartphones in the same period.  Samsung is more than 5 times larger, is a much more diverse company, has arguably better products and has incredible brand power.  This makes it incredibly difficult to compete against them, which is why we’re seeing HTC shift its focus to China and India, in the hopes of cracking into the lower-cost markets.

Unfortunately, as we’ve seen from RIM, fighting in the low-cost markets without (or perhaps with) a high-end product is a recipe for disaster. Just like RIM is trying to do now, HTC needs to have a flagship product that drives volume in developed nations, on which to earn better profits. If it can’t accomplish this, it may be unable to survive.  Sure, it has the HTC One series, which has garnered fantastic reviews. But if the market sees Samsung as the “go-to” brand for Android phones, it’s a tough battle for HTC. (And that's to say nothing of the marketing dollars Samsung's spending this summer on the Galaxy S3.) And fighting for sales of a high-end phone in lower cost markets isn’t any easier given average income levels. HTC’s stock peaked last spring, and is down more than 75 percent since that peak. The smartphone volume shipments coming out of HTC are not that much different from Chinese competitor ZTE (Android), or even Canada’s RIM (BlackBerry). 

It seems to me there are plenty of bodies still to fall in the smartphone wars. HTC may well be one of them. Question is, what is it doing to stop this from happening?