HTC plots a turnaround as profitability hits ‘bottom’

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Manufacturer says that despite another set of disappointing financial results, it has plans that can restore the company to profitability

HTC reached rock bottom in the second quarter of the year, but is now on the road to recovery and profit growth, the company has said.

The comments were made by HTC’s CFO Chialin Chang following the release of the Taiwanese firm’s latest financial results, which show sales fell for the seventh quarter in a row.

Revenue for the second quarter (April, May and June) were NT$70.7 billion (£1.6 billion), down 23 per cent from the same period last year, which saw sales totalling NT$91 billion (£2 billion).

This is despite the release in March of its flagship HTC One smartphone, which the Taiwanese manufacturer said achieved strong sales in China and the US and outsold several of last year’s ‘hero’ products combined.

Profits also fell year on year from NT$8.2 billion (£1.8 billion) in Q2 of 2012 to NT$1.1 billion (£24 million), representing a decline of 86 per cent.

Chang said: “We hope, and we think, this is the bottom in terms of profitability. We have quite a few actions in place and we believe we can restore the company to profitability very soon.”

Despite the claim, HTC predicts its revenues will fall again in the third quarter of 2013 (July to September), with figures in the range of NT$50 billion (£1.09 billion) to NT$60 billion (£1.3 billion). This is down year on year from NT$70.2 billion (£1.5 billion) in the third quarter of 2012.

Gross profit margin (the total made from a sale accounting for production costs) for Q3 is expected to be between 18 per cent and 21 per cent for the third quarter, down from 23.2 per cent in the second.

Operating margin (the ratio of profit to revenue) is expected to be in the range of zero per cent to -8 per cent, down from 1.5 per cent in Q2.

Mid-tier concerns
Chang and HTC CEO Peter Chou claim the firm has struggled “mainly” due to gaps in the mid-tier market, having offered considerable focus on the high-end space.

The company has promised a range of more affordable products, starting with the HTC One Mini launched last week, with more to be unveiled later this quarter and in Q4.

Chang explained: “The falls have come mainly from the mid-tier, the HTC One is performing well. If you compare it to sales of our hero products from last year combined, the HTC One actually performed better.

“We have some holes in our product portfolio, which we are filling by launching new products.”

Chou said the addition of such products would help the company compete with rivals across all price points.

“We have suffered a bit in this tier from the end of last year to now, due to intense competition in the market,” said Chou.  “However, this new range of mid-tier products will address those challenges and help maintain momentum for the HTC One.”

Strong demand
The company has already seen “quite strong demand” for its HTC One Mini, a more affordable (around £380) version of its flagship device coming to the UK this month, Chou noted.

The CEO also hinted at moving into the tablet or connected device market, as well as forging new partnerships. He refused to elaborate on the sort of companies HTC intends to work with, although in the past the manufacturer has created smartphones with Facebook and Google.

Chou said: “We are always looking for new revenue streams, new product categories and partnerships.”

However, the company is weary of repeating old mistakes and releasing too many devices. “In 2011 customers complained that HTC had too many products, so we will be a little more balanced and controlled,” Chou said.

More handsets than demand
HTC also said it would tackle its decline in profit margins by clearing its channel of old inventory.

Gross profit margins were 23.2 per cent in the second quarter, down from 27 per cent in the same period last year. The company expects them to fall again over the next three months to between 18 and 21 per cent.

According to Chou, this is because HTC has manufactured more products than it can sell and now has to work on clearing these “ageing products”, which are dragging down the average profit it makes from each sale.

Chang said the situation has already improved, with HTC lowering its channel inventory of old, mid-range devices in the second quarter. The third quarter of 2013 is the last that will be affected by oversupply, the company said.

Chou added: “We have a profit margin challenge from some of our ageing products and inventory we have in the channel. We have to clean these up, because they will continue to cause margin decline for us in Q3.

“We are a young brand, but we also learn from experience. I think this year is the first where we have really tried to control and manage our channels.

“In the past we have really suffered by pushing too much product in certain areas. But I now believe we have established full capacity and we have a system that is able to watch sales closely and read the market.

“We hope this is the last quarter that we have to deal with this problem. We have decided to clear it all up over the next three months.”

Reducing production costs
HTC revealed that another reason profit margins were falling was the high cost of manufacturing the HTC One.

According to Chou, the company had expected to see substantial reductions in the ‘bill of materials’ (BOM) and operating costs in the second quarter, but has not reached its targets in this area and the problem will persist in Q3.

“We have a lot of overheads, so it impacted our gross margins. We are taking ages to improve and lower costs and we expect to see this improvement in Q4 [October to December],” Chou said.

Chang added: “We have actually seen sequential improvement from the first to the second quarter and we will continue to improve on that in the third quarter and the rest of the financial year.”

The CEO said the company is aiming to lower the cost of key components in the HTC One, such as the screen.

It will also work on reducing operating costs, which include heating and lighting of manufacturing facilities, shipment costs, packaging and labour, Chou said.

He added: “In terms of overall product costs, we are working on lowering the manufacturing costs and operating costs. Improvements in profit margin will come from both sides.”

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