HTC Stalls

HTC’s 1Q earnings were, as expected, terrible. From The Next Web:

The Taiwanese company reported net income after tax of $2.88 million (NT$85 million) on $1.45 billion (NT$42.8 billion) in total sales for the first quarter of 2013. That’s in line with the unaudited results for 1Q 2013 HTC announced in April.

HTC’s gross margin was 20.3% and the operating margin came in at 0.1 percent. Earnings per share were $0.003 (NT$0.1) for the quarter.

I’ve written a couple of times about HTC’s death spiral (first here, and a follow-up here). To quickly recap:

This is what a death spiral looks like:

  • HTC is a smartphone-only vendor with limited capital reserves
  • HTC foolishly wastes cash on acquisitions, including VIA and Beats, and pisses off the carriers to boot by allowing their phones to be unlocked
  • HTC underinvests in marketing, including above-the-line (advertising), commissions, etc.
  • Samsung does the opposite, plus a whole lot of other interesting stuff (lots more about this soon)
  • HTC sells relatively few phones compared to Apple and Samsung, resulting in less cash for marketing
  • Less cash for marketing means fewer phones sold; fewer phones sold means less buying power in the component markets
  • Less buying power for components means their “Savior” phone is late, which means they get less cash

The best analogy for this spiral is a stalled airplane, losing altitude fast. Wikipedia has an overview here (emphasis mine):

In most light aircraft, as the stall is reached, the aircraft will start to descend (because the wing is no longer producing enough lift to support the aircraft’s weight) and the nose will pitch down. Recovery from this stalled state involves the pilot’s decreasing the angle of attack and increasing the air speed, until smooth air-flow over the wing is restored. Normal flight can be resumed once recovery from the stall is complete. The maneuver is normally quite safe and if correctly handled leads to only a small loss in altitude…The only dangerous aspect of a stall is a lack of altitude for recovery.

In this analogy, putting the aircraft into a dive – the way to recover from a stall – is the equivalent of spending money on marketing. To handle a stall incorrectly is to pull on the stick, increasing the angle of attack. Unfortunately, that’s exactly what HTC’s former CFO and CMO did; according to folks I’ve talked with, they cut ALL discretionary marketing spend after the One X got off to a slow start last year. Unsurprisingly, both were fired.

There is evidence in this week’s earnings report, though, that their new leadership team at least understands the cure – more spending, not less. From Bloomberg:

HTC Corp. forecast weaker-than- expected profit margins as it boosts spending to reverse shrinking sales and contracting market share.

Second-quarter gross margin will be 22 percent to 24 percent, lagging the 24.6 percent average of 19 analyst estimates compiled by Bloomberg. Operating profit will be about half the average of estimates, while sales outlook was in line.

Given HTC’s predicament, more spending is a good thing. Sadly, it probably won’t succeed; they simply fly too close to the ground relative to Samsung in particular:

Benedict Evans - Click Image to Read Article
Benedict Evans – Click Image to Read Article

As Benedict Evans, who made this chart notes:

In the handset market today, having a lovely product is necessary but insufficient. This chart ought to show why.