HTC Abandons high-end as desperate cuts continue

HTC logoAfter losing NT$3.5B ($118.9M USD) before taxes and NT$3.58B after taxes in Q3 2013 -- its first ever loss in corporate history - HTC is riding on fumes and desperation. Once the top-selling phone brand in the U.S., today the company is making dire sacrifices, vowing to cut a quarter of its total expenses and dramatically change directions in hopes of turning a small profit in Q4.

I. Down, Down We Go

The latest rocky quarter for the embattled Android OEM saw it jettison its 24.85 percent stake in Beats Audio for $415M USD. That's not entirely a bad thing as HTC acquired a 51 percent controlling stake in Beats Audio for an estimated $300M back in 2011. It later traded that for a smaller stake in Beats Electronics, and some cash. Now it's yet again turning a small profit off the deal, which it says should amount to additional $85M USD in profit when all is said and done.

A stronger sign of desperation can be seen in HTC's decision to sell Saffron digital which it also bought in its 2011 heyday. It paid $48.5M USD for Saffron at the time, but is making only $47M USD off its just-announced sale, along with the freedom to use Saffron's patented video delivery technology.

HTC continues to shed employees and shutter facilities as well. It expects to reduce operations to NT$10B ($339M USD) in Q4 2013, down from NT$13.1B ($445M USD) in the money-losing Q3.

HTC continues to struggle to find a strategy. After saying last quarter that it was focused on building high end smartphones for the expanding Chinese market, where it has seen increasing success, HTC's new finance chief has abruptly announced that HTC instead would focus on a "broader" (read: low-to-mid range) lineup, stating, "We're looking at broader products in this quarter...we aim for higher volume into 2014 that will give better profitability."

II. Cutting Off its Arms and Legs to Save the Torso

If HTC indeed sticks to this plan, the HTC One and One Max -- high end, high quality, rather unique flagship Android phones -- may be the last of their kind in a sense, as HTC tries to fill lower spots on the food chain.

It's looking increasingly probable that HTC will adopt this approach out of necessity as it will likely have neither the engineering staff, nor the financial resources to design high-end Android handsets by the end of Q4 2013.

Meanwhile HTC's revenue continues to plunge downward. HTC made NT$60B ($2.04B USD) in Q4 2012 -- not exactly great. But by contrast, HTC's new forecast has that bitter memory looking a lot rosier as it just predicted revenue would fall by as much as a third to NT$40B ($1.36B USD) to NT$45B ($1.53B USD) for the quarter -- below the previous Thomson Reuters SmartEstimates analyst estimate of NT$47.1B ($1.60B USD) and far below the NT$52.2B ($1.77B USD) estimate that 21 analysts surveyed by Bloomberg expected.

Net profit is expected to move from NT$1B ($33.9M USD) in Q4 2012 to anywhere between a modest NT$1.41B gain ($47.9M USD) (NT$1.70 earnings per share) -- at best -- to a drop to NT$83M ($2.8M USD) at worst.

In other words since it began to struggle in late 2011 to early 2012, HTC has or is yet to shed most of its engineering staff and global facilities, in a survival attempt to reposition it as a maker of budget to mid-range phones. HTC's massive cuts continue in Q4, as its operating budget suggests that it will cut a quarter of its total expenses (employees, facilities, etc.).

At best these sacrifices will basically keep HTC steady at a small profit in the tens of millions of USD. At worst the phonemaker will essentially break even, an outcome only marginally better than last quarter's small, but historic loss.

Returning to the NT$10B ($339M USD) operating expenses number, remember that Q4 is a holiday quarter, which usually has much higher expenses (due to advertising, product, launches, etc.) than Q3. Yet HTC plans to actually cut its expenses, an extraordinary effort that equal parts praiseworthy and insane.

In Q4 2011, fresh off its dominance of the American smartphone space, HTC spent a whopping $NT63B on operating expenses. If HTC completes its current cost cutting trajectory it will have one-sixth the budget it had in 2011. It's hard to design great products, when you've fired most of your engineers and design staff.

Source: DailyTech

Tags: HTC, report, smartphones

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