HTC Q1 2012 Results

Analyst Blog

April 26, 2012, 10:56 a.m.
Joshua Flood, Senior Analyst

HTC ’s total revenues for Q1 2012 were $2.3 billion (67.8 billion New Taiwan Dollars), dropping by 33.2% from the previous quarter, and declining 34.9% from Q1 2011. The Taiwanese company’s gross margin was 25.03% and operating margin 7.53%; again, both financial ratios declined from the previous quarters by 2.09% and 5.18%, respectively. Additionally, HTC’s market share in the US has suffered greatly at the hands of Apple’s iPhone 4S and HTC’s CEO, Peter Chou, believes it will be impossible for HTC to dominate the US market in the near-term future.

HTC have stated several reasons for its revenue declines. First, the company is transitioning between different product cycles. Second, it has changed its strategy focus from Q1 2011 due to the rapidly changing competitive environment and this has also affected it operations and thus revenues. Chou also mentioned a number of errors in HTC’s strategic leadership, however, he declined to clarify during the Q1 2012 financial quarter call, where and who were making these mistakes. A major concern for HTC is its profit margins, although revenues fell by 35% from last year’s previous quarter, the company’s net income after tax dropped by 70%. HTC is projecting to generate $3.5 billion (105 billion New Taiwan Dollars) in the next quarter and its gross margin and operating margin should be approximately 27% and 11%, respectively.

HTC released its new One series in February atMobile World Congress , and so far, the new smartphone has received a number of positive reviews. The new model follows on from the HTC Sensation services. The HTC One X has a 4.7 inch touch screen display and contains quite a lot of impressive kit, including a 1.5 GHz quad processor. ABI Research recently included it in a recent report on hybrid smartphones/tablets and super smartphones. The HTC One series will be released in China this week and the firm also released the HTC J in Japan via the Japanese network carrier, KDDI .

Interestingly, HTC declared, during its financial Q1 2012 call, that it would still place equal focus and effort on Google’s Android and Microsoft’s Windows Phone operating system. Peter Chou believes HTC has had a long and special relationship with Microsoft and the new Windows Phone 8 is going to present a very good opportunity for HTC. This may sound very strange considering the increasing popularity of Google’s mobile operating systems globally; however, I suppose these are the types of statements CEOs need to make to keep both firms happy.

Examining HTC’s revenues by region, the Americas, EMEA, and Asia each accounted for a third of the company’s revenues. HTC doesn’t expect to gain much traction back in the North America market which is heavily dominated by Apple’s iPhone. EMEA holds a little bit of growth potential but not too much. HTC expects to see the majority of its growth generated from Asia, or more specifically China. One of the major beliefs within HTC is that its brand is well understood in China. Also, Chinese consumers appreciate the designs and craftsmanship of HTC phones. Nevertheless, Mr. Chou was quick to emphasize all HTC’s regional markets were of equal importance.

My conclusion for HTC is that 2012 will be tough and challenging year. As HTC have seen in the past year, the smartphone competitive environment is very dynamic and tough. HTC’s budget for marketing and sales has been abnormally high compared to its revenues; however, I believe this will be the norm for HTC in the future. Additionally, HTC is placing enormous faith in the China smartphone market. I believe a major obstacle could be its pricing. HTC’s lowest price smartphone in China is $1,999 RB ($317). Apple has now released the iPhone 4 for $99.