Last year, smartphone maker HTC (NASDAQOTH:HTCCY) announced a new mid-range smartphone, the HTC One A9. The device was essentially a shameless clone -- at least from an industrial design perspective -- of the hugely successful Apple (NASDAQ:AAPL) iPhone 6.
Shockingly, HTC's marketing materials referred to it as a "design worth imitating" -- talk about irony!
At any rate, the device was fairly well-reviewed, with The Verge praising the device's performance, industrial design, sound, and fingerprint reader. However, the site criticized the device's battery life, camera quality, and ultimately the value for the money that HTC brought to the table.
Although HTC said in a press release that this rather shameless iPhone clone was "well received" in Asia, the US, and Europe, the harsh reality from the company's most recent earnings report is that the business is simply falling apart. Let's take a closer look.
Revenue down, operating income way down
HTC reported revenue of 25.7 billion New Taiwan Dollars, or around $773 million in US Dollars in the fourth quarter. Although this represented a sequential increase, revenues were still down substantially from the year-ago period, in which the company reported revenue of 47.9 billion New Taiwan Dollars, or about $1.44 billion US Dollars.
Things look even worse from a profitability perspective. Though the company managed to eke out an ever-so-slight profit in the year-ago period (100 million New Taiwan Dollars, or around $3 million US Dollars), the bottom fell out in the most recent quarter, with the smartphone maker losing $123 million.
Gross profit margins fell from 20.4% in the prior year period to a meager 13.9%, suggesting that HTC's products have become less competitive in the marketplace (ironic given that HTC tried to command, to paraphrase The Verge, an iPhone-like price premium on the One A9).
Signs of a death-spiral
Seemingly in a bid to ease the pain of plunging revenue and a weaker competitive positioning, HTC reduced its operating expenses in the quarter on a year-over-year basis from $288 million to just $231 million. Surprisingly, HTC saw both sales and marketing spend as well as research and development spending drop year-over-year (by 28.6% and 21.1% respectively) while "general and administrative" costs actually increased by 33%!
This looks very much like a classic "death spiral" to me. Since revenue, margins, and ultimately profits are down, the company cuts costs in a bid to try to stem the losses as much as possible. However, by doing so, HTC is reducing its ability to actually sell its products (lower marketing and sales costs) and it is taking away dollars from research and development, which is what fuels the development of competitive products!
To be quite blunt, I have a very hard time envisioning a scenario in which HTC "comes back" and becomes the financially healthy and competitive smartphone maker that it used to be.
Circling back to Apple
In a previous column, I argued that Apple -- by virtue of its immense financial success -- has the capacity to dramatically outspend many of its peers, which I believe should prove a competitive advantage in the coming years. The apparent "death" of HTC as a true competitor to Apple likely represents the first of many casualties. I have my guesses on which companies will be next to fall, but that's another topic for another day.