HTC may have only sold 6 million smartphones in Q3, according to analysts; company posts its first loss

Despite a slick body design and strong reviews, a mixture of production/supply issuesintellectual property concerns, and ineffective marketing have sunk sales of HTC Corp.'s (TPE:2498flagship "One" smartphone.  

I. HTC Sees Slumping Sales, First Loss

According to Taipei-based Citigroup Inc. (C) analyst Kevin Chang, who spoke to The Taipei Times, sales of the flagship HTC device may have fallen to between 2.1 and 2.4 million units in Q3 2013. This is a dramatic fall for an OEM that was once America's top smartphone seller (in Q3 2011).  

Aside from slow sales of the One, HTC has also suffered from production issues with the case of the HTC One Mini, which launched in July.  Reuters reported only 200,000 units or so of the mid-range Android device were shipping per month.   Bloomberg reports that HTC achieved a mere 2.8 percent of global smartphone sales, or around 6 million units.  To put that number in context, HTC moved 5.6 million units in the U.S. alone at its peak in Q3 2011.

Sales of the HTC One Mini were limited by production problems in Q3 2013.

Throughout 2012 and 2013 HTC has struggled financially, and in Q3 the worst-case scenario was realized as HTC posted its first quarterly loss, according to the company's unaudited financials release.  HTC saw an operating loss of NT$3.50B  (~$119M USD), a net loss of NT$2.97B (~$101M USD) on a revenue of NT$47.05B (~$1.6B USD).

HTC has been in part victimized by a global smartphone slowdown.  Whereas rivals like Samsung Electronics Comp., Ltd. (KSC:005930) -- and to a lesser extent Apple, Inc. (AAPL) -- have a more diverse product lineup to fall back on, HTC all-smartphones lineup left it especially vulnerable to slowing smartphone sales.

Founded in 1999, HTC produced smartphones for other companies as an original design manufacturer (ODM) until 2006 decided to make a name for itself selling products under its own brand as an OEM.  In its early days as an OEM HTC became one of the first major champions of the Android platform and benefited from the surge in interest in what would become the world's top smartphone platform.

Peter Chou
CEO Peter Chou led HTC to early success as an OEM via the hot Android platform.
[Image Source: Android and Me]
But even as Android smartphones today encompass nearly 4 out of every 5 smartphones sold worldwide, HTC has been passed not only be Samsung, but by LG Electronics Inc. (KSC:066570) and a variety of Chinese OEMs -- including The Lenovo Group, Ltd. (HKG:0992), ZTE Corp. (SHE:000063), and Huawei Technologies Comp. (SHE:002502).

II. Windows Phone? An Exit or a Bane?

A lone ray of hope was that HTC's Windows Phone lineup (composed of the HTC 8S and 8X) saw relatively strong sales of 400,000 - 500,000 units according to various estimates, including the Interactive Data Corp. (IDC).  That was good enough for third place in the Windows Phone market behind Nokia Oyj. (HEX:NOK1V) and Samsung.

The HTC 8S Windows Phone

Bloomberg reported that Microsoft Corp. (MSFT) has offered to remove a potential ban on HTC's lineup if it commits to Windows Phone.  That report comes in the wake of news that Nokia -- Microsoft's Windows Phone partner -- had secured a preliminary injunction from a U.S. trade court that could ban the sales of a broad range of HTC's Android smartphones.  HTC has a bit of time to ponder its fate; that ban is not set to take effect until April 2014.

If the Bloomberg report is true and HTC refuses to switch, its only real option will be to switch the internals circuitry of its devices; however, in that regard there's no clear route to escaping a ban.

If HTC doesn't switch to WinPhone in may be forced to redesign its smartphones to use Broadcom discrete modem chips to avoid a product ban by Nokia. [Image Source: oskay/Flickr]

The infringing components are found in Qualcomm Inc.'s (QCOMSnapdragon chips, which contain on-die modems that implement features that appear to be described by Nokia patents -- most of which were filed in 1999.  HTC could switch to NVIDIA Corp. (NVDA) and use a discrete modem from Broadcom Corp. (BRCM) or another chipmaker, but that could hurt battery life in its Android smartphones.  And given that the upcoming NVIDIA Tegra 4i chip will feature an integrated modem, that approach may quickly dry up as well.

One other alternative in the long term is Intel Corp. (INTC), however its 22 nm LTE-compatible Atom smartphone chips, which recently started shipping to OEMs at volume, but have yet to make it to a consumer product.

III. HTC Chairwoman: "Our Communication Does Have a Problem"

Even if HTC can resolve its platform and intellectual property uncertainty, it still faces trouble as financials continue to be in the doldrums.  In an interview with Bloomberg (the same source that reported the alleged Microsoft demands), HTC chairwoman and founder Cher Wang bemoans the Q3 2013 miss commenting, "We really have the best technology and the best product."
HTC BlinkFeed
The HTC One
She says that her company must "communicate better" with customers, remarking, "Our communication does have a problem but we are improving on that.  It’s a gap between our new products coming out and we are improving our innovation and our marketing."

Much of HTC's hopes to improve its marketing and brand image revolve around Robert Downey Jr., who is serving as the pitchman for HTC in new commercials.  The deal with Mr. Downey lasts for two years and is reportedly worth $12M USD; however, early commercials have seemed a bit confused if humorous.  But Ms. Wang firmly believes that Mr. Downey will deliver, stating, "People like him because people see him as a change maker.  I believe HTC is here to change."

The commercials so far all sample this longer commercial spot:

Ms. Wang comments that Q4 2013 will be HTC's "biggest challenge" yet, as it tries to reverse losses.  HTC released a comment "clarifying" this remarking, writing:

In a Bloomberg TV interview today, Cher Wang, the chairman of HTC, was not referring to the company facing financial challenges this quarter. Instead, she was referring to living up to the challenge of innovative marketing in Q4 of 2013. She puts direct communications with consumer at the center of its overall business strategy.

The best product and cutting-edge technology are still the most valuable assets to the company. Our biggest need in the forthcoming quarters will be embarking on alternative marketing thinking. HTC is in a time of change, taking necessary innovative steps on marketing to create a resurgence of the HTC brand.

The fiscal struggles have led some to believe that a sale or merger -- perhaps to a Chinese OEM -- would be the best route for HTC.  Indeed, after BlackBerry, Ltd. (TSE:BBposted its own first loss (which to be fair/clear was much larger -- nearly $1B USD) it announced a sale which is currently being finalized.  However, Ms. Wang is actively blocking any purchase of HTC.

Ms. Wang -- the daughter of billionaire former chairman of Formosa Plastics Corp. (TPE:1301), Wang Yung-ching -- currently owns an estimated 20 percent of HTC.  Ms. Wang has been cited at the richest woman in Taiwan.

Sources: Bloomberg, HTC, Reuters, Taipei Times

"If you can find a PS3 anywhere in North America that's been on shelves for more than five minutes, I'll give you 1,200 bucks for it." -- SCEA President Jack Tretton

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