Just six years ago, HTC was flying high. The company pioneered the use of Android in smartphones and built early Windows Phone hardware as well. The company’s revenues and market share both surged in 2010 and 2011, establishing the company as an early leader in modern smartphones and the competitor to beat in those markets. Unfortunately for HTC, both Apple and Samsung rose to that particular challenge, and the company’s revenues have been declining for years. They took a particular beating in Q1 2016, sliding a massive 64% compared with Q1 2015 results.
The image above is from HTC’s own documents and shows the decline in both revenue and operating profit. HTC has done a fairly good job managing its own operating profit declines by cost-cutting and one-time sales, but it’s still a steep decline for the manufacturer. Gross margin declined from 19.7% in Q1 2015 to 9.4% in Q1 2016, implying that HTC had to steeply discount its own products to prevent inventory build-up. Even so, its inventory turnover (the amount of time it takes to sell hardware in the company’s possession) has spiked from 58 to 149 days. Is Day Sales Outstanding (the amount of time it takes the company to collect on money it is owed) has risen from 75 to 111 days, while its Days Payable Outstanding (the amount of time it takes HTC to pay its bills) has risen from 126 to 188 days. In other words, it’s taking HTC more than six months, on average, to pay its debts.
The fact that these figures have all increased significantly in the past year may mean HTC is having trouble moving its older phones as well as generating cash flow for continuing operations.
There’s some potential good news on the horizon, however. Both the HTC Vive and the HTC 10 launched to critical acclaim in the past few weeks, with multiple sites and publications declaring the HTC 10 to be the best Android smartphone available today. The Vive, meanwhile, has reportedly sold briskly despite being $200 more expensive than the Oculus Rift. Strong launches for both products should deliver much-improved revenue for HTC in Q2 2016, and could help the company mount a turnaround for the rest of the year.
Strong long-term execution is what HTC will need to turn a strong quarter into a sustained comeback. After a great initial debut in Android, the company rapidly lost ground to the likes of Apple and Samsung. In challenging Oculus, HTC has challenged a company with the financial resources of Facebook, while Samsung has its own plans for Gear VR.
HTC’s Vive is backed by Steam, which isn’t without resources of its own. But Valve’s sense of timing and its overall commitment to long-term projects is erratic on the best of days. Many of the company’s popular game franchises have languished for years — and no, we don’t just mean Half-Life 3. Steam itself is years overdue for a complete UI overhaul and rethink. SteamOS is still receiving regular updates, but it’s been several years since SteamOS generated much large-scale interest from OEMs (remember the array of Steam Machines announced back in 2013, most of which never came to market?)
That’s not to say the Vive and VR can’t catch traction or won’t succeed — just that HTC probably can’t rely on Valve to do the heavy lifting. We’ll have to wait until Q2 2016 to hear more, but here’s hoping the company can turn an excellent flagship device and strong VR into a better, more profitable future. Last year, some analysts declared that the entire value of HTC came down to its cash-on-hand — the HTC 10 and Vive could lead to some reappraisal of that stance if the two products perform well.
Now read: Oculus Rift vs. HTC Vive vs. PlayStation VR: Battle of the high-end headsets