HTC, in its Q3 earnings call, declined to give any forecasts for its revenues or profits in the current quarter: “it’s our intention that we will not be providing financial forecast in the coming quarters,” said Chialin Chang, CFO and president, global sales, complaining that the guidance they used to give was far too detailed – gross margin, earnings per share, revenue. But he would offer this: “I will say the following. We are expecting – I’d like to expect Q4 result as compared to Q3 result to see the incremental improvement on revenue and the net income.”
(Actually, I challenge anyone to read that transcript and get any sense out of it. Sure, English isn’t Chang’s first language – it might not be his second language – but he seems competent enough to talk a lot in it. He just doesn’t actually explain anything. And what a sad little call; only two analysts on it, based on the questions.)
Law of averages
Still, even if HTC isn’t going to predict its revenues, we can. That’s because the Taiwan Stock Exchange makes listed companies report monthly revenues. And there’s a pattern to companies’ sales, especially those which are quite seasonal and predictable, like HTC. February is smaller than January; March is bigger than February; April’s about the same; and so on.
Using the monthly data from the past nine years, I’ve generated the “average” forecast for HTC’s revenues by month over the year. And we’ll use this to forecast this quarter’s revenues (and maybe profits).
Here’s how HTC’s year goes, from month to month, on average over the past nine years:
You’ll notice that the “next January” mark is lower than the previous one – which is just one of those things; on average, the revenue has grown by 3% over the year, then fallen by 17% the next January. Shrinking, in other words, which it has been doing since 2010.
But this is a pretty simple model. How good is it at predicting? How does it fare when we compare it with HTC’s revenue this year?
Here is the comparison, where we only use the data up to 2014 for the forward guidance:
So the aggregate error in revenue from forecast over the year is 10% – the highest value being around 12%. (I’ve used absolute values for the error, rather than averaging the plus and minus.)
But what if we feed in the results from 2015 too? It improves the graph a little:
I’ve changed the colour for the aggregate error: 8.7% for total revenues over the year so far. Not so bad.
Given this, what can we say about HTC’s revenue to the end of this year in two months? We’ve just had the October revenues, so we can look forward to the rest of the year. On the adjusted basis, using the new data, my forecast comes in at NT$26.64bn (about US$830m). That’s down from $47.9bn in the same period a year ago – a forecast decline of 45%.
Bear in mind there’s a likely error either way of 10% – so I’m forecasting NT$29bn-$23.9bn. (The midpoint figure would satisfy Chang’s wish for incremental improvement in revenue.)
And profit? Pretty hard to say, but assuming that things continue as they have at HTC, its gross margin will be 18%, so about NT$4.79bn; that’s NT$1bn more than the previous quarter, so the loss will be about that much less – so probably NT$4bn (around US$125m), which would also satisfy Chang’s vague wishes.
Obviously these are forecasts, based on single chunks of data, though they have been pretty accurate so far this year. If the HTC A9 takes off, or if the Vive VR set is a hit, I’d be completely wrong. I don’t see any obvious signs of that though.
The inventory squeeze
More generally, HTC is a company in crisis, with no obvious reason to exist and little to differentiate it from any other Android OEM. You can see the incredible pressure on it in its inventory/revenue numbers, which measure how much stuff it has sitting in the backroom compared to how much stuff it has sold. This ratio has now hit a historic high of nearly 100%, as of the end of the third quarter:
High inventory/revenue levels tend to mark out a company in severe stress. It can mean that it has lots of wonderful new finished products in the warehouse just waiting to be sprung on the world, which will fall on it with delight. But usually it doesn’t because you have to distribute those things to wholesalers who will sell them. And historically, HTC hasn’t been a rabbit-from-hat sort of company, as the graph suggests.
Clearly this isn’t a situation that can go on indefinitely. HTC says that it has things coming down the chute – there’s the HTC Vive, its virtual reality offering. Much handwaving from Chang in the earnings call, but nothing concrete. And if HTC really thinks that VR is going to bring its business back into profit in 2016, well, I don’t see it; these are high-priced devices with an uncertain market, regardless of the quality of HTC’s offering.
Of course that could have been said back when HTC was preparing its first Android smartphone. But the difference was that HTC had already been making smartphones (for Windows Mobile) for some years.
Overall, the best summing up of this came from The Verge, where Vlad Savov’s story had the deathless headline: “HTC will no longer give guidance for the future it doesn’t have”. Quietly brilliant, that one.