Tuesday 26 September 2017

HTC faces uncertain future as results falter and inventory rises

Cher Wang, co-founder and chairperson of HTC, at this year's Mobile World Congress in Barcelona
Cher Wang, co-founder and chairperson of HTC, at this year's Mobile World Congress in Barcelona

Tim Culpan

Tucked away in a corporate earnings report, past the data on profit margins and revenue growth, hidden deep inside a balance sheet, is a number that can tell you a lot about a mobile phone maker's health.

In the global smartphone war, brands are routinely measured by market share, revenue, profit, and the coolness of their ads.

But one line item called finished goods inventory, which refers to the percentage of materials that were manufactured into phones but went unsold, can give insight into whether a company's fortunes are changing.

The latest company to let phones pile up in warehouses and on store shelves is HTC. The Taiwanese company's stock just fell to its lowest point in a decade after lowering its sales forecast earlier this month and announcing a $93m writedown, though it's recovered some of that loss amid speculation the decline could make it a buyout target.

HTC's finished goods inventory had climbed to a record high 2.35pc of total assets at the end of last quarter.

During the company's heyday, that figure rarely nudged above 1pc.

"The rise in finished goods inventory could be a sign that HTC's latest high-end phone, the M9, is not selling as well as expected," says John Butler, an analyst at Bloomberg Intelligence.

"The phone has received rather negative reviews from tech critics and may not be faring well against some very competitive, feature-rich phones on the market from rivals like Samsung with the S6 and Apple's iPhone 6 and 6 Plus."

Inventory, sometimes used by data divers to peek into the bowels of a company, is generally divided into three types: raw materials, which are the bits and pieces that get fed into the production line; unfinished goods, the stuff still in production; and finished goods, the devices sitting in warehouses, on trucks, or even on store shelves.

The distinctions are important.

Having a ton of materials or unfinished goods isn't necessarily a disaster. Many materials can be switched around between products, so even if one incarnation of a smartphone faces low demand, the components can be swapped into another product pretty easily. Leaving unsold products lying around, however, is an especially bad sin in the consumer electronics industry.

Once a smartphone is assembled and leaves the production line, the clock starts ticking. In the high-paced technology business, consumer devices lose their lustre fast, which makes the chance of actually selling the product decline with each passing day as newer models come onto the market.

In a display of irony, this month's writedown was a response to some of those 2011 supply contracts. HTC declined to comment.

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