HTC Messed Up Its Google Deal

(Bloomberg Gadfly) -- It was a long wait, but Thursday morning finally looked like the time for me to congratulate HTC Corp. on a smart move.

Except I can't. HTC messed up.

Taiwan's iconic smartphone maker is selling 2,000 of its best and brightest engineers to Alphabet Inc.'s Google for $1.1 billion. It's netting about $500,000 per member of the "Powered by HTC" team in a deal that also includes the non-exclusive licensing of HTC intellectual property.

What's not to love about $1.1 billion in cash? Except that HTC doesn't need cash, it needs profits.

What HTC is not doing is selling its factories, and Chief Financial Officer Peter Shen told a press conference there are no plans to eliminate staff (beyond those it's selling to Google). That means overheads for running production facilities remain. Those costs are not what they were -- depreciation is about 4 percent of revenue, around half of that being for machinery and equipment. But there's a manufacturing staff to maintain, and HTC needs to look for savings wherever it can.

The transfer to Google will reduce headcount by about 19 percent, according to Bloomberg Gadfly calculations. Those are probably among the most expensive people on the payroll; arguably they also add the most value. To be clear, HTC still has a solid team of engineers that works on its branded devices, such as its flagship U11 smartphone, which isn't touched by the sale. "Powered by HTC" is the division primarily tasked with building products for non-HTC brand devices, such as the Google Pixel.

For HTC, the main point of this deal is to cut costs. It will do that with a 30 percent to 40 percent reduction in operating expenses, Shen said.

Unfortunately, based on financial results for the past six quarters, a 40 percent improvement in op-ex still isn't enough to swing HTC to profit. Deeper cuts are needed. A 35 percent cut in the second quarter would have put the company in the black (barely) for that period, but revenue for the most recent two months indicate that this June quarter bounce was a fluke rather than a trend. HTC may well move in and out of profit, but there's nothing to indicate this can be sustained.

Even those calculations don't take into account the possible loss of revenue from transferring 2,000 engineers to Google and the resulting reduction in sales for the Pixel. And helping Google make better phones that compete with HTC's own brand doesn't look like a solid strategy.

HTC says it wants to use the larger cash pile to invest in future technologies and businesses. Beyond smartphones, a declining sector for the company, that future is built around virtual reality.

HTC's Vive headsets were released almost 18 months ago and sold for about the same price as a high-end smartphone. A continued slide in revenue for HTC since then suggests these products aren't gaining traction -- at least not on the scale once enjoyed by smartphones -- and it's since had to slash prices to keep up with the likes of Facebook Inc.'s Oculus and Sony Corp.'s PlayStation VR. This price war won't end soon.

In finally entertaining the idea of selling parts of the business, Chairwoman Cher Wang showed much-needed pragmatism. Sadly for HTC, its investors and its loyal fans, she failed to undertake the deeper re-engineering the company really needs.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

To contact the author of this story: Tim Culpan in Taipei at tculpan1@bloomberg.net.

To contact the editor responsible for this story: Paul Sillitoe at psillitoe@bloomberg.net.