Letter to Shareholders
In the year that HTC celebrated its 20th anniversary, we want to express our deep appreciation towards our shareholders for your dedicated support and commitment to our pursuit of brilliance.
Over the last three years, we"ve been working hard to position HTC for the future, focusing on delivering the innovation and technology that defines HTC and devoting the necessary resources to create great products. We produced another strong year of innovation in 2017, recording more technology firsts and consolidating our position as thought leaders across our product groups.
In September 2017, we entered a ground-breaking business cooperation agreement with Google, Inc., whereby the "Powered by HTC" engineering and technical teams working on Google"s Pixel smartphones were transferred to Google in a deal worth $1.1 billion. Building on our decade-long strategic relationship with Google, this agreement allows us to strengthen our HTC-branded smartphone business, enabling a more focused product portfolio, greater operational efficiency and financial flexibility. It also enables HTC to continue investing in emerging frontier technologies, including VR, AR, AI, Smart IoT and Blockchain which will be vital across all of our businesses and present significant long-term growth opportunities.
This agreement also represents a substantial investment in Taiwan as a key innovation and engineering hub, and it is a true testament to the engineering and innovation powerhouse that HTC has built over the last twenty years. The teams that have been transferred to Google will continue to play a key role in building the Android ecosystem for the benefit of the whole industry.
This move, combined with the significant effort we have made in strengthening and investing in our innovation teams, streamlining our business processes and reducing our operating expenditure over the past three years, has created a solid foundation on which we can build the future of HTC.
HTC VISION: VIVE Reality
Early in 2018, we defined a new vision for HTC, a vision to unite all teams and businesses around a single direction: VIVE Reality.
VIVE was founded three years ago on the uniting of humanity and technology to unleash the imagination. VIVE Reality describes the convergence of Virtual and Augmented Reality (VR and AR), artificial intelligence (AI), high-speed connectivity and other emerging technologies, where humans interact with virtual and augmented reality environments naturally and natively. 5G and subsequent wireless connectivity standards will usher in a whole new era of experiences that will truly revolutionize the way we live, work, and play. Light-speed data transmission and edge computing will enable access to immersive content anywhere, in real time. In this new ecosystem, smartphones will continue to play a vital role, and indeed will be the first step towards 5G for most of us, although they may take on different forms in the future as the need for device-based computing power diminishes. 5G and AI are complementary technologies for VR and AR, enabling each device to provide the most immersive experiences for consumers and enterprises.
This convergence of technologies is reflected in HTC"s realigned organization, with the VIVE and smartphone businesses collectively able to leverage the technical expertise and extensive experience of the diverse, world class design, engineering and manufacturing teams within HTC. This will enable us to continue to create beautiful, considered and intelligent products that empower our customers to pursue their own brilliance.
Smartphones and Connected Devices
The HTC-branded smartphone business remains a strategic business for HTC. Smartphones are with us 24 hours a day; they are our digital hub and our primary connection to friends and family. HTC has a long and distinguished history in this industry, and we continue to raise the bar for innovation.
2017 saw several industry-first smartphone innovations introduced in the new family of smartphones called the U series, which included the flagship HTC U11, the HTC U11+ and the HTC U11 life.
For many years, interactions on smartphones have centered around on-screen interaction, but the HTC U11 introduced the next dimension in touch interaction: the squeeze. HTC Edge Sense is an unprecedented, intuitive way to interact with your smartphone, allowing users to launch and operate their favorite applications with a simple squeeze of their phone. HTC Edge Sense also featured in the HTC U11+ smartphone launched later in the year.
Our camera technologies were unparalleled in 2017, with smartphones designed by our teams taking the top three scores in the independent DxOMark industry benchmark. The HTC U11 achieved the highest ever ranking for a smartphone camera at launch. At the same time, our audio technologies were further refined, with HTC USonic offering personalized audio settings and the most advanced headset for personal audio, which even included active noise cancellation.
2017 was the year that AI came to smartphones with HTC Sense Companion, with the HTC U11 introducing the world to both Google Assistant and Amazon Alexa personal assistants available at the simple utterance of their respective wake-up phrases.
Finally, there was a new design language for all U series smartphones in the form of a seamless, curved "liquid glass surface", created using a specialized technology for a remarkable reflective finish in strong colors, some with a stunning dual-tone effect.
In line with HTC practice, we will continue to bring flagship technologies to the wider market smartphones, with several features of the HTC U series set to feature on mid-range phones in 2018. We were delighted to launch our latest flagship, the HTC U12+, in the first half of 2018, gaining wide media coverage and strong acclaim. We also announced Project Exodus, an innovative framework for the best crypto networks. Working with the blockchain community, Project Exodus will result in a new smartphone to power the decentralized web for users more concerned about their privacy.
HTC VIVE Virtual Reality
The HTC VIVE has been firmly established as the industry leader in PC-based virtual reality (VR), and HTC has put considerable resources into building a thriving development environment. We are expanding the VR hardware and platform ecosystem to enable the whole industry to grow through the creation of compelling content and rich experiences. The VIVE business unit retains its four distinct business areas, covering hardware, platform, content generation, and an accelerator program.
The HTC VIVE virtual reality system saw continued sales momentum over the year, with a price reduction to spur wider access in advance of the launch of the new headset, the HTC VIVE Pro, which was revealed at the Consumer Electronics Show (CES) in January 2018 to wide acclaim, winning many "best in show" awards. A full headset upgrade with greatly enhanced resolution and built-in audio as well as improved design, the HTC VIVE Pro started shipping in Q2 2018. 2017 also saw the launch in China of the VIVE Focus, the first standalone headset in the VIVE series, which has been strongly welcomed, especially by the enterprise sector.
Beyond the headset, HTC launched two other innovations serving to expand the VR ecosystem: first, the VIVE Tracker, a device that can be affixed to real-life peripheral accessories and tracked by the base stations in the same way as the controllers. The Tracker has proved popular for applications like VR Sports, where it can be affixed to a table tennis paddle or a baseball bat for that authentic feel. Second was the VIVE Wireless Adaptor, also announced at the CES show in 2018, which allows users to "cut the cord" and experience VIVE PC VR untethered.
The VIVE Focus launch saw the launch of the VIVE WAVE Open Platform, which is aimed at bringing together the highly fragmented mobile VR market by creating a common platform and storefront across multiple hardware vendors, enabling easy mobile VR content development and device optimization. Numerous content developers have already built VR content optimized for VIVE Wave, with more set to join as the platform gains momentum.
The VIVEPORT VR app marketplace has grown considerably in the past year, and now hosts over 1,000 content titles globally, providing an exceptional platform for content developers to promote their titles and enable greater monetization opportunities. During 2017, VIVEPORT Subscriptions was introduced, whereby subscribers can try five titles a month, which has created a consistent and growing revenue stream as well as building customer loyalty.
Content is a critical aspect of the VR ecosystem, with the number of titles across VIVEPORT and Steam at over 3,000 by early 2018. The VIVE platform received a boost in 2017 with the publication of Triple-A games for the HTC VIVE, including major franchises such as Star Trek: Bridge Crew, Doom VFR, L.A. Noir and FallOut 4, with more set to follow in 2018. These titles deliver hundreds of hours of gameplay, bringing the original PC games to life in room-scale VR with the HTC VIVE, and it is anticipated that these popular brands will provide fresh momentum to the adoption of VR among more mainstream consumers.
VIVE Studios, the content production engine for VIVE, saw the publication of several popular titles in 2017, including Front Defense. VIVE Studios continues to enhance its in-house content design and engineering capabilities, and it invests in external projects to produce compelling content in both gaming and non-gaming fields.
The VIVE X accelerator program executed its third batch of companies in 2017, and added Tel Aviv to its Beijing, Taipei, Shenzhen and San Francisco roster of locations, with London to roll out the first European batch in 2018. Over thirty companies per batch have taken part, focused on developing VR content, applications and tools that take VR into new areas and enhance VR operations.
Other new initiatives launched in 2017 include:
- VIVE Arcade: 2017 saw the first wave roll-out of VR arcades globally, with VIVEPORT Arcade creating a new revenue stream for developers and arcade owners. As the number of games designed for arcades grows, HTC sees arcades as the ideal forum for a wider group of consumers to try VR with minimal outlay and experience the immersive HTC VIVE.
- VIVE Arts: a multimillion dollar fund to enable and preserve cultural heritage for the world, and to democratize creation and artistic expression in the arts. VIVE Arts addresses a diverse, global audience and contributes to the knowledge and enjoyment of our cultural heritage, both in museums and in the home. HTC VIVE has helped bring exhibitions to life in the National Palace Museum in Taipei, and the Tate Modern and Royal Academy in London, among many others.
- VR for Impact: a multimillion dollar fund to inspire innovators to create compelling content that drives awareness around the United Nations "Sustainable Development Goals"; including experiences that make us more proactive in helping humanity solve some of the most difficult challenges facing our world today. Current content highlights global problems like deforestation, and the mass demise of honey bees; there are also applications for medical training and treatment in remote areas. In early 2018, HTC opened up this initiative to work with the World Economic Forum for wider engagement and thus greater impact.
The enterprise market continues to recognize the value of totally immersive VR in enhancing their business processes and collaboration activities, with companies both large and small around the world adopting the HTC VIVE for their strategic applications. Top-tier automotive and airline companies number among VIVE users, and there has been rapid growth in medical, healthcare and retail applications. With VR looking set to become a mainstream consumer technology in the near future, we look forward to the VIVE becoming a material contributor in HTC"s portfolio.
HTC continued its on-going drive for operating efficiency over the year, and we have stepped up those efforts following completion of the cooperation agreement with Google in early 2018, undertaking a significant realignment of smartphone business resources in order to bring operating expenditure in line with current and anticipated business needs. The consolidation of Company processes and management structure changes have clarified organizational objectives and will drive greater efficiency across the regions, enabling a stronger, clearer focus on innovation for all teams.
Over 2017, HTC earned NT$62.1 billion in revenue, with a gross profit of NT$1.3 billion and a gross margin of 2.16%; however, the operating margin of -28.05% led to a net income of -NT$16.9 billion, corresponding to an earnings per share of -NT$20.58.
While keeping a keen eye on expenditure, HTC continues to invest in key technologies that will enable the Company to leapfrog current generation product trends and drive our vision of VIVE Reality.
HTC takes our responsibility as a corporate citizen seriously, especially as a manufacturer, and makes every effort to conserve resources, and reduce waste and our carbon footprint.
HTC continued to work hard at further improving our energy management at our manufacturing facilities in 2017, achieving an electricity use reduction rate of up to 49.83%, compared to 42.26 % for 2016. The corresponding reduction in carbon emissions represented a greenhouse gas emission reduction of up to 50.20%, again comparing favorably to 2016"s 42.69 %.
Progress was also made regarding the green fields and planted areas inside the factories, which are irrigated with recycled sewage water to avoid increasing total water consumption. This contributed to a sewage recycling rate of 73.99% in 2017, up from 72.54% the previous year
HTC is committed to smart, sustainable growth, and we strive to maximize our contribution towards a better world.
Our Pursuit of Brilliance is never-ending, and we have the right strategy, world-class talent and a heritage of innovation that will drive HTC"s next stage of growth. As we look ahead, I am confident that our core strengths of innovation, engineering and system integration, combined with our strong IP portfolio and commitment to platform development, will continue to be the foundation for our success.
CEO and Chairwoman