Letter to Shareholders

Dear Shareholders,

Over 2019, HTC’s continued laser focus on innovation paid off, with numerous product highlights acrossour hardware, software, platform and services, strengthening HTC’s position in the global technologymarket. HTC remains intent on driving our vision of VIVE Reality, investing in the key technologies of virtual and augmented reality, artificial intelligence, high-speed 5G connectivity and emerging technologies like blockchain to drive a world where technology will fade into the background and human experiences will come to the forefront.

At the time of publication, much of the world has been afflicted by a new coronavirus pandemic (COVID-19)that is disrupting society in dramatic ways. Governments have imposed isolation policies on billions of people, requiring an immediate transition to home-based working, entertainment, education and communication. Through our VIVE virtual reality systems and platforms, HTC is helping to bridge those distances, working with strategic content and platform partners to enable remote socializing, meeting,collaborating, learning, training, wellness, and much more. And while major industry events such as Mobile World Congress 2020 have been cancelled to prevent further spread of the virus, HTC proceeded with 2020 VIVE Ecosystem Conference completely virtually, with over 2,000 people joining in VR and a million watching the livestream in many countries around the world, demonstrating our thought leadership and pioneering spirit. With our clear vision and focused product and platform strategy, HTC has prepared well to facilitate society changes and seize the opportunities arising from this and future transitions.

HTC’s drive to enhance our operations, create a more balanced structure and be more thoughtful in our product decisions over the last few years has enabled HTC to commence its transformation into the next stage of its development. Accordingly, the Board of Directors appointed Yves Maitre as Chief Executive Officer in September 2019 to continue that transformation. A veteran executive of Orange, the leading telecom operator, Yves brings a deep reserve of experience in consumer and technology markets, and industry partnerships to HTC.

In terms of product success, HTC earned 36 awards at the Consumer Electronics Show (CES) in Las Vegas in January 2019, covering hardware, software and platform offerings. The VIVE Pro Eye earned a ‘Best Invention of the Year 2019’ award from Time Magazine, while the first product in our new 5G portfolio,the HTC 5G Hub, won ten awards at Mobile World Congress the following month, impressing carriers and consumers alike with its powerful connectivity and versatility. With such a strong foundation of technical expertise and market experience, HTC expects to continue driving innovation into 2020 and far beyond.

Product Strategy

In line with our VIVE Reality vision, HTC has focused on developing and implementing the core technologies of virtual reality, 5G connectivity, blockchain and artificial intelligence across our portfolio,and developing the platforms and content necessary for complete ecosystems to drive implementation and user adoption.

Smartphones and Connected Devices

Given the high levels of investment globally into forthcoming 5G mobile networks, HTC maintained a keenfocus on 5G in 2019 to ensure a key position in this fast-developing ecosystem. The first product in thisseries, and one of the world’s first 5G devices, the HTC 5G Hub, was launched at Mobile World Congress in February 2019, with leading telecom carriers joining as launch partners. The 5G Hub combines three devices in one compact form factor: a 5G-supported hotspot and a router that allows up to 20 users to benefit from the ultra-fast connectivity, and a plug-and-play entertainment hub for 4K video streaming and low-latency gaming, providing a convenient way to integrate the burgeoning 5G connectivity into homes and offices as well as on the go. The 5G Hub maintained momentum over the year, with more telecom carriers realizing its potential to help drive 5G adoption among their customers. HTC will continue to focus on product offerings that take full advantage of 5G for multiple market segments.

Also in 2019, HTC launched four highly targeted mid- to low-level smartphones: the HTC U19e, Desire 19+,Wildfire X, and Desire 19s in select markets around the world.

VIVE Virtual Reality

HTC continued to gain the world’s attention and numerous awards over 2019. Most importantly, HTC once again redefined premium VR with a high-quality user experience for both consumers and enterprise through revolutionary hardware and software applications as well as content services.

At CES 2019, HTC unveiled the brand new VIVE Pro Eye headset. With the growth of commercial VR demand, the launch of VIVE Pro Eye introduced eye tracking technology to the VR sector, with applications including advanced training and eye movement-based data analysis, providing professional users with a way to continue to improve how we interact and work with VR. The VIVE Pro Eye integrates artificial intelligence to deliver far greater accuracy in tracking human behaviour and attention, leading to more sophisticated commercial, training and educating techniques, as well as enabling foveated rendering for greater power efficiency.

For standalone VR, the latest generation VIVE Focus Plus started shipping in April 2019. Designed to meet training and collaboration needs of enterprise users, the VIVE Focus Plus is a professional-grade all-in-one VR headset with six degrees of freedom, enabling users to seamlessly interact with their virtual environment with the same freedom as PC VR devices.

Later in the year, the VIVE Cosmos was launched, representing a new approach to PC VR. Delivering the most impressive VIVE visual resolution yet, the VIVE Cosmos enables a dive into virtual reality with a much simplified setup and inside-out tracking for plug-and-play portability, with no need for base stations.

Six camera sensors expand the range of motion, with accurate inside-out tracking via a wide field of view and six degrees of freedom support. VIVE Cosmos also heralds the era of being able to tailor the VR experience with a forthcoming range of modular faceplates that change the functionality of the device, providing an adaptable headset that can grow with users.

VIVE Cosmos was the platform of choice for the highly successful VIVE Arts collaboration with the Louvre museum in Paris, where an engaging insight into the Mona Lisa painting was experienced by thousands of visitors to the museum’s remarkable exhibition to mark the 500th anniversary of the passing of Leonardo da Vinci. VIVE Arts participated in other exhibitions around the world, including at the National Palace Museum in Taiwan, and again worked with contemporary artists on acclaimed VR installations at Art Basel Hong Kong and the Venice Biennale, while VIVE Originals collected numerous awards for its coproduced VR movie shorts at international film festivals.

For the development of VR and AR, we believe that it is important to focus not only hardware, but also on software, platforms, services and associated content. In 2019, we launched the world’s first new unlimited cross-brand virtual reality subscription service, VIVEPORT Infinity, and our new VR portal interface, the VIVE Reality System, which significantly updated the presentation interface of the VIVE platform. The VIVE Reality System is an entirely new design philosophy for VR, designed to make VR feel less like launching apps and more like stepping between worlds.

The VIVE X accelerator program continued in six cities around the world, attracting exciting talent to the program to create new tools, applications and solutions in the VR space and beyond. The proportion of companies involved in enterprise applications increased in 2019, reflecting the importance and potential of this market.

The wide implementation of isolation and distancing practices prompted by the COVID-19 pandemic has changed the way we interact with each other, and we recognize that in every disruptive change in the world, there arises opportunity for technology to improve our lives. Accordingly, during the lockdowns, we have broadened access to our Viveport content store to enable people to enjoy entertainment and learn more about our world in VR, as well as run pilots of our VIVE Sync virtual business meeting application. We envisage that the current conditions will extend the trend towards remote working and online lifestyles long after the pandemic subsides, and that VR will increasingly come to the forefront as the most realistic in-person remote working experience.

Looking ahead to 2020, we expect to continue to introduce more breakthrough software and hardware products in the VR and AR fields. Since VIVE Reality involves the combining of VR with AR, 5G, AI, and blockchain technology, the launch of 5G commercialization in 2020 is expected to be a huge breakthrough both for the VR and AR industries.

Financial Performance

Over 2019, the Company continued the important work of streamlining operations, reducing expenditure where prudent while investing in new technologies, with an 18% reduction on operating expenditure from NTD 14.5 billion to NTD 11.9 billion. HTC has exerted considerable effort into refining the product mix to raise margins, with significant success, seeing sequential quarterly gross margin increases over the last two years; in 2019, gross margin was NTD 2 billion, representing strong year on year growth from 2.2% to 20.3%.

While positive trends could be seen in key product areas, overall business performance was again put under pressure; in 2019, HTC earned revenues of NTD 10 billion, gross profit of NTD 2 billion, and net loss after tax of NTD 9.4 billion. However, we believe the operational and portfolio changes put in place over the year will position HTC well for the next few years.

Social Responsibility

HTC continues to enhance operations in the factory and our R&D and testing labs, improving manufacturing processes and quality standards, as well as seeking areas to reduce our emissions and raise our power efficiency.

HTC was proud to be awarded a gold medal in recognition of our EcoVadis CSR Rating 2019, which assesses a wide range of corporate social responsibility indicators in the core areas environment, labour and human rights, ethics, and sustainable procurement. In addition, HTC continues to combat climate change, calling on supply chain partners to jointly continue evaluations and actions on climate change measures. In the Carbon Disclosure Project, the world’s largest carbon disclosure platform, HTC has attained management level in the climate change rating and leadership level in the supplier engagement rating.

HTC actively promotes the concept of waste reduction through concrete measures such as the classification, recycling and management of waste at the front end for employees to reduce waste generation as well as setting dedicated areas for general waste, resource recycling, and kitchen waste to facilitate resource recycling and reuse, to reduce the amount of waste produced, and to improve on the cleanliness of the environment. As an illustration of this, HTC’s waste recycling rate has increased from 57% in 2011 to 85% in 2019; a remarkable achievement.

In early 2020, HTC was swift to implement appropriate measures to prevent the spread of COVID-19 in our offices across the globe to protect our most important asset, our talents, in line with and often exceeding the advice of local government and health officials, and continue to monitor the situation closely.

HTC would like to warmly thank our shareholders for their continued support. With the new leadership in place, HTC looks forward to another strong year of execution and improved operational performance as we maintain our path towards VIVE Reality.

Cher Wang
Chairwoman

HT Cho
Director

Wen-Chi Chen
Director

David Bruce Yoffie
Director

Chen-Kuo Lin
Independent Director

Josef Felder
Independent Director

Vincent Thai
Independent Director

Daniel Wu (Yeong-Cheng Wu)
Member of the Compensation Committee