2018 saw the emergence of a stronger, more agile innovator in HTC. Two significant transitions were set in motion over the year that are revitalizing the Company and providing fresh impetus to move forward as a dynamic technology powerhouse.
First, there has been an alignment across the whole Company around our vision of VIVE Reality, announced last year, whereby key technologies such as virtual and augmented reality, artificial intelligence, high-speed 5G connectivity and emerging technologies like blockchain will be combined in multiple ways to create richer immersive experiences that will change our lives. These fundamental building blocks are increasingly being applied across our product portfolio, and HTC is keenly focused on investing in the technologies and the talent to develop them.
This alignment afforded a unique opportunity to fully integrate the sales, marketing and operations functions for the VIVE and smartphone businesses in the regions, undertaken over the year, which has removed barriers between departments and promoted synergies. The impact has been remarkable: HTC earned a record number of awards at the Consumer Electronics Show (CES) in Las Vegas in January 2019, surpassing our great performance in 2018 by over 20%, and there is a new spirit of innovation and determination across the Company.
The second transition involves HTC being reimagined as a complete ecosystem company, encompassing not only our bedrock expertise in hardware and software integration, and extending our content creation and platform activities, but adding services such as enterprise VR solutions that provide genuine value to our customers, as well as expediting adoption of the technology. In playing a greater role in enabling VIVE Reality, HTC is creating new revenue and margin opportunities over the medium to long term. To achieve this, we are reshaping our hardware development processes with a view to optimizing our returns across software, platform and services, and have increased our skill base and dedicated the necessary resources to achieve this objective.
In 2018, we saw progress across all of these business areas. Alongside the premium VR and smartphone hardware offerings launched over the year, our VIVEPORT VR content store continued to gain traction among headset owners, and our VIVE Wave SDK has started driving our platform across products from partner hardware companies in the VR ecosystem. It is of note that the 36 awards gained at CES 2019 covered hardware, software and platform innovations: a first for HTC. Additionally, we created a new business unit dedicated to the burgeoning enterprise VR market, an offering that goes far beyond our traditional hardware sales model into consultancy and services, serving customers in manufacturing, design, retail, automotive, aeronautics, education, healthcare, and location-based entertainment; markets not traditionally addressed by HTC.
HTC continues to invest heavily yet wisely in new technologies and processes to ensure that we retain our leadership in innovation in all key areas, as we believe this is the right strategy to drive the Company forward into the era of VIVE Reality.
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.
Smartphones and Connected Devices
HTC smartphones saw numerous feature enhancements in 2018, including to HTC’s innovative Edge Sense ‘squeeze’ technology for more intuitive one-handed interactions, as well as wider-angle front cameras to create better selfies. High-efficiency, low-distortion earphone amplifiers greatly enhance the sound effects of the built-in speakers.
The flagship smartphone of 2018 was the HTC U12+, which was launched in May 2018 to considerable acclaim, and was followed later in the year by the HTC U12 life, incorporating some of the key features of the HTC U12+, including the 18:9 widescreen format, and 4K video capability. For the mid-tier market, the HTC Desire 12 and Desire 12+ phones launched in Q1 2018 in certain target markets; these phones followed the smart design and advanced photographic features of the HTC U series, and the HTC Desire 12+ boasted a large 6” display.
HTC also innovated laterally on the smartphone platform with the HTC EXODUS blockchain phone, enabling consumers to own their digital keys, a vital step in empowering consumers to control their own digital identity, data and virtual creations. This concept continues to be developed, to make the benefits of blockchain technology more accessible to consumers.
Finally, the smartphone and connected devices team has focused considerable R&D resources on 5G communication technologies, the next generation of high-speed connectivity. The large bandwidth and low latency of 5G will be a game-changer for industry and business as well as home applications, and HTC is widely acknowledged as having advanced capabilities in wireless technologies, as demonstrated with numerous industry firsts with communications technologies in our history. The first product in this new line is the HTC 5G Hub, demonstrated in late 2018 and launched at Mobile World Congress (MWC) in February 2019, with some of the world’s leading telecom carriers joining as launch partners, including Sprint in the US, Telstra in Australia, and Deutsche Telekom, Elisa, Sunrise and Three in Europe. This all-new smart sensor hub system provides an all-new user experience, and a more intuitive and more convenient operating experience at home, in the office and on the go. We look forward to forging a deeper partnership with carriers as the HTC 5G Hub rolls out globally.
HTC’s VIVE virtual reality business had another bumper year, with numerous targeted hardware, content and platform announcements. For the enterprise market, HTC launched the VIVE Pro at CES 2018, and the VIVE Pro Eye a year later, another VR headset aimed at professional users featuring precision eye-tracking and foveated rendering for optimized performance as well as greater feedback for developers on their content environment.
Early 2019 saw announcements on VIVE Focus Plus, an enhanced model of the standalone VIVE Focus launched the previous year, with 6 degrees of freedom control, and early demonstrations of VIVE Cosmos, the next generation headset with modular functionality, which will be launched later in 2019.
Our VIVEPORT VR content store continued to grow its user and subscriber base over the year, and in early 2019 announced VIVEPORT Infinity, an all-you-can-eat subscription model for VR content, similar to the Netflix model for movies. Across all platforms, there are now over 4,500 titles for VIVE headsets, a 50% increase over the previous year.
2018 was a stellar year for VIVE Studios, with the production of the world’s first feature-length VR film, ‘7 Miracles’, which won best VR film at the Raindance Film Festival at the end of 2018. It published content for entertainment, such as the ‘Ready Player One’ open world titles, and for enterprise, targeting training, healthcare, fitness and education applications. VIVE Studios also launched the VIVE Libraries program in over 110 public libraries in the US, featuring 40 education and experiential titles, to help democratize access to VR.
VIVE ORIGINALS, the Taipei-based VR entertainment content team, saw the co-produced titles ‘The Deserted’, ‘5x1’ (five VR short films directed by Chinese golden-awarded directors) and the ‘Gloomy Eyes’ VR animation featured at numerous international film festivals to great acclaim, while ‘Circus Galactica’ was featured in ‘America’s Got Talent’, the first time for a VR-interactive performance at this reality show.
VIVE Arts continued its important VR outreach work with the world’s leading art galleries, museums and artists. Following the success of the exhibitions at the Tate Modern and the Royal Academy of Arts in London and the National Palace Museum in Taipei, VIVE became the first ever VR partner of Art Basel, the leading international art fair, presenting new works by contemporary artists in both 2018 and 2019. The ‘Up the River During Qingming’ experience at the National Palace Museum and Monet exhibition at Paris’ Orangerie were spectacularly immersive journeys into two of the world’s classic artworks, while the T. Rex experience at the American Museum of Natural History brings pre-history back to life. As a teaching tool or an art medium, immersive VR is proving a welcome complement to the traditional art environment.
HTC’s VIVELAND VR arcade program, launched in Taipei in 2016, has extended both within Taiwan and further afield, with a new arcade opening in Hong Kong in January 2019 and another coming to Korea shortly. The VIVELAND concept itself has been successfully transplanted in Japan, China and Hong Kong, with plans to enter the Middle East and Southeast Asia in 2019, bringing this exciting location-based entertainment format to a wider audience around the world.
Finally, the VIVE X accelerator program is now the world’s most active investor in the VR space, with over a hundred companies in the portfolio, and added London to the locations in Taipei, Beijing, ShenZhen, San Francisco and Tel Aviv. Over a third of the companies are involved in enterprise applications, reflecting the importance and potential of this market.
HTC DeepQ Healthcare
The HTC DeepQ Healthcare business unit comprises cross-domain experts and engineers in areas such as computer science, software engineering, medicine, regulations, user experience, design, through virtual and augmented reality, big data and artificial intelligence technology, with the goal of developing and providing precision personalized medical products and services to reduce costs and improve the effectiveness of healthcare. Several AI innovations were launched over the year, including medical service chat robots for general healthcare, epidemic prevention and disease management.
January 2018 saw the completion of the business cooperation agreement with Google Inc., and the transfer of US$1.1 billion to HTC contributed to a net income for the year of NT$12.0 billion, corresponding to an earnings per share of NT$14.72.
On the operations side, the nascence of the virtual reality market combined with continued intense competition in an ever more saturated smartphone market with longer product replacement cycles, sustained the pressure on business performance over the year, with total revenues coming in at NT$23.7 billion, with a gross margin of 2.2% and an operating margin of –58.8%. The sequential increase in gross margin over the year reflected the change in portfolio mix, as well as our continued focus on reducing operating expenditure across the business.
The integration of the sales, marketing and operations of the VIVE and smartphone businesses in the regions enabled the company to streamline internal expenditure and processes as well as external costs, while further cost-savings were realized by realignment and reorganization across manufacturing operations, property management, internal systems and platforms, and administration. The changes put in place over the year will place the company on a stronger financial footing going forward.
HTC continues to advance factory automation and testing across all product lines, continually improving quality standards and customer satisfaction ratings, at the same time transforming the cost structure of the business; over the latter half of 2018, manufacturing cost reductions have comfortably exceeded strict target levels. Today, there is much closer collaboration between manufacturing and the R&D teams to optimize production and continuously improve manufacturing processes, as well as seeking areas to reduce our emissions and raise our power efficiency.
The transition of our ‘Powered by HTC’ teams to Google early in the year went very smoothly, with Google sharing HTC buildings in both our Taipei and Taoyuan facilities.
As HTC transitions to a full ecosystem company, data security becomes a major objective for the Company, to ensure customer trust and reassurance. Accordingly, our IT and Legal teams executed a full company roll-out of the EU’s strict new data protection directive, the General Data Protection Regulation that came into force in mid-2018, which defines the way consumer data is handled across every sector. The internal roll-out included comprehensive training in all regions and with all relevant functions, and an external audit awarded HTC full compliance with the GDPR requirements as well as BS10012 certification in late 2018.
At the end of a year with significant positives, we wish to express our appreciation to our shareholders, and look forward to your continued support as we complete our transition to a full ecosystem company.
David Bruce Yoffie
Daniel Wu (Yeong-Cheng Wu)
Member of the Compensation Committee