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July 20 2008
Source: Ft.com
The UK technology reporting season kicks off this week and, in contrast to other sectors of the economy, managements are likely to express cautious optimism for the coming six months.
The eclectic mix of outsourcing companies, hardware re-sellers, consumer electronics components providers and industry-specialist software providers have so far largely avoided the repeated dire warnings that have blighted the banking, housing and retail industries.
Companies such as Autonomy, SDL, Wolfson Electronics and Telecity are likely to follow the industry leaders such as Google, IBM and Intel in telling investors that while cautious about the future they see further earnings growth in the rest of the financial year.
Far from being the canary in the coalmine that signalled the onset of the downturn in 2001, earnings in the sector have remained resilient.
Yet the relative optimism has not been shared by the stock market. Until the broader stock market’s fall in recent weeks, the FTSE 350 Software and Computer Services index and FTSE 350 Hardware and Equipment index had underperformed the FTSE All-Share index during the past nine months by 15 per cent and 20 per cent respectively. Technology was sold off last November when signs appeared that the credit crunch could have a lasting effect.
There are various factors that explain the disparity between the two views.
Companies and analysts agree that the difference between the last
There are few ambitious information technology projects, managements have learnt a great deal, and the reliance on IT in the workplace and the proliferation of laptops and BlackBerrys means IT spending cannot be cut back as it was in 2001.
Although technology is cyclical and a beta sector in the real economy, it is now late cycle, said George O’Connor, an analyst at Panmure Gordon.
In the main, tech spending is sticky, with about 80 per cent being geared to keeping the existing fabric of companies intact.
However, in spite of technology’s importance to the economy and society, few expect it to remain immune from any downturn. Gareth Evans, an analyst at Investec Securities, argues that effects are only likely to be delayed.
Larger contracts, from procurement to completion, can span many months or years, he says.
Companies have not not stop their IT projects mid roll-out but continued with them.
However, as these older projects come to an end, attention will move to new projects, which we believe managers will be unwilling to commit to in the current climate.
Mr Evans fears that the climate could begin to worsen in the latter part of 2009. Mr O’Connor agrees: Investors should prepare for bad news next year, not this year. We will be downgrading earnings estimates, but not yet, he says.
Adding to such concern is evidence that the IT jobs market is tightening for contractors, with skilled staff seeking out permanent positions.
The Philadelphia Fed index, which measures US companies capital expenditure plans, has shown a year-on-year decline for several months.
Karl Havers, senior partner at Ernst & Young, says he would be astonished if there were not profit warnings in the sector in the next six months as projects are cut back.
But there are bright spots, he says, pointing out that companies are likely to be focused on improving what they’ve got.
Outsourcing remains a bright spot and is quite counter-cyclical, he says.
Other areas that he expects to be relatively insulated from a downturn include companies focused on the public sector, security and green IT projects.
IT remains one of the industry’s largest polluters, he says.
However, technology is so vital, companies can push back projects six months but it won’t go away.
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