I almost choked on my latte last week when I read a report from Ernst and Young that arrived in my inbox, unaware of the turmoil that it was about to create.
“Profit warnings up by 24 per cent in the first quarter and software and computer services fared worst,” screamed the research report headline. Surely this could not be the case. The software and services fragment of our sector has been keeping us afloat. It is its slothful and sluggish cousin, the hardware sector, that has been misbehaving so badly.
But as with any kind of research, the devil, as they say, is in the detail. So software and computer services, the most unlikely piece of the IT sector pie to be under any pressure (or so we have been lead to believe), has doubled profit warnings in Q1 compared with the previous quarter. This was especially confusing, because since the dot-bomb era, strategists and experts have been calling for IT firms and the channel to rely more and more on services. Software has even been touted as the very future of IT.
However, a closer look at the report from E&Y reveals the truth behind the numbers. The only reason why software and services have doubled profit warnings, over the more tetchy and nervous IT hardware sector, is that there are simply more listed software and services companies.
In reality, only six per cent of firms in the software and services sector issued a profit warning, compared with eight per cent in the hardware sector, and 14 per cent in the mobile telco sector.
However, E&Y makes the interesting distinction that there is a strong correlation between take-overs and profit warnings. The research found that more than one-third of companies that were acquired in Q1 had issued profit warnings in the previous 12 months. Perhaps profit warnings do not mean that a company is in trouble. In fact, as the report points out, most investors – be they companies or venture capitalists – now see the words ‘profit warning’ as a euphemism for ‘for sale’.
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