Technology firms increase profit warnings

Ernst & Young survey says a third of such businesses issued warnings last year

2007 is destined to be a difficult year for technology with a third of companies warning on profits in 2006, according to a survey by Ernst & Young.

The consultancy's Quarterly Profit Warnings Report says over the course of last year, out of the 49 FTSE technology and hardware equipment companies 16 issued 21 profit warnings as the sector was hit by weakened product demand.

Profit warnings in the sector rose by 40 per cent year-on-year, with 15 warnings in 2005.

Delayed or discontinued contracts and difficult trading conditions were increasingly cited as reasons for the warnings.

Several warnings came from the semiconductor vendors supplying consumer electronics and mobile handset manufacturers.

John Hughman, senior technology analyst at Ernst & Young, said: ‘Although 2006 is expected to be another record year for worldwide semiconductor sales, a comparative lack of scale means UK technology hardware vendors have been exposed to industry volatility.’

‘UK companies tend to focus on fewer product applications, which means they can suffer if a particular niche product underperforms, even when the wider market is buoyant. It also means single customers are more likely to account for a higher proportion of revenues, increasing the risk from contract delays,' he said.

Bigger players are feeling the pressure along with smaller companies as four of the warning companies in 2006 have a turnover of between £210m and £1bn.

However, the report says that new product launches such as Apple’s iPhone, could revitalise the sector in 2007.

‘Accelerated cyclicality is a perennial feature of the technology hardware industry, but companies are getting much better at managing these peaks and troughs. The UK has several world leading vendors, particularly in the semiconductor space, and the innovative products they deliver provide a solid platform for near-term recovery,’ said Hughman.

In other sectors, 42 software and computer services companies (23 per cent of the FTSE total of 181 software and computer services companies) issued 55 warnings in 2006.

Out of the 42 companies, two companies issued profits warnings three times and nine made warnings twice.

Meanwhile, support services companies issued 44 profits warnings in 2006.

What do you think? Email us at: [email protected]