Profit warnings from small software firms rise

But figures are not necessarily cause for concern

Profit warnings from small firms are on the rise

More than one in four of the UK’s publicly-listed software and services firms have issued a profit warning in the past 12 months, compared with one in six last year.

There have been 62 profit warnings from 47 different companies in the past year, representing 28 per cent of the sector, with 15 downward revisions of predictions in the past three months alone.

Profit warnings always cause a sense of disquiet in the industry, because sales hit a massive high just before the dot com collapse in 2001.

But this year’s figures are not necessarily a sign of an industry downturn, according to Ernst & Young senior technology analyst John Hughman.

“The UK’s leading software and service companies continue to perform well ­ most of these warnings are coming from small firms,” he said.

The 15 most recent warnings came from 15 different firms, representing nine per cent of the quoted software sector. All the companies had a turnover of less than £200m and 10 of them had revenues of less than £20m.

Smaller companies need to forecast more accurately, said Hughman. The figures suggest firms invested heavily in anticipation of rapid growth, which then did not materialise.

“It is crucial that small and medium-sized businesses’ forecasting teams are in close contact with sales teams,” he said.

“In big businesses, shareholders are often more in touch with what is going on inside companies.”

A spate of 11 profit warnings in the sector in January was blamed on young firms listing on the alternative investment market (AIM) before they were ready. Nine of the 11 warnings came from AIM-listed firms.

In the electronics and electrical equipment sector, profit warnings rose from seven to nine in the past three months, the highest number ever recorded in one quarter.