Total sales and market value (MV) of the top 100 global technology companies
Note: sales in this chart are reported on a trailing 12-months basis.
Source: EY analysis of Capital IQ data, accessed 11 August 2011.
“Rapid growth remains for companies aligned with important trends such as smart mobility, cloud computing, business analytics or social networking.”
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Caught between the return of macroeconomic uncertainty and the mobile, social and cloud innovations that are causing fundamental technology shifts, the top 100 global technology companies experienced slower sales and operating income growth in the second quarter of 2011 and a sequential decline in median market value.
Even among these top 100 companies, there is a widening gap between leading innovators and those working to catch up.
Second quarter 2011 earnings season highlights
- Overall growth slows in the second quarter — but companies innovating in cloud computing, smart mobility or social networking continue to experience rapid growth
- Aggregate operating income for the top 100 global technology companies increased 17% year-over-year (YOY) to $292 billion for the trailing 12 months
- At $2.5 trillion, aggregate sales for the trailing 12 months grew 16% YOY and 2% sequentially
- Top 100 companies, as a group, traded at 11.1 times trailing 12-months operating income in 2Q11, compared with 11.6 times in 1Q11 and 10.7 times in the year-earlier period
- Top 100 companies more than doubled M&A buying YOY and sequentially, to $28.2 billion in 2Q11
Positive outlook turns gloomy
The quarter started with positive news, including stories about spending flowing back to technology from large corporations, globally.1 Before 2Q11 drew to a close, however, the macroeconomic environment turned gloomy: economists reported stalled growth in developed economies.2
Likewise, 2Q11 key performance indicators (KPIs) for the top 100 global technology companies showed growth slowing from the previous quarter — and an increase in the number of companies with declining operating income. Aggregate sales for the top 100 were just shy of $2.5 trillion for the trailing 12 months ended in 2Q11, a 16% increase over the year-earlier period.
Total sales and market value (MV)
of the top 100 global technology
But that growth slowed from 19% for the period ended in 1Q11. The drop in growth of operating income was larger: to 17% YOY for the 12 months ended in 2Q11 from 30% for the 1Q11 period. Median market value, meanwhile, increased 24% YOY but declined 4% from 1Q11.
Also in 2Q11, 28 of the top 100 companies experienced a YOY decline in operating income for the trailing 12 months, compared with 18 decliners for the period ended in 1Q11. However, many companies did experience high growth in sales and operating income.
Fast-growing companies lead disruptive innovation
The difference between these and the decliners was clear: the fastest-growing companies were those leading disruptive innovation that has the potential to reshape business models — specifically, smart mobility, cloud computing and social networking — or those that have responded swiftly to such innovations.
Several of the sector-specific analyses reveal this pattern. In the communications equipment sector, for example, the fastest-growing companies are those shipping innovative smartphones, including manufacturers who made early commitments to the Android platform. Of note, intense smartphone competition is fueling dozens of related IP suits and countersuits, as well as patent acquisition deals with prices above $1 billion.
Similarly, the fastest-growing companies in the software sector were those offering data center software for cloud computing or those that have rapidly adopted software as a service (SaaS) delivery models. In addition, enterprise applications companies that are helping corporations deploy smart mobility also experienced rapid growth.
Alignment with cloud computing and smart mobility
Exposure to fast-growing emerging markets was a bright spot for some companies, particularly in the semiconductor sector and the computers, peripherals and electronics sector. However, in both sectors, it was alignment with cloud computing and smart mobility trends that was the major determinant of growth.
In the internet sector, companies were expanding into each other’s businesses and into other industries as well during 2Q11. Importantly, as the technology industry enables information-related innovation to become an increasing component of the value of all industries’ products and services, technology industry sectors are blurring into each other and into other industries at a faster pace than we’ve previously seen.
Coping with slowing organic growth and disruptive innovation may be what’s driving M&A activity to heights not seen since 2007, before the beginning of the global downturn.3 Aggregate global technology M&A deal values of the top 100 companies doubled in 2Q11 over both the previous and the year-earlier quarter.
Disruptive change continues
Meeting the challenges of disruptive change continues to require growth in organic investments, too, as exemplified by the group’s high levels of R&D and capex spending growth. Our analysis shows that median capex spending grew 61% YOY for the 12 months ended in 2Q11, which was the same median growth figure reported for the period ended in 1Q11.
Similarly, median R&D spending also grew 20% YOY for both periods. Aggregate capex spending grew 52% YOY for the trailing 12 months to $137 billion, while aggregate R&D spending grew 10% to $154 billion. Still, top 100 companies have the wherewithal to invest. Their aggregate cash and investments at the end of 2Q11 stood at $880 billion, a 22% YOY increase. Of that, $606 billion (69%) is concentrated in the top 25 companies — a figure that increased 21% YOY but fell slightly from $610 billion in 1Q11.
Outlook for technology companies
The return of global macroeconomic uncertainty, including growing sovereign fiscal issues, overshadowed even the rapid pace of disruptive innovation in 2Q11. Unfortunately, that shadow is likely to remain in the short term.
Companies will face hard choices, at least for the rest of this year, as they decide where and how to invest in innovation that leads to future growth. Gaps between “winners” and “losers” may widen.
1 “Dollars Flow Back Into Tech; IBM and Intel See Surge in Earnings as Businesses Spend Big on Hardware,” The Wall Street Journal Online, 20 April 2011, via Dow Jones Factiva, © 2011 Dow Jones & Company, Inc.
2 “Economists Downgrade Prospects for Growth; Weakness in First Quarter Now Showing Signs of Persisting,” The Wall Street Journal Online, 31 May 2011, via Dow Jones Factiva, © 2011 Dow Jones & Company, Inc.
3 Global technology M&A update, April-June 2011, EY.