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.
Disruptive megatrends dominate as growth slows
Macroeconomic gloom and the lingering effects of two natural disasters continued to slow growth for the top 100 global technology companies in the fourth quarter of 2011, as aggregate sales for the group increased just 2% year-over-year (YOY). What growth remained in the quarter was mostly tied to five megatrends that are generating disruptive innovation in technology and leading to technology-enabled innovation in other industries.
In fact, one company tied to several of the megatrends defied the slowing growth to such a degree that securities analysts removed that company from their analyses of broad market indices to get a clearer picture of the health of the remaining companies, according to the new report, View from the top: global technology trends and performance, an analysis of results from the 4Q11 earnings season. Removing that company from the top 100 data for 4Q11 showed that sales for the other 99 companies declined 1% and operating income declined 10%.
Fourth quarter 2011 earnings season highlights:
- Aggregate fourth quarter operating income for the top 100 global technology companies increased 3% YOY to $86 billion
- At $673 billion in aggregate sales, YOY growth slowed to 2% in 4Q11, down from 6% in 3Q11 and 13% each in 2Q11 and 1Q11
- For the year, sales grew 9% to $2.5 trillion; operating income grew 6% to $305 billion
- Double-digit growth in sales and operating income continued to accrue for companies innovating in the five disruptive technology megatrends
- Driven by those same megatrends, global technology M&A buying increased 41% for the year — compared to a slight decline for all industries. 4Q11 technology M&A spending increased 25% YOY.
Five “megatrends” drive remaining growth
YOY sales gains and declines were split 50-50 among the top 100 companies, but 26 companies that were well-aligned with one or more of the five disruptive innovation technology megatrends grew by double-digit percentages.
The five megatrends are smart mobility, cloud computing, social networking, “big data” analytics and a growing sense of “blur,” as technology industry sectors blur together and the technology industry disrupts other industries — challenging whether certain companies are pure technology companies or have entered the industries that they are disrupting.
That last point is particularly applicable to the internet companies among the top 100.
The internet subsector, of course, is “home” to the cloud and social networking megatrends, makes extensive use of data analytics to predict user behavior and benefits from cross-industry blur. For example, leading top 100 internet subsector companies draw revenue from the traditional advertising and retail industries.
For these reasons, the internet subsector had double-digit YOY gains in aggregate sales (31%) and operating income (20%), despite the overall growth slowdown, the View from the top report notes.
As counterpoint to the internet’s strong YOY growth, the computers, peripherals and electronics (CPE) subsector had the worst YOY declines in aggregate sales (-5%) and operating income (-26%) of any subsector.
More than other subsectors, CPE companies among the top 100 felt the lingering effects of the earthquake and tsunami in Japan and the flooding that occurred earlier in the year in Thailand. Other subsectors were also challenged; semiconductors, for example, experienced an aggregate YOY sales increase identical to the top 100 overall (2%), but aggregate operating income fell 13%.
Social media conundrum
In our report, we also discuss the increasing challenges technology companies face as product life cycles shorten and there is less time to derive profit from new products. Consequently, this generates increased pressure both for continuous innovation and for cost efficiency.
We go on to describe an approach called “total cost to serve” that enables companies to quantify cost — and profit — variables by product, distribution channel and customer, thus significantly improving the quality of decision-support information.
Outlook for technology companies
Even the traditional sequential aggregate sales gain from the third to the fourth quarter of 2011 was smaller than in 2010, 8% compared to 11%. With a seasonal dip expected in the first quarter and ongoing macroeconomic uncertainty continuing to overshadow the rapid pace of disruptive innovation, growth will remain challenged in 2012.