View from the top: 2Q 2012 earnings season

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The top 100 global technology companies continued to face strong headwinds in the second quarter.

While aggregate YOY growth in sales and operating income slowed compared to the first quarter, there were more hopeful signs under the surface.

Macroeconomic uncertainty again slowed their sales and earnings growth, while five transformational technology megatrends continued to challenge their business models and where they focus their investments. These megatrends are:

  • Smart mobility
  • Cloud computing
  • Social networking
  • Big data analytics
  • A growing sense of blur

Many “disrupted” companies are making progress at reinventing themselves – absorbing technology’s latest cycle of transformation and preparing for the future.

While aggregate year-over-year (YOY) growth in sales and operating income slowed compared to the first quarter, there were more hopeful signs under the surface. The need for rapid and continuous innovation has permeated the cultural fabric of many technology leaders, which is laying the groundwork for positive change as we head into 2013.

Quarterly highlights

  • Aggregate second-quarter operating income for the top 100 global technology companies increases 1% YOY to $69 billion, down from 5% YOY growth in 1Q12.
  • Aggregate sales grow 2% YOY to $634 billion, down from 6% YOY in 1Q12.
  • For the trailing 12 months, sales grow 4% YOY to $2.6 trillion, down from 7% growth in 1Q12.
  • Companies reporting operating income increases versus declines improved to a 50-50 split, as companies adjust to the new economic and transformational technology realities.
  • Disclosed-value M&A transactions totaling $11.6 billion help companies accelerate adaptation to the megatrends.

Growth leaders have embraced transformative megatrends

Our research shows that companies that have led innovation in one or more of the five technology megatrends we’ve identified are likely to have posted the largest growth, while those that have lagged are posting the largest declines. The five megatrends are continuing to drive the need for reinvention across the industry as technology industry sectors converge, and the technology industry transforms other industries.

A challenging macroeconomic environment

The global macroeconomic environment grew even more challenging in the second quarter, further dampening technology spending. The European Union reported a 0.2% decline in gross domestic product, and growth slowed in China and the US.

The impact of these macroeconomic headwinds is most apparent in the Europe, Middle East and Africa (EMEA) region, which underperformed the other regions.

Sector views

In general, sectors tied to hardware – communications equipment (CE), computers, peripherals and electronics (CPE) and semiconductors – were more challenged than the internet, IT services and software sectors, which are often more agile because normally they can adapt without having to transform extensive physical supply chains. Our full report includes a breakdown of how each sector performed.

  • Communications equipment: double-digit sales growth from two smart mobile device leaders couldn’t lift overall CE sector sales, as smartphone growth continued to slow and macroeconomic concerns continued to hold down public network communications equipment purchases.
  • Computers, peripherals and electronics: cloud computing was the primary bright spot in the CPE sector, which was otherwise challenged by slow sales in PCs and LCDs.
  • Internet: although disruption from smart mobility slowed sales growth slightly, the Internet sector dramatically outperformed the rest of the top 100.
  • IT services: volatile macroeconomic conditions continued to suppress sales growth, but smart management decisions have protected operating income.
  • Semiconductors: a weak macroeconomic environment and slumping PC sales make a recovery unlikely in the second half of the year, in spite of growth from smart mobility and cloud computing.
  • Software: companies in this sector slightly outperformed the overall top 100, as they continue to make significant transformations driven by SaaS, smart mobility, big data analytics and integration of social network functions.

Outlook: a flat finish to 2012, growth returns in 2013

Although we began the 2012 calendar year with high hopes for a strong finish, the top 100 global tech companies continued to post flat-to-moderate growth in 2Q12, even as they position for future success.

With the second-quarter earnings season behind us, signs are that the macroeconomic recovery will take longer than expected. A handful of top 100 technology companies may fall victim to the latest cycle of technology disruption, combined with a weak global economy.

However, most appear poised for recovery. Restructurings and a general willingness to drive out costs and institutionalize rapid innovation will likely drive higher growth rates in early to mid-2013.

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