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Cash on the chip: working capital in technology - Fundamental technology drivers - EY - Global

Cash on the chip: working capital in technology

Fundamental technology drivers

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Each working capital component contributed to the industry’s improved working capital performance, but with varying degrees.

Since 2002, levels of receivables (DSO) have been reduced by 9%, or 5.3 days. Three out of seven segments — diversified technology, semiconductor components and EMS — reported a reduction in levels of receivables.

Receivables (DSO)

Distribution, computer equipment and communications equipment posted a significant deterioration in receivables performance, partly due to changes in products sales mix and in OEM channel programs, as well as a combination of acquisitions and development of solutions and services to enterprises.

For the distribution and computer equipment segments, this deterioration has been more than counterbalanced by a corresponding increase in levels of payables. The differential between receivables and payables (DSO–DPO) for these segments was cut by five days and three days, respectively, since 2002.

For these segments, the increase in DSO for 2010 would have been much lower had the last quarter of the year been used as a basis for calculation, reflecting the acceleration in sales throughout the year. Q4 2010 DSO as compared to Q4 2002 shows an increase of 11% for each segment (instead of 23% for distribution and 21% for computer equipment).

A feature that may have influenced receivables performance across the industry in recent years has been the rising proportion of total revenues derived from service and support payments as opposed to transactions.

For software and services, such annuity payments now account for up to 70% of revenues. Outsourcing, business process services and financing businesses also feature a relatively higher share of annuity content. By comparison, transactional revenues are principally composed of equipment sales, consulting, systems integration and one-time software licence charges.

A further contributing factor behind the receivables performance has been the changes in the revenue mix by region and country, together with the related impact of local payment terms practices. In 2010, 60% of total sales made by the US technology companies in this report were realized outside the US, up from 50% in 2002.

Change in receivables performance, 2002–10

  DSO
Segment 2010 2002 Change
Diversified
technology
75.0 94.5 –21%
Semiconductor
components
36.7 40.8 –10%
EMS 51.3 55.4 –7%
Software 63.3 62.7 1%
Communications
equipment
46.6 40.8 14%
Computer
equipment
45.1 37.3 21%
Distribution 57.4 46.6 23%
Top 70 US 56.4 61.7 –9%

Source: EY analysis, based on publicly available financial statements

Inventory (DIO)

Since 2002, levels of inventories (DIO) have been reduced by 16%, or 3.9 days. Four out of seven segments reported reduced levels of inventory, with diversified technology showing the largest fall, followed by communications equipment. In contrast, EMS and, to a lesser extent, distribution saw increases in DIO.

Software, meanwhile, reported a large percentage drop in DIO, but from a relatively low level. The divergence in inventory performance between segments can be partly explained by the expanded use of VMI arrangements.

With suppliers increasingly holding more inventory on behalf of customers, there has been a shift of inventory toward upstream suppliers. The extent varies according to the segment’s or company’s relative influence within the value chain.

For EMS, the adoption of lean practices by OEMs has led, in some cases, to increased levels of inventory as companies assumed greater supply chain responsibilities. Changes in product mix also may have contributed to increased DIO. Texas Instruments, for example, has indicated that about 30% of its distributors’ revenues, accounting for 30% of total sales, result from VMI. The aim is to reach a figure of 50% over time.

A significant percentage of OEM customers are also managed on a consignment basis. Adding the two, such arrangements now represent about two-thirds of the group’s total sales.

Another feature that may have influenced inventory performance across segments and companies in recent years has been the change in the products sales mix with the increasing contribution of software and services that carry negligible levels of inventory to total revenues.

Change in inventory performance, 2002–10

  DIO
Segment 2010 2002 Change
Software 3.8 6.3 –40%
Diversified
technology
14.8 23.4 –37%
Communications
equipment
17.5 21.0 –17%
Semiconductor
components
39.6 39.8 0%
Computer
equipment
11.1 11.0 1%
Distribution 36.9 35.4 4%
EMS 50.7 40.0 27%
Top 70 US 20.8 24.7 –16%

Source: EY analysis, based on publicly available financial statements

Payables (DPO)

Since 2002, levels of payables (DPO) have risen by 14%, or 4.7 days. Four out of seven segments — distribution, computer equipment, EMS, and semiconductor components — reported higher levels of payables.

Overall progress in payables was driven by a stronger focus on procurement and sourcing, as well as by success made in expanding payment terms. Changes in sales product may have also played a part.

Note that for distribution and computer equipment, improvement in DPO would have been much lower (28% and 13%, respectively) had the last quarter of the year been used as a basis for calculation rather than the full year.

Change in payables performance, 2002–10

  DPO
Segment 2010 2002 Change
Distribution 52.6 37.1 –42%
Computer
equipment
60.3 49.4 –22%
EMS 64.0 56.0 –14%
Semiconductor
components
25.3 24.6 3%
Diversified
technology
34.2 34.2 0%
Software 16.1 16.5 -2%
Communications
equipment
13.2 15.6 –15%
Top 70 US 38.9 34.2 14%

Source: EY analysis, based on publicly available financial statements



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