EY - View from the top: 1Q14 early view

View from the top: 1Q14 early view

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Early returns predict investments in innovation as new technologies continue to be disruptive.

Continued innovation showed potential to further disrupt the technology industry in the first quarter of 2014, even as the top 100 global technology companies continued their adaptation to previous disruptions from smart mobility, cloud computing, social networking and big data analytics.

“It’s encouraging that technology companies appear to be increasing investments in R&D and capex. It suggests they’re gearing up to embrace new innovation powered by the five technology megatrends of mobile, social, cloud, big data analytics and accelerated adaptation.”

— Pat Hyek, Global Technology Industry Leader, EY

The top 100 technology companies appear to be gearing up in response: early 1Q14 results suggest they are increasing investments in R&D and capex. Plus, they made 1Q14 the biggest quarter for strategic M&A in at least four years.

Meanwhile, M&A deals and VC investments in the quarter suggested coming waves of wearables and internet of things (IoT) and virtual and augmented reality technologies, along with an ongoing shift toward growing investment in Chinese technology companies. A similar shift toward China was evident in changes to the list of the 25 fastest-growing public technology companies.

That list, and the quarter’s mix of IPO companies, also shows that the earlier disruptive technology waves are spreading across the globe. Sales growth was nearly flat — again the 39 companies depicted in our “early view” of top 100 performance in 1Q14 showed modest aggregate sales growth YOY.

Our analysis suggests nearly flat growth of 1% or 2% when extrapolated to the entire group of 100 companies. That’s because this group of 39 companies had similar or higher growth in previous quarters when the overall top 100 were flat. The highest YOY percentage growth came from semiconductor companies (through M&A) and internet companies (through organic growth). Companies disrupted by the cloud/SaaS and smart mobility megatrends continued to post declining or flat sales.

The early view companies’ 12% YOY aggregate increase in quarterly R&D investment suggests growth in the mid-teens for the top 100 overall, which would more than double the average for the last three quarters. In terms of capex, there is no clear pattern in the relationship between early view companies and the overall top 100. However, the 15% YOY increase in 1Q14 for early view companies represents a surge from recent quarters.

Top 100 technology companies’ key performance indicators (KPIs), with 39% of companies reporting

EY - Graphic showing  the KPIs for the top 100 technology companies, 1Q14

Source: EY analysis of Capital IQ data, accessed 1 May 2014.

1Q14 highlights

  • With 39% of the top 100 global technology companies reporting 1Q14 results so far, aggregate sales increased 6% year-over-year (YOY). However, extrapolating these results to the overall top 100 suggests another quarter of nearly flat aggregate YOY growth.
  • Aggregate operating income increased 9% YOY, suggesting growth of approximately 12% YOY for the top 100 overall.
  • New waves of disruptive innovation appeared to be forming in 1Q14 around wearable and internet of things (IoT) technologies, while some top 100 companies were still struggling to adapt to the transformational megatrends already underway: mobile, social, cloud, big data analytics and accelerated technology adaptation.
  • Technology IPO volume and value soared again in 1Q14, with proceeds raised up 307% on a YOY basis, but both declined sequentially.
  • Venture capital (VC) investment value rose YOY (82%) and sequentially (35%), but the number of rounds declined 12% sequentially.
  • China saw significant increases in IPO and VC investment levels.