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The 2012 high tech industry


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2012 High Tech Industry

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The 2012 high tech industry

  1. 1. OCTOBER 2012 Winner Takes All The 2012 AlixPartners Global Telecom and Technology Outlook INSIDE: Growth, Profitability, and Shareholder Returns Business Models and Overhead Costs Significant Regional Differences Balance-Sheet Strain© 2012 AlixPartners, LLP
  2. 2. 2 Winner Takes All T he once high-flying high-tech to cut up to 30% of their sales, general & industry is experiencing a administrative (SG&A) costs. Even stronger dramatic shift: growth rates performers will need to change their operating have dropped to just 2%, models radically, including transitioning to and the industry’s market “asset-light” operating models and cutting value is underperforming broad market indices. overhead costs by as much as $50 billion in For many companies, according to The 2012 total. High-tech companies across the industry AlixPartners Global Telecom and Technology will need to act now to remain competitive in Outlook , this environment requires significant 1 an increasingly polarized market where, more action. Poorer performers face the biggest and more, the winner takes all. challenges; the analysis shows they’ll need Growth, Profitability, and Shareholder Returns According to the study, after years of double- FIGURE 1: Industry Revenue, Percent Change YoY digit annual revenue increases, the $5.5 trillion LTM is June 2011 - June 20121 global high-tech industry has experienced 35% a dramatic cooling of top-line growth rates. 30% 25% Industry revenues grew just 2% over the 20% 12-month period concluding June 30 , 2 15% 10% compared with an average 10% growth rate 5% during the two-year period of 2009 to 2011 0% -5% (figure 1). Meanwhile, the three sectors that -10% make up 20% of the overall industry – consumer -15% 2009 2010 2011 LTM 2009 2010 2011 LTM electronics, telecommunications equipment Channel (distribution & retail) Technology Cos and semiconductors – saw revenues drop by Computer Hard. & Elec. Equip. Consumer Electronics Internet/Digital Media Semiconductors 8%, 1%, and 3%, respectively. Contract Manufracturing Software Telecom Equipment All High Tech Telecom Operators For companies filing Q2 ‘12 results (~90% of companies by revenue) 1 Source: CapIQ, AlixPartners Analysis The 2012 AlixPartners Global Telecom and Technology Outlook studied 1,173 companies across 10 major high-tech industry sectors: telecommunications operators, telecommunica- 1 tions equipment, semiconductors, Internet, contract manufacturing, computer hardware, consumer electronics, software, multi-sector technology and channel (distribution and retail). Public economic data and forecasts were also used in the study. 2 Based on the reported second-quarter performance of 90% of the companies included in AlixPartners’ analysis.© 2012 AlixPartners LLP
  3. 3. 3 Winner Takes All Profit margins in the industry have also been FIGURE 2: Revenue vs. EBITDA Margins, 2011 squeezed over the past year. Operating- income margins have shrunk by nearly 6% 35% Software Telecom Operators Revenue: $1.8B across all sectors since 2010, with declines of 30% 25% approximately 50% in consumer electronics, 30% Internet Semiconductors 20% in semiconductors, 20% in telecommunications EBITDA (%) Multi-Sector Tech 15% equipment, 15% in contract manufacturing and Telecom Communication Equipment 10% 6% for telecommunications operators. Currently, Computer Electronics Computer Hardware 5% telecom operators generate approximately half Contract manufac. Channel 0% (47%) of industry operating profits on the back of $0 $200 $400 $600 $800 $1800 Sector Revenue ($B) only about one-third (34%) of industry revenue (figure 2). However, if margins in this sector Source: CapIQ, AlixPartners Analysis continue to erode, the trend could likely have a substantial impact on overall industry profitability – and result in mediocre shareholder returns. SP 500 averages, which grew 16% and At first glance, it appears that the high-tech 8%, respectively, in the same period. industry as a whole outperformed broad The study also finds that for the period market indices in terms of market capitalization between January 1, 2011 through (excluding dividends) this year through August August 31 of this year, companies 31. But, if we exclude just one company, Apple, in the most-profitable quartile (defined by Inc., we see that market-cap for the high-tech earnings before interest, taxes, depreciation industry grew just 6% during that period. That and amortization, or EBITDA) of their sectors trails both the NASDAQ Composite Index and were 73% more likely to outperform the SP 500 average than those in the bottom Business Models and Overhead Costs EBITDA quartiles. adopt “asset-light” operating models and reduce costs, including SGA. The study finds To combat the considerable challenges to that while average industry return on capital revenue growth, profitability, and shareholder employed (ROCE) has remained steady at returns, many companies urgently need to about 11%, over the last five years companies© 2012 AlixPartners LLP
  4. 4. 4 Winner Takes All FIGURE 3: SGA as Percent of Revenue with leaner asset models, including many 35% software and Internet companies (where 30% sector ROCE levels are currently 22% and 17%, 25% respectively), continue to show higher overall 20% returns. Conversely, “asset-heavy” sectors, 15% such as consumer electronics and computer 10% hardware (with ROCE levels of 5% and 8%, 5% respectively), continue to be challenged. 0% In this environment, the most successful 2007 2008 2009 2010 2011 LTM C hannel (distribution retail) Computer Hardware tech players are aggressively outsourcing Consumer Electronics Electronic Equipment Software Contract Manufracturing manufacturing and supply-chain operations, Internet/Digital Media Technology Cos Telecom Communications Semiconductors thus reducing capital employed, often with Equipment All High Tech Telecom Operators the added benefit of also reducing risk and Source: CapIQ, AlixPartners Analysis exposure to technical discontinuities. of about 1% of overall industry revenues. Poorer The study also finds that overhead costs as performers, such as many companies in the less- a percentage of revenue have jumped by as profitable consumer-electronics and telecom- much as 17% since 2010 in sectors such as hardware sectors, face an even higher hurdle. semiconductors (+ 17%), computer hardware Those companies may need to cut overhead by (+ 14%), and consumer electronics (+ 4%) (figure as much as 30% to be cost-competitive going 3). As a result, in total, companies in the high- forward. High overhead costs may have been tech industry need to trim overhead costs by as permissible when the industry was booming, much as 5%, or $50 billion—or the equivalent and they may still be absorbable by some high- Significant Regional Differences flying individual companies today, but for many compared with the global industry average if not most companies, that’s no longer the case. of 10% during the same period. In contrast, Among the four major regions studied in the compound industry revenue growth over the Outlook, the European market is enduring the same period in Asia-Pacific, the Middle East slowest compounded annual revenue growth and Africa (MEA), and North America averaged rate—just 3% over the two-year period from 12%, 12%, and 14%, respectively. the end of 2009 through the end of 2011,© 2012 AlixPartners LLP
  5. 5. 5 Winner Takes All Regional differences may grow even more We anticipate that the current, raging “battle pronounced in the future, in part because of the mobile devices and operating systems” North American companies are exhibiting will have both near-term and long-term a greater focus on the more innovative, consequences for the industry, particularly for profitable technology spaces, while Asian European players ranging from semiconductors players continue to “commoditize” more to telecom operators, telecom equipment traditional areas, such as consumer electronics. manufacturers, and consumer electronics. According to the study, Asian-based companies Meanwhile, North American companies generated nearly half (49%) of industry revenue today command a much higher market share in 2011 but only about 37% of industry EBITDA. globally in three of the industry’s four most North American companies, on the other hand, profitable sectors: software (74%), Internet generated 33% of industry EBITDA last year (76%), and semiconductors (48%). European on 30% of industry revenues; for European companies command a relatively high market companies, the comparable numbers were share in the telecom-operators sector (33%), 22% and 17%, and for rest-of-world companies, while Asian companies have a relatively high 8% and 4%, respectively. market share in four of the six least-profitable sectors: consumer electronics (92%), contract FIGURE 4: Regional Performance and Share of Revenue by Region (FY 2011) 30% Software Higher Value Sectors Internet Semiconductors Telecom Operators EBITDA Margin, % 20% Telecom Multi Equipment Techology LEGEND Bubble Size is Sector Revenue Share of Revenue by Region: Lower Value Sectors Cons. AP Electronics NA 10% EUR Hardware ROW Channel Contract manufac. Global Revenue, $ Trillions $1.0 $2.0 Source: CapIQ, AlixPartners Analysis© 2012 AlixPartners LLP
  6. 6. 6 Winner Takes All manufacturing (82%), multi-sector technology margin of 23%) and European companies (74%), and computer hardware (62%) (figure 4). (with an average EBITDA margin of 27%) Meanwhile, last year, North American high-tech were significantly more profitable than Asian companies in general (with an average EBITDA companies, which recorded an average EBITDA Balance-Sheet Strain margin of just 15%. FIGURE 5: Percent of Revenue Generated by Companies Facing Distress1 As a whole, the industry continues to feel the All Industry strain of high leverage and debt levels. Debt- 50% to-equity levels in such sectors as consumer 0% 2007 electronics (led by recent multi-billion-dollar 100% 2008 2009 2010 2011 LTM debt issuances by Sony Corp. and Sharp 80% Corp.) and contract manufacturing (led by Hon 60% Hai Precision Industry Co.’s recent $8 billion 40% offering) have been climbing sharply. By the 20% same token, interest coverage is falling in 0% many sectors, most notably in semiconductors 2007 2008 2009 2010 2011 LTM (where coverage has fallen from about 23 C hannel (distribution retail) Computer Hardware Consumer Electronics Electronic Equipment times interest in 2010 to about 18 times interest Software Contract Manufacturing Internet/Digital Media Technology Cos during the 12-month period ending in July of Telecom Communications Semiconductors Equipment Telecom Operators this year) and consumer electronics (where Companies with an At-Risk or High-Risk rating. 1 coverage has fallen from about 12 times interest Source: CapIQ, AlixPartners Analysis in 2010 to under eight times interest today). (defined as the possibility of insolvency within As a result, companies generating more than two years, absent aggressive intervention). 85% of revenues in the consumer-electronics The same holds true for companies generating sector today face risk of financial distress more than 70% of revenues in the telecom-© 2012 AlixPartners LLP
  7. 7. 7 Winner Takes All Conclusion As the technology industry continues to and move to more agile, “asset-light” business polarize, it is increasingly becoming a “winner- models” to remain competitive. Future takes-all” industry. As Apple and a few other “winners” will need to succeed in these efforts top-performing companies generate the lion’s while simultaneously innovating and deriving share of market-cap growth for the entire real value from CapEx and RD expenditures. industry, all companies will need to cut costs© 2012 AlixPartners LLP
  8. 8. 8 Winner Takes All For more information, please contact: Eric Benedict Yung Chung Managing Director Managing Director +44 20 7098 7437 +82 10 9437 2750 Karl Roberts Masahiko Fukasawa Managing Director Managing Director +1 (213) 437-7155 +81 3 5533 4850 Michael Weyrich Managing Director +44 20 7098 7413 About AlixPartners AlixPartners conducts a broad range of surveys and research in industries around the globe. To learn more about our publications, or to contact the AlixPartners professional nearest you, please visit AlixPartners, LLP is a global business advisory firm offering comprehensive services in four major areas: enterprise improvement, turnaround and restructuring, financial advisory services, and information management services. The firm was founded in 1981 and can be found on the Web at© 2012 AlixPartners LLP
  9. 9. 9 Winner Takes All DISCLAIMER – IMPORTANT INFORMATION REGARDING THIS WHITE PAPER This white paper regarding the High-Tech Industry (“White Paper”) was prepared by AlixPartners, LLP (“AlixPartners”) for general information and distribution on a strictly confidential and non-reliance basis. The recipients of the White Paper accept that they will make their own investigation, analysis and decision relating to any possible transactions and/or matter related to such and will not use or rely upon this White Paper to form the basis of any such decisions. Accordingly, no liability or responsibility whatsoever is accepted by AlixPartners and its employees, partners or affiliates for any loss whatsoever arising from or in connection with any unauthorized use of the White Paper. This White Paper may be based, in whole or in part, on projections or forecasts of future events. A forecast, by its nature, is speculative and includes estimates and assumptions which may prove to be wrong. Actual results may, and frequently do, differ from those projected or forecast. Those differences may be material. Items which could impact actual results include, but are not limited to, unforeseen micro or macro economic developments and/or business or industry events. The information in this White Paper reflects conditions and our views as of this date, all of which are subject to change. We undertake no obligation to update or provide any revisions to the White Paper to reflect events, circumstances or changes that occur after the date the White Paper was prepared. In preparing this White Paper, AlixPartners has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise provided to us. AlixPartners has not audited or verified the data reviewed in connection with the preparation of this report. This White Paper is the property of AlixPartners, LLP, and neither the White Paper nor any of its contents may be copied, reproduced, disseminated, quoted or referred to in any presentation, agreement or document with or without attribution to AlixPartners, at any time or in any manner other than for the internal use of the recipient, without the express, prior written consent of AlixPartners.© 2012 AlixPartners LLP