Profit warnings by UK-listed companies in the tech and telco sectors almost tripled in the first quarter.
EY-Parthenon’s latest Profit Warnings report found 69% citing contract delays or cancellations as a cause of profit warnings, as CIOs continue to delay major spending decisions and consolidate vendor relationships.
Since the start of 2022, 98 companies in all have issued at least two profit warnings, while a significant cohort of UK companies have faced particularly challenging conditions after entering the three warning ‘danger zone’.
Of the 31 companies that have issued three warnings since the start of 2022, 29% have since delisted or are in the process of being sold. As EY-Parthenon puts it: “This marks a greater-than-average market dropout rate, as typically just one-in-five companies delist within a year of their third warning, most due to insolvency.”
There were 16 tech and telco profit warnings between January and March 2023: nine for software and computer services companies and seven for telco-related companies. Warnings from telecoms sectors were the highest since 2018. The sector is “particularly vulnerable to cost-cutting and uncertain demand” Profit Warnings said.
EY-Parthenon Partner Jo Robinson, a turnaround and restructuring strategy specialist, said: “Economic forecasts may have seen some improvement in recent months, however the extraordinary strength of headwinds over the last two years has left some businesses facing recession-like conditions.
“As pressures move through the supply chain, we’ve seen a higher number of companies warning of delayed or cancelled contracts in comparison to the last quarter… We would normally expect to see insolvency activity peak nine to twelve months after a profit warning peak, so the coming year will be crucial,” she added.
Many non-listed tech startups are also concerned at running out of runway as investors pivot hard from accepting and indeed encouraging years of carefree expansion-focussed spending in favour of a focus on revenue growth and indeed a drive towards profitability. For such companies, the next year will also be crucial.
“We haven’t had a compression in values like this in more than 20 years. It’s an absolute bloodbath,” said Cameron Lester, global co-head of technology media and telecom investment banking at Jefferies, adding to Bloomberg that companies that are able to raise money, even at a lower valuation, are the lucky ones.
“What matters is you’re a survivor,” Lester said.