As most businesses brace for an economic downturn, tech and telecom could see new prospects. But, to turn the headwinds to your advantage, you need to find your unique opportunities and risks.
“I think we’re going to see a bigger fight for market share, and I think profitability in those areas might decline.”
A Simply Wall St analysis shows that earnings and revenue continue to rise in the tech sector, but that the total market cap has dropped. “I think we’re going to see a bigger fight for market share, and I think profitability in those areas might decline,” said Grant Thornton Transformation Managing Director Ronald Gothelf. “It will vary, partly based on the type of provider you are in the technology industry.”
Company size is another factor, with many large companies looking for acquisitions, small companies preserving cash and mid-size companies striking a balance. But almost every company can benefit from better cash management, operational efficiency and product innovation. Now, companies need to weigh whether it’s the right time for these opportunities and others that can help them turn the headwinds around.
Is this the time for M&A?
“Some companies will have the momentum, cash and capability to gain market share through M&A right now,” said Grant Thornton Technology and Telecommunications Industry National Leader Steven Perkins.
“I think that there are sellers who have more realistic expectations about valuation now than they did a couple of years ago.”
“The big story is valuations,” said Grant Thornton Strategy and Transactions Partner Bryan Walker. “Public company valuations have come down, and it has reset expectations on the private seller side. I think that there are sellers who have more realistic expectations about valuation now than they did a couple of years ago.”
“Everything that’s been driving M&A — dry powder in private equity, cash on corporate balance sheets — all of those fundamentals are still there,” Walker said. “Private equity investors in software are still talking about good pipelines.”
So, what questions can you ask to make sure your company (or the one you want to acquire) is healthy?
Do you need to rebalance your supply chain (again)?
The pandemic forced many tech companies to rebalance supply chain strategies, giving greater weight to supplier resilience and availability versus supply costs.
With many companies continuing their hybrid and work-from-home environments, the demand for business equipment and services should be steady. “I think telecom is poised very well,” Gothelf said. “I think that there’s going to be increased demand for telecom, because I don’t see the remote workforce going away.”
“Tools to support remote working are going to continue to see a lot of demand. But those manufacturers could be restricted as they try to get materials,” Gothelf said. Ongoing political instability has thrown new hurdles in the path of supply chains that were just starting to recover.
“Tech manufacturers are going to have to really try to lock in supply chains for materials,” Gothelf said — especially for some materials. “We may start to actually see a resurgence of recycling in the U.S., to try to capture some of these rare earth metals. We’re going to see more competition in that area.”
“We’re going to see other onshoring, too, which is going to create an even tighter job market,” Gothelf added. Emerging and ongoing workforce issues could contribute to the drive for greater structural efficiencies.
Do you need to restructure, and where?
“Some of the layoffs in tech are not inflation related,” Gothelf said. “I think some of them are because some very high-growth technology market segments are at a point of greater maturity. Now’s an opportunity to scoop up those resources, for those technology companies that are still on an evolution and growing path.”
“There are some things that you can do to take advantage of this pause in growth, like restructure and rationalize infrastructure and processes.”
The changing job, customer and competitive markets mean that many companies need to restructure for more effectiveness and efficiency. “When you have a high rate of growth, you tend to worry less about your efficiency and more about expanding your growth or geography,” Perkins said. As growth slows, priorities shift. “There are some things that you can do to take advantage of this pause in growth, like restructure and rationalize infrastructure and processes.”
Every company will have unique opportunities to improve efficiency. To find those opportunities, start with analysis. “When you’re investing in infrastructure — especially with a remote workforce — it’s especially important that processes are clearly understood and clearly defined,” Gothelf said.
Once you know where you can improve, you need to allocate sufficient resources to the effort. “The companies that rationalize their infrastructure and processes need to deploy their cash to do things more effectively inside their organization. Many middle-market tech companies need to manage their cash and be much more efficient and effective in their operations,” Perkins said.
How should you shift your cash, and can you grow it?
“Companies in the tech and telecom space need to invest to better understand their ongoing cash flow forecasts, as we experience this fluctuation in market demand and in supply and in labor,” Gothelf said.
Software companies need to watch both sides of this equation.
“There’s great demand, which could fuel growth,” Gothelf said. “Treasury’s a hot area. I think there’s continued investment in back-office and front-office systems, from a software and process standpoint. A lot of companies are investing to improve their processes throughout, especially their order to cash and their payables, accounts payable or procure-to-pay process areas.” Gothelf added that this means growth opportunities for the companies that provide these services and solutions, “but then, there are limitations and constraints from labor, materials and other factors that are volatile.”
So, even if your company has chances to grow, overall volatility will continue. How can companies protect the revenue they have?
How can you protect your cash?
“The emerging tech companies are going to struggle for funding and will be mostly focused on cash preservation.”
Stability might seem hard to find in the tech and telecom industry, especially for smaller companies. “The emerging tech companies are going to struggle for funding and will be mostly focused on cash preservation,” Perkins said. But there are some factors that can help you find as much stability as possible.
Subscription and as-a-service models have become essential starting points for tech revenue stability, and there are still some new ideas to explore. Gothelf explained, “In many situations, it’s the classic razor-and-razor-blade model being applied to technology.” Companies can look for new opportunities to apply the razor-and-razor-blade (or printer-and-cartridge) pricing model to products in their sphere.
“Everybody loves the recurring revenue model in software. When the external economy is driving your growth, you can cover up some churn,” Walker said. “But when things slow down, the best in class focus on retaining their customers — which in some cases involves deployment of tools or working with other companies that help them capture renewable revenue.”
To keep customers, you need to keep demonstrating value — even new value. This is especially important to keep business customers, which can give you more resilience than a purely consumer customer base. “Have a value proposition that demonstrates how your tool will save customers money,” Walker said. “That’s how the sale gets repositioned,” Perkins added. One of the ways to demonstrate value is through the ongoing shift to cloud-based services and solutions.
“One of the growth areas for tech will be the continued transition of companies to cloud,” Perkins said. “I don’t think that’ll slow down. I think there will be incentives to move more quickly. If you think about clients that had a big tech project on the board, which was going to cost six or seven million dollars to implement and begin to show a return 18 months after it’s implemented, they can move to the cloud and go to an op ex model very quickly.”
“I think you’re going to see a continued — and even accelerated — move to the cloud, and to companies positioned in that space who can help,” Perkins said.
Some things will stay the same
The economic climate might be turbulent, but regulators will remain. “What will be a constant in the industry, despite all of the headwinds, is that there will still be regulatory pressure on the industry,” Perkins said. If companies have gaps they need to cover for ESG, privacy or other regulatory compliance, those might be at the top of the priority list.
When tech and telecom leaders understand all of their unique opportunities and risks, they can map the priorities and actions that will help turn the headwinds in their favor.
“They have to figure out how they get growth in a slow-growth environment,” Perkins said. “Maybe that’s M&A, maybe it’s getting better at securing recurring revenue. Maybe it’s a product shift that allows you to respond to what clients need in your marketplace,” Perkins said. “And some of it is probably retooling your internal operations to be more efficient and effective.”
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