Despite pockets of strong growth and investment around the mobile-social-cloud and big data analytics megatrends, YOY aggregate sales growth for the top 100 global technology companies was negative for the second quarter in a row in Q213, according to the EY study View from the top: global technology trends and performance. This suggests that even as the macroeconomic outlook improves, particularly in developed economies, the customer-demand shift toward megatrend technologies, such as smart mobility and the cloud continues to accelerate, eating away at demand for legacy products and services.
While some top 100 companies are leading innovation in one or more of the megatrends, most must catch up with leaders’ innovations. And all are faced with the “innovator’s dilemma” of deciding when, how and how fast to transition to innovative new products and services from highly profitable but increasingly outdated ones. Consequently, megatrend-related innovation disrupts their established product lines, business models or both, even as they continue to invest in and place their bets on where they want to play in the emerging megatrends-dominated technology landscape.
At the same time, surprising shifts in the macro economy may be catching technology companies unprepared. Growth is picking up in the US, Europe and Japan, but slowing in many emerging markets. Companies across many industries have focused on emerging markets for growth for many years, but this year developed economies appear to be contributing the majority of global economic growth.
But technology investors are looking for growth. Lacking that, the top 100 technology companies’ aggregate market value increased just 7% YOY at the end of Q213, compared with 16% for the benchmark NASDAQ Composite Index. Only the internet sector and the 25 fastest-growing companies increased aggregate market value faster YOY than the NASDAQ, at 29% each.
Two other areas of Q213 growth were in technology IPOs and venture capital (VC) investment. IPO activity, which was down YOY given Facebook’s record-setting debut. in Q212, increased sequentially in Q213 — and for the second quarter in a row. VC investment likewise was down YOY but improved sequentially. In the case of VC investment, it was the first sequential improvement since the recent peak in Q212. Behind much of this growth are the mobile-social-cloud and big data analytics megatrends, along with a host of supporting technologies.
The internet sector
The internet sector had the highest YOY growth rates of any sector in Q213 for many KPIs, including sales (21%), operating income (27%), R&D (19%) and free cash flow (25%). But the sector’s privacy and regulatory challenges continue. Internet companies are at the forefront of collecting and digitizing the world’s information, and thus their future growth potential appears extremely large and diverse. Their ongoing challenges continue to be focus — i.e., choosing the best growth opportunities and sticking to them — and managing regulatory and privacy issues, which appeared to be on the rise again during the Q213 earnings season. For example, there was a new online privacy “test case” lawsuit in Europe, while research in the US showed that teenagers appear far more concerned about online privacy than previously thought.
The IT services sector
The IT services sector was at the opposite end of the spectrum, with a 3% YOY decline in aggregate sales to the lowest quarterly total for the sector in at least two years. Challenges for the sector are likely to increase in the short term. Market researchers have lowered their projections for IT spending growth for the rest of 2013, and the migration to cloud services continues to eat into sector revenue. Meanwhile, analysts suggest that even cloud services growth could be at risk as a result of revelations involving the US NSA's PRISM program.8 Some arguments suggest this could lead to a global re-evaluation of the security of cloud services, while others hold an opposing view that the business benefits of the cloud outweigh security concerns.
3D printing, social networking, security and smart mobility drive “fast 25” growth
Most KPIs for the 25 fastest-growing public technology companies (as defined by YOY market value increase) grew at about the same rate in Q213 as they did in the previous quarter. Aggregate sales increased 25% YOY in Q213 (26% YOY in Q113) and aggregate operating income increased 15% YOY in Q213 (16% YOY in Q113). Of note, the top 25 public technology companies (which are 22 times bigger in aggregate sales than the fast 25) had flat aggregate sales YOY in Q213 and increased operating income just 2% YOY. The top 100 overall had a 1% YOY sales decline and an 8% YOY improvement in operating income.
The five companies that grew sales fastest (on a percentage basis) included two 3D printing companies, Stratasys and 3D Systems; professional social network LinkedIn; internet and mobile security company Qihoo 360 Technology; and TPK Holding, which makes touch sensors for mobile devices. Just one company saw Q213 sales decline YOY.
About the study
View from the top: global technology trends and performance is based on extensive secondary research and trend analysis combined with EY’s analysis of Capital IQ data for the top 100 and 25 fastest-growing technology companies; Capital IQ and Dealogic data for IPO companies; and Dow Jones VentureSource data for venture capital investments.
The top 25 technology companies are: Amazon.com Inc., Apple Inc., Canon Inc., Cisco Systems, Inc., Dell Inc., eBay Inc., EMC Corporation, Ericsson, Google Inc., Hewlett-Packard Company, Hitachi Ltd., Hon Hai Precision Industry Co., Ltd., Intel Corporation, International Business Machines Corporation, Koninklijke Philips N.V., Microsoft Corporation, Nokia Corporation, Oracle Corporation, Panasonic Corporation, QUALCOMM Incorporated, Samsung Electronics Co. Ltd., SAP AG, Sony Corporation, Taiwan Semiconductor Manufacturing Co. Ltd., Toshiba Corporation.
Top 25 fastest-growing public technology companies are: 3D Systems Corporation, Alliance Data Systems Corporation, Analog Devices, Inc., ARM Holdings plc, Cerner Corporation, CGI Group Inc., Dassault Systèmes S.A., Expedia Inc., Gemalto N.V., GoerTek Inc., HCL Technologies Ltd., IPG Photonics Corporation, Lam Research Corporation, LinkedIn Corporation, NCR Corporation, NXP Semiconductors N.V., Qihoo 360 Technology Co. Ltd., Rackspace Hosting, Inc., Red Hat, Inc., Salesforce.com, Inc, SolarWinds, Inc., Stratasys Ltd., Teradata Corporation, TPK Holding Co. Ltd., Trimble Navigation Limited.
About EY Romania
EY is one of the world's leading professional services firms with approximately 175,000 employees in 728 offices across 150 countries, and revenues of approximately $25.8 billion in 2013. Our network is the most integrated at global level and its vast resources allow us to help our clients benefit from every opportunity. In Romania, EY has been a leader on the professional services market since its set up in 1992. Our over 450 employees in Romania and Moldova provide seamless assurance, tax, transactions, and advisory services to clients ranging from multinationals to local companies. Our offices are based in Bucharest, Cluj-Napoca, Timisoara, Iasi and Chisinau. For more information, please visit www.ey.com.