Problems with credit access are set to undercut broadly stable conditions for the US technology sector over this year and next, according to ratings agency Standard & Poor’s (S&P).
In a report unveiled on 30 December, the agency’s specialist business intelligence wing S&P Capital IQ said that factors such as disruptive new technologies, large-scale M&A transactions and bulk share buybacks could impact upon credit availability in 2016 and 2017.
As a general rule, S&P considers operating performance among firms in the sector as less of a credit risk than financial policy, as the sector has delivered consistent revenue growth with flat-to-higher profit margins.
However, it warned, pockets of weakness still exist within the hardware and services subsectors, and in the category of ‘B-rating’ firms, while the business cycle of the semiconductor subsector tends to be somewhat volatile.
S&P’s analysis covered 158, rated US technology firms – 46 at investment grade and 112 at speculative grade. The agency predicted:
In the larger, speculative-grade segment, the report said: “We anticipate that metrics for most… companies (excluding Dell and possibly the semiconductor subsegment if strong M&A trends continue) will improve as credit-market factors and limited balance-sheet capacity make large M&A and shareholder returns less attractive.”
“Hardware margins,” the report explained, “have been trending up because Apple, which has EBITDA margins in the mid- to high-30% area, has become a larger portion of the subsector during the past few years.”
However, it said: “Removing Apple and Cisco, which also has EBITDA margins in the 30% area, decreases hardware-sector margins to the mid-17% area from 25% for 2015, and flattens margin expansion.”
It added: “Although some hardware companies have consolidated their cost structures during the past few years, this has not resulted in margin expansion because of declining revenue. We anticipate that 2016 margins will resemble those of 2015 as revenue stabilises.”
From 2011 to 2015, the report noted, growth in US tech-sector revenue ranged from the low-2% area to the mid-4% area, with a total, compound annual growth rate (CAGR) of 3.7%.
The software subsector led with 7.1% CAGR, while services lagged at just 0.4% because some companies have mature and declining offerings, or are transitioning their service models. In addition, tightening defence-contract budgets have squeezed government IT contractors.
Meanwhile, the hardware and semiconductor subsectors have delivered GDP-like growth in the high-2% to mid-3% range – but with higher volatility than the software and services subsectors.