Naveen Selvaraj's  Instablog

At a company level, the Technology sector companies have probably had the maximum earnings beats(against consensus estimates) in the Jun09 quarter though revenues have declined for almost every company. I thought that it would be interesting to see what has been the revenue and operating profits change on a YOY basis in Jun09 quarter.

Since most Tech sector companies felt the real impact of the global recession from the Sep/Dec08 quarters, this Jun qtr YOY comparison was probably an 'ideal' case to measure the impact of the recession on top-line and bottom-line. The data pertains to ~337 companies which have reported Jun09(or corresponding quarter) results so far and the numbers are compared to Jun08 results. While the Jun08 quarter had very little impact from the slowdown, the companies have had nearly six months to deal with with the slowdown in the Jun09 quarter and take several re-structuring/cost adjustment decisions. Further the consensus opinion among the Tech sector management is that demand has probably hit bottom and can only remain there or go up from there.

                                    (Click to enlarge all graphics)

Tech Sector - Jun09 Quarter: YOY Revenue And Profit Change

Source: Gridstone Research

Some caveats before we absorb and interpret the data:

1. All companies do not report in USD and so the non-USD reported numbers have been converted to USD at period-end exchange rates for both the quarters-Jun09 and Jun08
2. This list is largely made of US-listed stocks(~98%) and so is not a representation of worldwide numbers. However, I would also add that this set of companies should be fairly representative of the sector.
3. Naturally, there is some double-counting at the sector-level as it includes revenues and profits from companies across the Technology supply chain. But the YOY comparison should even this out as this double-counting would have add its effect in both the comparable periods.

Jun09 Quarter - Results Analysis

Despite the cost reduction exercises undertaken by many of these companies, the revenue decline(16%) was just too much to handle. As a result, profits have declined by ~30% which translates to $10B in lesser profits. The USD has appreciated against the Euro by 11%(Jun09 Vs Jun08) and this probably accentuates the revenue decline while on the operating income front, the impact seems to be largely due to demand contraction.

The Top 20

The top 20(by revenues in Jun09) accounted for nearly half((~53%) of this profit decline i.e ~(5.6B) and around $(30B) of the revenue decline(or ~60%).  These twenty Tech behemoths contributed 61% of the total sector revenue in the Jun09 quarter which is the same as the Jun08 quarter but their profit share has increased from 66% of total sector profits to 72% of profits. The top 20 seem to have absorbed the impact of the recession better though they have also had huge declines in top-line and bottom-line in absolute terms.

Top 20 By Revenue In Jun09 Quarter And Their Stats

Source: Gridstone Research

Barring Apple and Google, every other top 20 company has seem revenue declines in the Jun09 quarter. In profits, seven of the top 20 managed to increase the operating profits indicating that belt-tightening helped in arresting the profit decline in this group.

The Next 40

Moving on the next set of forty companies, these contributed to $(11B) in revenue decline(~19% of total decline) while profits declined by $(2.6B) or 25% of total. These forty companies contributed to ~21% of revenues(among the 337 tickers considered) in the Jun09 quarter,same as Jun08. Profit share has declined from 20% to 18%. Relatively this group has performed worse than the top 20. One reason could be that while the top 20 had just one semiconductor major(Intel), this set has a larger proportion of semiconductor stocks - Texas Instruments, ST Micro, Applied Materials, Taiwan Semi being among the larger ones.

The Next 40 By Revenue In Jun09 Quarter And Their Stats

Source: Gridstone Research

And The Rest

The remaining 277 companies contributed to 18% of sector revenues in Jun09 compared to 19% in Jun08. Their profit share declined substantially from 14% in Jun08 to 10% of sector profits. At  total revenue of $49.9B, their revenues are lesser than IBM and HPQ combined and their profits of $2.4B in Jun09 quarter are
just 40% of the combined profits($6.2B) of IBM/HPQ in the quarter.

This brief analysis seems to suggest that size helps to cushion the impact of such slowdowns as many large companies can easily tweak their cost structure to arrest any impact on bottomlines.

Looking At Industry Group-Level Data Next...

In my next part, I will try to analyze the numbers at the industry/industry group level to see how the large industry groups software,hardware and seminconductors have fared relative to each other.

Disclosure: No Positions

PS: For those interested in the datasheet with the numbers for all the 337 tickers, please e-mail me at: naveen.selvaraj@gridstoneresearch.com