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IT companies dominate profit warnings

The results of the survey come as British IT companies continue to reduce staff numbers in response to tough trading conditions.

Today alone over 10,000 IT workers face losing their jobs as BT, NTL and NEC slash the size of their UK operations, joining online directory Scoot and IT consultancy Cap Gemini which both announced staff cuts last week following a slew of worldwide retrenchment

Telecom manufacturer Lucent has already slashed 45,000 jobs worldwide on the back of a $3.25bn (Pounds 2.28bn) loss, while mobile phone manufacturer Ericsson is considering cutting 10,000, or 10% of its workforce.

A quarter-on-quarter comparison showed a 26% drop in the number of profit warnings, but according to Alan Bloom, E&Y’s head of corporate restructuring, this was not an indication that trading conditions were improving.

Bloom said the number of warnings were still high, adding that their slight decline may indicate that it is too early in the financial year for some companies to be issuing warnings to correct over-ambitious forecasts. On average, a profit warning resulted in an immediate 22% collapse in a company’s share price.

And on a month-by-month basis, profit warnings continued to rise throughout the last quarter, with Bloom warning that profit warnings might rise in the next quarter.

Other sectors which saw profit warnings accelerate were ‘electronic & electrical equipment’, and ‘engineering & machinery’ which each accounted for 10% of warnings.

Two-thirds of warning companies blamed difficult trading conditions in major markets, and sales falling short of forecast. Other factors cited were the slow down in the US economy and the ‘burst bubble of the hi-tech sector’.

Bloom called on managers to ‘get back to basics in this bear economy’.

‘The basics means taking a critical look at all overhead spend, addressing working capital control, stock control, creditor management, debt collection, rationalising or renewing product ranges, supply bases and so on , all those good habits that are all too easily forgotten , and for some necessarily not learned , in a lengthy bull run,’Bloom added.

And John Harley, E&Y’s corporate finance partner specialising in the technology, media and telecommunications sector played down the effects of the US meltdown. He said the City had ‘woken up to the fact that the TMT crisis is more than a US phenomenon and now that it has hit Europe, investors are looking very carefully at how managers are handling it.’

He added: ‘Most companies will have to adjust their forecasts for the third quarter. If they do not, they will either be very lucky, which is unlikely, or fail to meet their targets and be seen to be poorly managed.’

Links

Tough rules increase profit warnings

Tech companies tightening their belts

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