By Ryan Starkes
Technology company CFOs are expressing an optimistic, albeit cautious, outlook for 2012 with a renewed focus on M&A and raising capital to supplement slightly lower revenue projections, according to the fifth- annual BDO Technology Outlook Survey. The survey examined the opinions of 100 chief financial officers at leading technology companies throughout theU.S.about all aspects of their company’s operations, including growth, financial, hiring and production strategies for 2012. The following provides a snapshot of the Technology Sector Outlook this year:
Revenue Increases Tempered by Economic Volatility
Growth is ultimately judged by increasing the top-line and 73 percent of chief financial officers atU.S.technology companies expect revenues to increase in 2012. Although the outlook is positive, CFOs foresee overall revenue increases of just 2.6 percent – significantly lower than the forecasted growth in last year’s survey (10.4 percent) and the first time since 2009 that revenue projections have not exceeded the previous year. This is not surprising based on recent global economic and marketplace volatility.
M & A Outlook Strong
The vast majority of technology CFOs (75 percent) expect M&A activity in the sector to rise in 2012, down just slightly from 2011 (78 percent) and 2010 (81 percent). Revenue and profitability remains the most commonly cited primary driver for mergers and acquisitions in the technology industry, as cited by 38 percent of CFOs. With high-levels of competition among cloud and SaaS providers, the software industry is expected to see the most M&A activity by 39 percent of CFOs, followed by media/telecom (33 percent), life sciences (12 percent) and hardware (11 percent). GivenNew Jersey’s predominance in each of these technology subsectors, it is likely that 2012 will be an active year.
Outsourcing Declines Spur Job Growth
In what can be seen as a positive result of recent proactive business-friendly initiatives, such as the various financial and incentive-based programs offered in New Jersey, just 32 percent of CFOs say they currently outsource services or manufacturing to companies outside of the U.S. This marks a notable shift from 2009 when nearly twice as many companies (62 percent) were outsourcing. As the tech industry moves jobs stateside, companies are looking to bolster their workforce in 2012. In fact, half of CFOs plan to hire more employees this year, and the outlook is positive for tech industry jobs to stay in theU.S.Among the companies who are not currently outsourcing, 80 percent report that they are unlikely to outsource services or manufacturing overseas in the near future. Bringing services and manufacturing back to theU.S.is also a smart move for tech companies looking to improve the quality of service and reduce exposure to international risks and major supply chain disruptions.
With 91 percent of CFOs predicting that hiring will increase or remain steady at their organizations, there is renewed confidence for jobs in the technology industry. CFOs expect to see the most new positions in the sales and marketing (41 percent) and R&D functions (23 percent), a signal that companies are aiming to bolster the product cycle. Other CFOs expect to hire the most new employees in manufacturing (15 percent), administration (12 percent) and management (5 percent). These trends are consistent withNew Jerseybased technology companies.
Major Shift for Manufacturing
In a major shift, manufacturing went from being the most commonly outsourced service in 2011 (53 percent), 2010 (51 percent) and 2009 (54 percent), to the least cited outsourced service in 2012 (33 percent). The natural disasters that rockedThailandandJapanin 2011, causing major delays in supply chains that are still not fully remedied, are the likely contributors to this change. Of the 32 percent of companies who are outsourcing, IT (63 percent) and R&D (51 percent) are the top outsourced services. More CFOs also report outsourcing call centers this year (37 percent vs. 12 percent in 2011). WhileIndiaandChinaremain the largest countries to which technology companies outsource,Latin Americawas identified as the most popular region for considering future outsourcing opportunities. A part of this “nearshoring” trend,Latin Americahas become an increasingly attractive option for tech companies, as it affords the advantages of proximity and a skilled labor force.
Private Debt Emerges as Primary Strategy to Access Capital in 2012
With the financial crisis of 2008 still fresh on their minds, technology companies have been very strategic in preserving cash and liquidity to sustain their business activities through cash generated from operations. While 76 percent of CFOs say they feel better about the ability to access capital in 2012, the findings showed a 9 percent drop from 2011 levels (83 percent). Despite a high level of confidence in access to capital, the survey reported only 38 percent of CFOs plan to seek additional capital, compared to 43 percent last year. Interestingly, and in a change from 2011, among CFOs who are planning to seek additional capital this year, 55 percent will focus on debt to do so, a significant increase over 2011(31 percent). Of those CFOs, the vast majority (91 percent) will focus on private debt, with the remaining 9 percent looking to public debt. This is not surprising given the Fed’s efforts to continue to maintain low interest rates. Fewer CFOs (35 percent versus 43 percent in 2011) indicated that private equity will be their main tool to raising capital. Interest in public equity also dropped, with 9 percent of CFOs citing it as their primary source of funding, down from 19 percent in 2011.
With some recently completed IPOs, as well a number of greatly anticipated, future stock market launches pending for 2012, including Facebook, 63 percent of technology CFOs forecast an increase in IPO activity this year. This expectation is consistent with BDO’s recent IPO Outlook Survey, which found that 73 percent of capital markets executives expect an increase in IPO activity in the technology sector.
In conclusion, it appears that the positive outlook for M&A activity and a lower cost of capital are providing technology companies with the confidence to increase hiring and look for opportunities to continue to expand their businesses. GivenNew Jersey’s continued focus on supporting technology based companies, a highly-skilled technology workforce, and the ability to raise capital,New Jerseybased technology companies are well positioned to benefit from these improving conditions.
Ryan Starkes is a partner in the Tech & Life Sciences Practice of BDO USA, LLP and based in the firm’s Woodbridge office; firstname.lastname@example.org.