Company performance: software sliding into recession?

A quarter of the UK Computer Software industry is showing signs of recession, according to the latest Plimsoll Portfolio Analysis: Computer Software. The analysis finds companies must be adopting one of four views on the current recession debate. Taking the findings of the research and interpreting it, the following conclusions have been drawn.

Current views on the recession:

`I'm in a recession now'

23% of the industry is losing market and profitability. These companies are finding the market tight and highly competitive.

`There is no recession"

39% are showing no signs of recession at all. These companies are powering into the market and uncovering great returns.

`I'm preparing for the worst just in case'

29% are adopting a steady approach trying to profits and in most cases, are using these profits to pay off debts.

"I'll blast my way through"

29% are going for it striving for as much market as they can get. Currently though these companies are showing poor returns for their efforts.

Software Industry Background

A quarter of the 947 companies studied in the Computer Software industry are feeling they are in a recession. These 222 companies have seen sales decline a staggering 17.3% on average over the last year. 55% are now at high financial risk according to Plimsoll and on average all of these companies are loss making.

These companies tended to be the smaller companies and are seemingly getting left out an otherwise healthy market. Current market growth for the industry is a healthy 10%. Profitability is on the right side of the red line at 3.0%. Efficiencies seem to be good at the moment and sales per employee numbers are healthy at around 129,000 [pounds sterling] per person.

Comparing dismal performance with the exceptional, Plimsoll located 366 companies who grew above the industry average with 22.1%! These companies would definitely not consider themselves to be in a recession at the moment.

For those 84 companies who are preparing for the worst in case of a recession, Plimsoll found overall debt had declined in these companies. Although profitability is steady at 7.4%, their compromise seems to have been sales growth. Last year saw a 15.5% drop in their sales. Motivation and future competitiveness for these companies should prove interesting. Perhaps the most captivating are those companies who plan on going for growth no matter what the cost if a recession hits. These 275 companies are growing at 16.2% on average. Like those companies most fearful of recession, all of these companies are on average loss makers. This cavalier approach to recession is no doubt brave but perhaps a bit too risky. The fact remains some companies thrive in a buoyant market and others lose ground commercially and financially. It could be suggested that in this virtual game of Snakes and Ladders, companies fearful of sliding into recession might be the most attractive to acquirers.

Plimsoll's own research suggests that recession should not be measured by industry(s) as a whole. "To generalise on company performance seems outdated and flawed. Recession will be more accurately determined by individual companies. It is up to individuals as to what stance they have on the issue and what strategies they will take to ensure survival,"

Survey Analysis Results

IN RECESSION:

Sales growth              -17.3%
Profit margin              -0.6%
Taking on more debt        53%
High financial risk %      55%
Sales per employee        119, 000 [pounds sterling]
Number of companies       222
Percent of Industry        23%

NOT IN RECESSION:

Sales growth               22.1%
Profit margin               6.3%
Taking on more debt        56%
High financial risk        25%
Sales per employee        149, 000 [pounds sterling]
Number of companies       366
Percent of Industry        39%

PREPARED JUST IN CASE

Sales growth              -15.5%
Profit margin               7.4%
Taking on more debt        38%
High financial risk        32%
Sales per employee        132, 000 [pounds sterling]
Number of companies        84
Percent of Industry         9%

GOING FOR GROWTH:

Sales growth               16.2%.
Profit margin               0.0%
Taking on more debt        61%
High financial risk        54%
Sales per employee        114,000 [pounds sterling]
Number of companies       275
Percent of Industry        29%

INDUSTRY:

Sales growth               10.3%
profit margin               3.0%
Taking on more debt        55%
High financial risk        41%
Sales per employee        129,000 [pounds sterling]
Number of companies       947
Percent of Industry       100%

www.plimsoll.com

David Pattison, Financial Analyst, Plimsoll Publishing Limited