Saturday, 2 February 2008

Lies, damned lies and statistics

A year back, whilst preparing a speech as Chairman of the Prince's Trust Technology Leadership group, I was surprised to read Government ministers claiming an increase in the number of 16-24 year olds in employment in the UK whereas the figures I intended to use showed a 15% increase in the number of 16-24 year olds who were not in employment, training or education. But both statistics turned out to be true - in part because of the number of jobs going to young people from eastern Europe.

On Saturday, I was reading the Tempus column in The Times - Computer language still goes over the market's head . It is really good and got better when I saw my name mentioned in the following paragraph

"Even if the turbocharged Autonomy is excluded, the sector's average forecast earnings growth this year is still a heady 16 per cent. Given historic sales growth in recent years of about 12 per cent, that assumption would appear to be far too optimistic — especially given predictions from the likes of IDC and Forrester that industry revenues will rise by between 3 per cent and 5 per cent in 2008. Holway, the respected UK IT report, is even less bullish and expects no growth at all. On that basis, it would be prudent to assume that consensus earnings forecasts are too high and that the investors should be braced for profit warnings."

Nick Hasell, the writer of Tempus, gives the impression that all these statistics are contradictory. Actually they are probably all true!

Firstly, you can get high earnings growth even when revenues are static or falling. You just cut costs. "Historic sales growth" in the SCS sector as a whole hasn't been in double figures since the late 1990s. But if you average the top line sales growth of the FTSE350 SCS companies, you would indeed find double figure revenue growth last year. That's because companies include acquisitions (and a lot of other things like overseas revenues, currency fluctations etc) in their top line figures. Hence the reported top line revenue growth is always higher than the market growth.

Then we get to IDC and Forrester forecasting 3-5% growth. Firstly, these are themselves very recently downward-revised forecasts. But they include inflation. Holway's "no growth at all" was "in real terms". With UK RPI now around 4%, you can see that (for once) Holway, IDC and Forrester are all pretty much forecasting the same growth.

So, we ALL agree. No UK SCS growth in real terms in 2008 but you can still boost earnings either by choosing a sector with above average growth or cutting costs (or both).

Footnote - Funny, in the article above, how I'm still a 'brand/product' not a 'person'.

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