Tuesday, 23 September 2008

Beware Q3

Yesterday I had my normal day full of meetings with people at the very heart of our sector. Except it wasn’t ‘normal’. It was the first day after the momentous events of last week. As I have said countless times before, since this whole credit crunch debacle became public in Aug 07, most of the SITS sector has been ‘Living in Denial’. “It won’t affect us”,We are seeing no evidence of any downturn” etc. The SITS sector went on its annual break in August. At least, when they returned, their eyes were opened and they started facing reality at last.

Without naming names, let me just summarise some of the things that were said to me yesterday.

The UK CEO of a Top Ten provider of SITS to the UK market told me that orders “had fallen off a cliff” in the last quarter. Customers were delaying decisions. “Let’s revisit this in 3 months time”

The manager of one of the larger Private Equity funds active in the UK SITS market told me that they had institutional pressure to sell holdings. They were having run-ins with management who thought this was a lousy time to sell - which it is. But if cash offers were on the table, they would force a sale.

The CEO of a small quoted SITS company told me “I did the rounds of our investors over the last couple of weeks. Almost without exception they were more interested in whether we would be able to survive a sustained downturn, than in this or next year’s profits.”

The fund manager of one of the largest Global Tech Funds confirmed to me that their end user research indicated that users were “cutting budget and deferring decisions”. Consumer tech spend was slowing down – from TVs, to smart phones, to gaming systems to PCs. Even Apple iPhone sales had slowed. The emphasis, even in the tech companies themselves, was how to reduce internal IT spend. Ie the vendors were applying the tech spending brakes just like their customers.

On the markets, any company admitting a slowdown saw their share priced hammered.

I could go on, but I hope this gives an impression of the reality that is setting in right now.

The problem is that if you look at the graph above of UK SITS stocks (as measured by the FTSE SCS Index) compared with the FTSE100, you might be excused for feeling that nothing was wrong. The FTSE SCS Index is pretty much unaltered YTD (down 1.7%) compared with a 18% decline in the FTSE100.

But that’s before Q3 results to 30th Sept 08 are announced. I now have little doubt that many results will not meet expectations and most will give extremely cautious outlook statements.

How long will the downturn last?

Nobody I talked to expected any upturn this year. The debate centred on whether a nadir would be reached in the middle or end of 2009. My own view veers towards the latter.
Batten down the hatches. There is a real storm ahead.

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