Martin Hingley's Blog

World ITC Recovery Highlights

• On average the 20.8 million employees of ITC suppliers generated $75k revenues and $7.8k net income each in Q2 2010
• Those in hardware and software companies and divisions generate much more revenue than those in Telecom and IT Services ones
• Despite a dramatic fall in the credit crunch Software has returned to leadership in terms of profit margin and net income per head
• Revenue per head is much higher in the Americas than in other regions
• Revenue per head in EMEA s lowest and (worryingly) now dropping below the lowest level in the recession
• Profit margin and net income per head for ITC suppliers is highest in EMEA
• ITC suppliers have slowed recruitment, which stood at an annual increase of 3% in Q2 2010
• There has been a shift of employment from West to East with increases in Asia Pacific holding around 6% throughout the downturn, despite significant drops elsewhere
• We can learn new things about our industry by studying different business planning data

At ITCandor we have always held that there are many lessons to learn from a downturn. Recent quarters have shown some dynamic changes in market share and the success of individual offerings. Our market model is different from most others in that it includes new types of business planning information. We believe we run the only tracker in the world to capture net profit and headcount for all suppliers alongside the more traditional revenue information. So we thought you would be interested to see our view of what the credit crunch did to these measures and how the market has developed during the recovery. This is new stuff, so we’re particularly keen to get your feedback and ideas.

Software And Hardware Suppliers Achieve Much Higher Revenue Per Employee, Software Leads In Terms Of Profitability

In Q2 2010 we believe the ITC market was worth some $1.5 Trillion ($1.5 thousand billion). Net Profit stood at $162 billion and employment among suppliers was 20.8 million worldwide.

Figure 1 shows the average revenue each employee generates for its supplier in the four broad categories of the ITC market for each quarter from the beginning of 2007 to the end of Q2 2010. If you’re a supplier operating in one of these broad categories you should compare your own revenue development to see whether your business exceeds or falls short of the average. All currency values in this article are ‘current $US’ by the way: we haven’t done anything to remove the effects of exchange rate fluctuation from the results.

Overall ITC suppliers currently generate around $75k per employee, which is better than the $71k at its lowest point – but down from the high of $85k at the end of 2007. The ongoing pruning of – especially Western – employees during the redundancy means that revenue per employee for our industry didn’t take the same shape as the decline in revenues. There are some interesting findings for the categories. In particular:

• Hardware suppliers generate the highest revenue per employee; productivity dropped from $110k each at the end of 2007 to $84k in Q1 2009; the sharp recovery in sales of hardware devices put the average per employee at $85k in Q2 2010
• Software companies also generate high revenue per employee and the smaller size of the market creates more dynamic movements than other categories; the peak in term of productivity was actually post-recession in Q4 2009, although the average has fallen back somewhat since then
• Telecom Service has fallen from $92k at its peak in Q2 2008 to around $78k per employee in Q2 2010; as the largest category movements here are more measured than in other sectors
• IT Service has changed dramatically over the decades with a broad move from highest (in the 1990s) to lowest revenue per head of the various categories; in recent quarters it has hovered between $53k and $62k per employee on average

Profit margin (revenues divided by net income) and the average profit per employee produce similar results, as can be seen in Figure 2 and 3. Here the immediate and deep effect of the credit crunch can be clearly seen on the performance of the ITC industry. There had been a significant drop in net profits in Q4 2007 as well in the Telecom Service market, due largely to massive ($29b) losses at Sprint in the quarter.

The dip in Q4 2008 included significant losses from all kinds and nationality of vendors including China Telecom, NEC, Sprint (again), Hitachi, Nortel, Motorola, Alcatel Lucent and Symantec.

All sectors have recovered, with Software returning quickly to strong double-digit profit margins. Hardware margins have remained low, rising to just 7% by Q2 2010. IT Services was least affected by the credit crunch, suffering a slight fall before returning to a 10% level by Q1 2010.

As we mentioned above the picture for absolute net income (Figure 3) is similar to that for profit margin (Figure 2). It is interesting that whole sub-sectors of the market made a loss (Telecom Service in Q4 2007, Software in Q4 2008 and Hardware in Q4 2008 and Q 1 2009). Overall the absolute net income per head for the total ITC market has recovered to around $7k per quarter.

America Leads The World In ITC Supplier Revenue Per Employee – EMEA In Net Profit And Profit Margin

When looking at these measurements from a regional perspective we had some interesting findings. In particular:

• The Americas lead in terms of the average revenue per employee for ITC suppliers, averaging over $90k each in Q 4 2007 and Q4 2009, generating thousands of dollars more each quarter than other regions; a lighter workforce and large markets contribute to higher average revenue per employee there
• In EMEA the average revenue per head for ITC suppliers is constantly lower than in other regions, worryingly dropping to just $65k in Q2 2010; we believe the costs of supporting multiple countries in the region (rather than in the other regions where the US, Japan and China predominate) contributes to lower average revenue per head.
• Asia Pacific closely follows the world market, with the average revenue per head hovering around the $75k market

The average revenue per head took a sharp downturn in the middle of 2008, reaching its lowest point in Q1 2009, from which it has largely recovered. Drops in this measure at the beginning of 2010 are worrying – especially in EMEA where the average is now lower than it was in the depth of the credit crunch.

Our industry is known for higher productivity than others. On a longer term basis the average grew from around $59k per head at the beginning of 2003 to the peak of $84k in Q4 2007. The disruption of the credit crunch has stalled the increase for now. It will be interesting to see if they resume once more stable market conditions return.

Profit margin and net income per employee (Figures 5 and 6) show some even more interesting results. In particular:

• EMEA leads in terms of margin and absolute profit per head, with peaks in the middle of 2007 and beginning of 2008; in Q2 2010 each employee of ITC suppliers in the region generated $9k net profit which in turn produced a margin of 14%
• Profit margins and averages per head were worst in Asia Pacific of the three regions, although at around 6% and $5k respectively in Q2 2010 they have now returned to the levels they were at before the credit crunch
• The Americas closely follow the trends for the world, with a return to a profit margin of around 10% in Q2 2010 and an average per head of $9k

Why is revenue per head lower and profit per head higher in EMEA than in other regions? Certainly there are comparatively less manufacturing operations there, increasing the proportion of sales and marketing reducing the number of manufacturing staff. In addition the greater granularity of country markets (mentioned earlier) may constrain the largest revenue opportunities. Please let us know if you have observed this and have a better reason.

Supplier Headcount Shifts To Asia Pacific, Telecom Leads ITC Categories

The ITC industry has been very successful in comparison with others, resulting in a continuous increase in overall staffing levels. It has grown from 15.3 million at the beginning of 2003 to 20.8 million in Q2 2010. However there was already a slowing in the growth rate from 2007 onwards before the credit crunch brought about large scale redundancies and a decline in the Hardware and IT Services categories (Figure 7). Interestingly Telecom has gone through a recruitment phase in recent quarters. The overall rate now stands at about 4% annual growth per quarter –down from around 8% at the beginning of 2007.

Increases in employment have not been similar in all regions. In particular there has been a strong shift from the Americas and EMEA to Asia Pacific (Figure 8). While pursuing the legitimate aim of expanding their business in emerging countries (typified by BRIC strategies), many suppliers have also used the smoke screen of the recession to hack away large parts of the Western workforces – restructuring in ways which would not be tolerated by governments and unions in more stable economic times.

Some Conclusions – What Can We Learn From The Recession?

On a long term basis the period between 2003 and 2010 has been one of significant success with rises in all of the measures. For all ITC suppliers revenue per head has increased from $59k to $75k; net income per head from $3.3k to $7.8k and profit margin from 6% to 10%.

Looking at profitability, revenue per employee and similar new measurements gives us a clearer picture of what happened to our industry during the downturn and subsequent recovery.

At the end of 2007 there was a significant drop in net profit overall created in the Telecom Service area – particularly by huge losses at Sprint. Of course there were also strong declines in a number of measures at the end of 2008 caused by the credit crunch.

In the health industry there are two overall strategies for many suppliers – looking after an ageing population in the wealthy Western countries, while bringing better standards of medicine to poorer populations in Eastern ones. Similarly in the ITC industry there appear to be two strategies – bringing even more expensive devices and services to Western emerged economies (witness the wildfire success of Apple’s products), while expanding coverage of broadband and first sales to emerging ones. Both strategies have helped shape the statistics we have shown here.

Perhaps the most interesting finding is the level of disruption caused by the credit crunch. These measures move at different rates – profits decline faster than revenues, which in turn drops sooner than employment levels. While a number of countries are worried that austerity measures adopted to cut back massive sovereign debt could create ‘double dip’ recession, we should also be concerned that the instability of the ITC market could result in another dramatic drop in business in the next year or so.

What do you think? Have the markets recovered enough to forecast ongoing growth? As always please let me have your comments.

Filed under: Market Share And Forecast, Surviving The Downturn Tagged: | credit crunch, headcount, net income per head, profitability, Recovery, revenue per head