Talking Tech

Talking Tech is produced by the Progressive Tech Team of George O’Connor, Ian Robertson and Gareth Evans. Our aim is to bring you up to date with the tech news cycle each week. We comment via blog and podcast on the slings and arrows of the sector at a time of huge change.

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June 19, 2024

Tech Sector economics: The curate’s egg

Into the Q2 end we tap-tap and break into our macro data. The sector has some good points, some not so good ones: runny and hard.

In this edition we highlight an array of data points spanning: those persistent Tech sector lay-offs, hiring intentions from ManpowerGlassdoor, Tech worker vacancies and the ongoing salary pressure. We show Gartner’s upward revision to IT spend forecasts, but the subsequent reduction in UK GDP growth estimates stymied wider enthusiasm. But there is enthusiasm. To wit: Our ‘Sell in May’ investment thesis came a cropper as FTSE Techmark index is +4.2% since May to 17 June. Sector TSR +9.15% YTD vs -7.8% cal2023. Sector valuation nudges better (FY1 P/E 18.3x, vs 16.7x for May). Corporate news saw Salesforce shares hit hard (-17%, 29 May) on a revenue miss and guidance which trailed consensus. There appears to be some ‘bloat’ among enterprise buyers but this marked GenAIs first warning. In the ensuing panic we reviewed software sector NRRFCF and ARR . . . and breathe.

In the UK, Raspberry Pi shares are +57% on its IPO prompting us to ask ‘how have tech IPOs performed’? Tracsis warned on election delaying spend (forgivable), but also squeezed in a mention of US problems. On 18 June we had a storming set of FY results from Intercede, a so-so SThree H1 Trading update and shareholders approved the Darktrace acquisition. This morning (19 June) we have positive macro news (UK inflation) but echoing the Curate’s Egg theme MSP Maintel informs that H1 revenue was “slower than expected”, but given a buoyant sales pipeline the company is cautiously optimistic about achieving consensus expectations. Line up the soldiers, read on as we peck at the sector data points.

The data

Sector layoffs persist, and salaries drift lower

Message in the chart: Tech sector lay-offs remain persistent (40.9k Q2TD, vs 57.2k sequentially, 46.4k Y/Y). The pressure on tech salaries remains, but the free-fall eased and UK June full-time rates (£56.9k) saw a sequential rise, 0.5%. This first sequential increase since September last. All help sector profitability.

 

 

Job openings and hiring intentions

Message in the chart: Hiring intentions remain lower Y/Y with the Manpower NEO 22% unchanged sequentially, -6% Y/Y. Tech worker vacancies saw a sequential rise to 211k (14 June), from 168k. SThree (18/6) H1 update saw net fees -7% Y/Y with Permanent -18% Y/Y. This doesn’t capture the moves to work staff pyramids and the re-tooling for GenAI.

 

 

‘Selling in May’ blatantly not working so far

Message in the chart: In a traditional ‘Sell in May’ sector, this summer has seen a strengthening Techmark Index, which is feeding a more general enthusiasm for the sector. The FTSE Techmark index is +4.2% since May to 17 June. There is greater awareness that the UK is cheap, but importantly there is share momentum.

 

 

IT Spend forecast, by Gartner Group

Message in the chart: The first increase in IT spending forecast by industry analysts Gartner, with IT spend forecast increased from 6.8% to 8% Y/Y largely because Enterprises are funneling more money into consulting rather than internal staff.

 

Source: Gartner Group

 

IT Services dashboard

Message in the chart: Comments by Gartner about a strengthening IT Services market is not evident from the revenue growth rates being reported by the IT Services cohort – here revenue growth rates continue to slip.

 

 

Sector TSR, since 2019

Message in the chart: Sector TSR, +9.15% YTD, compares favourable to the -7.8% in cal2023. Raspberry Pi shares are +57% on its IPO. We said farewell to LoopUp another AIM exit, and shareholders approved the Darktrace acquisition (18/6).

 

Charting UK GDP growth, IT spend, Sector FY1 P/E

Message in the chart: The upward revision to IT spend estimates by Gartner, was balanced by the subsequent reduction in UK GDP growth and persistent higher cost of capital stymied wider enthusiasm. Note rising IT spend will usually cause a rising PE.

 

 

Enterprise Software ARR, NRR and FCF sequential growth rates (%)

Message in the chart: Salesforce shares were hit hard (-17%, 29 May) on a revenue miss and guidance which trailed consensus. The ensuing panic prompted us to review wider software sector NRR, FCF and ARR to check for any contagion. These are +1.6% (reversing three quarters of decline), +6% and -6.2% sequentially respectively.

 

 

Glassdoor Company ratings

Message in the chart: Somewhat confusingly, given the wage outlook and staff reductions, tech staff are generally happier (3.83x) since January (3.79x). Could it be survivorship bias?

 

Source: Glassdoor, Technology Investment Services, Progressive Equity Research

 

Valuation heatmap

Message in the chart: The June sector valuation is broadly unchanged since January, however there are interesting changes in the cohorts: notably. Cyber, Data Analytics and Mag 7 remain expensive, cheapest Recruitment (Note SThree 18/6), Data content, and Games. In addition we highlight the opportunity in RAG technologies which are still attractively priced.

 

 

IPO prices

Message in the chart: Day 1 is important but, as my former boss Tim Linacre would say the share price after a year is the thing. With that in mind we show tech IPO cohorts since 2018, in a ‘where are they now’ exercise.

 

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