05 April 2016

6 Working Capital Trends for Tech, Media and Telecoms Businesses

Against the backdrop of rapid change, companies in the technology, media and telecommunications (TMT) space must remain innovative in order to grow, while protecting their market share from disrupters, which are well-financed and eager for success.

According to speakers at a roundtable hosted by HSBC and staged in Singapore, evolving trends influencing the TMT sector are simultaneously impacting the financial operations of industry players. Below are six working capital trends and solutions impacting TMT businesses.

1. Increasing Mergers and Acquisitions (M&A) activity means businesses must free up cash to fund deals

Historically, there have been more deals in the TMT sector than in any other, and this trend is set to continue, according to professional services firm KPMG . However, many of these deals are small in size when compared to other industries, where businesses have sought to either grow or divest portfolios through transactions like conventional M&As and spin-offs. M&A deals give TMT players access to new customers, technologies and products. And, while the types of companies that operate in the TMT segment vary considerably in size, they are nonetheless dominated by a limited number of players with market capitalisations valued at more than US$100 billion1.

Technology companies, in particular, hold stockpiles of cash. This is primarily to ensure their stock prices remain attractive when compared to other companies and industries, as well as to fund corporate growth, which can run into the several billions of dollars on some transactions. Working capital is among the principal means through which cash is hoarded.

2. Relationships between industry segments are changing, as too is the onus of who finances sales costs

While for some time, technology companies have partnered with one another in order to grow market reach and strategically align their businesses with the brand value of others, this is a trend that is pertinent at present. For instance, partnership models are particularly common between telecommunication network providers (telcos) and device manufactures, where both parties leverage each other’s customers and advocates.

A noticeable trend in this particular instance is how, around a decade ago, telcos would fund the purchase of devices from handset manufacturers, and, in turn, provide these to customers who are locked in multi-year contracts. Today, however, this trend is now reversed, where handset providers now fund sales of their devices to customers through telcos. This rearrangement is impacting the working capital requirements of both telcos and device suppliers. This is resulting in better payables performance for the former without incurring handset expense. The latter are turning to bank financing schemes like account receivables factoring and securitisation for associated receivables.

3. Internet-of-Things is enabling once unimaginable efficiencies, but it is also increasing supply chain risk and complexity

Machine-to-machine communications — commonly referred to as the Internet-of-Things (IoT) — is creating unprecedented opportunities for technology firms and end-users, whether businesses or individuals. The industry will be worth US$33 billion by 2020, according to KPMG1. Nonetheless, IoT presents risks, particularly for its biggest user, the semiconductor industry. Already industry consolidation is taking place due to rising R&D costs, slowing growth and increasingly few suppliers. Furthermore, products that leverage IoT technology are seeing their lifecycles lessen. And, standardisation remains challenging for customers that need products from various suppliers.

From a working capital perspective, increased supply chain complexity is reducing visibility, which is impacting inventory transparency; sole supplier risk is forcing customers to seek alternative models with likely less favourable payments terms; and the diverse range of market end-users, ranging from industrials to consumer goods, is increasing operational complexity.

4. Shortening technology lifecycles are driving increased investment in R&D

As a result of technology lifecycles becoming increasingly shorter, industry players are ramping up their R&D spend in a bid to stay ahead of the competition. Driving this trend are changes in the way end-users consume content, and how mobile devices are becoming the focal point of peoples’ lives.

TMT businesses are now required to find capital to invest in the development of new technologies, which is adding strain to a firm’s working capital. This is resulting in companies demanding lenient payment terms from suppliers, as well as increased use of other working capital tools like milestone-based payments and payments restructuring.

5. Cloud services are reshaping how software is accessed and purchased

The introduction of cloud-based services instead of conventional ‘install and operate’ software is enabling end-users to access platforms and programmes from anywhere and at any time, due to the Internet. The various cloud service models — which include infrastructure-as-a-service, platform-as-a-service, software-as-a-service and IT-as-a-service — are usually accessed through a monthly subscription. This is moving technology from being a capital expenditure to an operational expenditure, which is favourable to the working capital of cloud customers.

For cloud services providers, however, this means payments are staggered over the course of the subscription, unless they are able to offer a discounted annual payment plan. These scenarios can be both positive and less constructive to the working capital arrangements of cloud businesses, as on one hand they will have to wait a year to receive the full subscription amount, and on the other hand, deferred payments result in regular revenue streams.

6. Tech firms are increasing their overseas cash portfolios

According to Moody’s, US non-financial corporates held around US$1.73 trillion in cash at the end of 2014, with overseas cash amounting to almost two-thirds of this amount. Of particular note, technology players held around 40% of this overseas cash2. Driving this trend are multiple factors, namely high income tax rates and future uncertainty regarding rules governing the repatriation of money back to the US; the high cost of holding cash idle; and the opportunity to achieve cash efficiency by balancing security, liquidity and yield from their overseas cash portfolios.

Tech firms are today working with global banks like HSBC to make investments that align with the company’s strategic objectives, and as the cash landscape becomes increasingly complex, businesses are appointing a cash manager to provide resources and scale, and to ensure that a firm’s cash positions compliment its working capital agenda.

1. KPMG Research and Analysis (2015)

2. Moody’s Investors Service, Global Credit Research. (07 May 2015). Moody's: US non-financial corporates' cash pile grows to $1.73. https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1004157

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