Only the strong

Last issue, I touched on a trend that suggests further consolidation and general squeeze in the IT distribution and reseller markets was going to ruffle a few feathers in the channel this financial year.

So it wasn't surprising to read through PricewaterhouseCoopers' 17 June bi-annual report on the Australian technology sector, which added some weight to my observation.

The report – which tracked the performance of 103 Australian technology stocks – suggested that further write-downs from ASX-listed technology companies during the reporting season, triggered by the recognition of 'impaired' assets – which have a market value lower than what's stated in company accounts – would drive industry consolidation.

I nearly fell off my chair when I read about how around 35 percent of all technology companies had a possible impairment of assets as of the end of last financial year and more than half of these companies faced possible impairment of intangible and tangible assets.

In addition, only 23 percent of these companies delivered positive results to their shareholders. PwC valuation and strategy partner Mark Reading was basically suggesting that under-performing technology companies (let me re-phrase that … the majority of Aussie and international technology companies) will need to consider reducing the value of their assets through write-downs.

He wrote that 'ultimately, write-downs will help force industry consolidation, enabling the strong players to grow through acquisition'. Well, those that are left anyway.

One recurring point in this report was that companies need to accurately value their assets and when this is completed, they can assess whether to merge, acquire or be acquired for their continued survival.

We're now operating in an industry where only the strong will survive, only those that don't inflate the 'true' value of their assets.

Reading hit the nail on the head when he said that tech outfits had been traditionally rated using a simple measure of 'revenue growth', which is 'short-sighted'.

The fact of the matter is that IT companies, particularly channel companies, should be rated not only on revenue growth potential but the strength of their business partnerships, management structure and more importantly judged on their ideas and ability to deliver.

So many top level managers in this industry are missing the mark. Revenue growth is all fine and dandy, but when it's all said and done, if there's red ink (something we're seeing more often these days) then there's no point.

The report found that three ASX-listed companies – IT services outfits Oakton Limited, Volante Group and ISP iiNet Limited – had acknowledged the changed tech environment and reviewed their business models.

I'll add Aussie developer Technology One to that list. Company CEO Adrian Di Marco told me recently that despite a $1 million internal restructure, the company would report a profit of $10 million on sales revenue of $50 million. In this market, that's tidy.

Do you agree with this assessment of the industry?

Byron Connolly is editor of CRN. He can be reached on (02) 8399 3611 or via email at bconnolly@ajb.com.au.