Technology companies are all feeling the impact of COVID-19—but in different ways. On one hand, demand for technologies such as cloud services, collaboration solutions, e-commerce services, and home-office equipment has spiked due to the lockdown, forcing people to work, study and connect electronically.
On the other hand, disruptions to supply chains, slowdowns in online advertising and discretionary tech spending, and liquidity crunches for some channel partners and customer segments have created growth and profitability challenges. Investor sentiments seem to reflect this, with tech stocks losing ~12% of their values from early February to mid-May.1
The good news is that many publicly traded B2B tech companies are relatively well-capitalized and do not face near-term liquidity challenges.2 However, the changes in customer behaviors because of COVID-19 may constitute a new reality, creating uncertainty for tech players in the near and medium term. For example:
- End customer segments in distress. Many businesses that are traditionally heavy tech buyers have been severely impacted by the current disruption. The impact on certain segments, such as hospitality, travel and energy, is expected to be particularly severe and prolonged. Tech companies serving those industries may see a sharper decline in revenues and cash receipts and may take longer to recover.
- SMBs and channel partners may bear the brunt of the downturn. Despite government efforts to keep them afloat, many small and medium-sized businesses (SMBs) may run into liquidity challenges; some may not survive. This could impact tech companies that rely on the SMB sector or the many channel partners that are SMBs.
- Supply shocks may return. With China and other countries starting to reopen their economies, the initial supply chain disruption has begun to fade. However, if COVID-19 resurges at any point, tech companies may still face disruptions should countries drop in and out of preventative measures.
- Demand pivot as work becomes more remote. Even as tech customers reopen their facilities, a portion of their workforce may remain remote. That may translate into lower demand for office IT equipment, on-premise networking, and security products, but it will likely increase demand for home-office equipment and services. Servicing this shift may require additional agility and increased costs of operations.
Getting ready for the next set of challenges
Many tech companies have already taken the first steps in reacting to near term-issues such as dealing with employee dislocation, identifying actions to support and retain customers, and address liquidity and cost challenges. Now, companies should be focusing on strategies for a new reality.
We recommend an integrated framework to help drive coordinated and strategic action, including:
- Resilience – Continue to preserve cash, give confidence to customers and employees, and ensure business continuity. Use the “Four C’s” (customer, cash, cost, capital) to guide activities.
- Recovery – Performance improvement actions to make it through a likely recession and maximize options in the face of uncertainty:
- Customer: Update customer retention programs and models to minimize churn. Adapt offers and acquisition activities for changing conditions and behaviors.
- Cash/Cost/Capital: Revisit network capital investment plans in light of changing demand and usage patterns. Shift spend from retail to call centers. Adjust advertising mix and messages. Aggressively manage bad debt expense.
- New Reality – Capture opportunities that arise because of the new reality:
- Take actions to better serve the needs of customers who may demand more flexibility in digital/remote engagement, capacity, delivery locations and commercial terms.
- Provide subsidies and adapt distribution models to maximize value in an environment where customer purchase drivers may be different.
- Seize M&A opportunities driven by dislocation, declining valuations, and reduced tolerance for risk. Use the downturn to stock up on talent.
Over the coming weeks we will examine each of the components of this integrated framework in detail, including considerations for different sub-sectors within tech. While market dynamics are shifting quickly and the future remains uncertain, companies that focus on moving from short term challenges to recovery and preparing for the new reality, will emerge in the best position.
Learn more about how technology, media and telecommunication companies are playing a crucial role in addressing the COVID-19 challenge.
- KPMG Analysis of all companies traded primarily on major US exchanges between Feb 19th and May 12th sorted by GIC codes
- KPMG Analysis of publicly traded tech companies using data from Capital IQ as of end of Q1 2020