In the UK, many IT resellers continue to lessen their reliance on hardware sales by offering value added services in order to increase their margins.
- Added value service is key
- Slim margins in the telecommunications segment
- On average, payments take around 60 days
The general demand situation for ICT in the United Kingdom remains good. Demand for hardware products continues to decline (with shipments down 7.7% in 2015), however this is from a very high base, and IT products will continue to be required. Data centres, cloud computing and the continued development of mobile apps and new technology (e.g. wearable technology) are the areas that are anticipated to drive the sector forward, as we have seen a surge of investment in this area. However, British ICT businesses will face stronger competition from their European peers, mainly due to the strengthening of the pound.
Telecommunications is a slightly more difficult segment given the dominance of a few large players in both airtime and handsets. Mobile telecommunication retailers represent a slightly higher risk than other ICT segments. Margins remain slim due to the dominance of the key players, meaning that distributors are often looking at margins of about 3%.
Many IT resellers continue to lessen their reliance on hardware sales by offering value added IT services. This enables them to secure medium- to long-term contracts, which provide them with a better visibility of revenues. Additionally, service activities tend to provide higher margins. Competition continues to be fierce in the ICT sector, with minimal barriers to entry. ICT businesses not only compete on price but also on their product offering, as they try to differentiate their offering in order to preserve margins.
Most ICT companies finance their businesses with asset-based lending facilities. While businesses usually have a working capital deficit, they are able to leverage their debtor book in order to aid liquidity. With the bulk of the lending being asset backed and IT distribution/reselling not seen as a particularly risky sector, banks are generally willing to lend.
On average, payments in the British ICT sector take around 60 days. Payment experience is good, and the level of protracted payments is low. The number of non-payment cases has not increased in the last twelve months, and this positive trend is expected to continue. The level of ICT insolvencies is low, and this rather benign environment is expected to remain unchanged in 2016. Given those strong points our underwriting stance for the British ICT sector remains open.