How might Covid-19 affect the technology sector?

Armstrong’s note of March 19th (‘Covid-19 - impact, support, and opportunities’) gave examples of sectors & subsectors that Armstrong believe to be categorised as either resilient, pressured, or snap-back opportunities during the ongoing pandemic.

This note looks at key themes for investors to consider in the technology services sector during this downturn, and the recovery to come. It follows those on Business Services, Financial Services and on Covid-19 - impact, support, and opportunities. Our next note will look at the Industrials sector.


Summary

The technology sector, already in-vogue for PE, is expected to be one of the more resilient sectors during the Covid-19 pandemic. B2B tech companies will play a key role in enabling the ‘new normal’ of distance working and commerce through transformation and management of corporate IT infrastructure, security and digital routes to market. Whilst most intermediated process are on hold for the time being, there remains a significant value creation opportunity for PE in carefully targeted off-market deals, bolt-ons and corporate carve outs.


Recommendations for investors – how investors can generate value from technology during/after Covid-19

  • Technology is the key enabler of distance working; telco and ITMS, already hot sectors, are receiving a further boost from the outbreak.

  • More distance working has opened up more attack vectors. Cybersecurity software and services, already high on corporate agendas, will attract additional spend.

  • Notable laggard sectors (legal, education, government, and healthcare) have been forced by the rapid dislocation to adapt to remote working. This provides a window of opportunity for service providers and ISVs serving these segments, many of which are offering free trial services in a land-grab, hoping to convert them to paying users later.

  • Understanding end-market vertical exposure is essential, even for recurring revenue businesses where customers in at risk sectors (especially retail / travel) may not be in a position to pay contracted fees, and increased business deaths (including SMEs) will lead to elevated churn.

  • Spend which is business critical, required to adapt to the changed working/consumer environment, or has long planning/budgeting cycles will be robust. Discretionary and project based spend is likely to be deferred. Temporary solutions (e.g. Citrix access to on-prem legacy systems) can act as a wedge to longer term solutions.

  • Digital marketing services will come under significant pressure as client discretionary marketing spend is pared back. Smart providers will be working with clients to plan strategies to steal market share when consumer sentiment stabilises and the economy re-opens.

  • E-Learning and training will be resilient in non-discretionary areas (e.g. regulations/compliance) and may benefit from the shift away from in-person provision.

  • The situation is evolving rapidly and official statistics have too long a lag time to keep up; real time alternative market data and BI has therefore increased in value.

  • Being able to sell / deliver at a distance is a key advantage for many tech businesses. Companies operating service desks (and any form of call centre) require well invested ITSM/comms infrastructure to enable secure home working. People/consultancy-based businesses which frequently work on-site are at a disadvantage.


Analytical framework - how we modelled the likely impact of Covid-19

The Armstrong Framework model accounts for the likely impact of Covid-19 by grading a sector (and then subsector or company or a portfolio) across a range of key metrics. This allows us to generate an initial categorisation of pressured, resilient, or snap-back. From there, we take a more detailed look at a sub-sector or a company’s dynamics, to generate recommendations which maximise opportunities and minimise risks.

For the technology sector the key metrics are:



Risks and opportunities - how selected subsectors might respond to the challenges

The results of this analysis for selected technology subsectors are as below.

Key;

1 block/red is likely most affected (“underweight”).

3 blocks/mid green is likely most resilient (“neutral”).

5 blocks/dark green is most likely to snapback quickly (“overweight”).



Note; We are happy to run specific subsectors and companies through our model and share the output and our insight with you. Please get in touch with our business services sector experts below.


Next steps – how Armstrong can help you and your portfolio companies

Armstrong is working with PE investors and portfolio companies to understand the new normal, identify risks and opportunities, and support management teams navigating this crisis.


If you would like to discuss the themes in the article in more detail and understand their impact on specific companies or sub-sectors, then please contact our Head of Technology, Mike Callow:

Mike Callow, Director, +44 7894 594 500, mcallow@armstrong-ts.com

Head of Technology

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