Tech sector drives rise in UK profit warnings

A surge in profit warnings by technology businesses drove a prolific first quarter for such announcements from UK-listed companies as economic uncertainty led to delayed and cancelled contracts.

UK-listed companies issued 75 profit warnings in the first three months of the year, according to analysis by EY Parthenon, their highest first-quarter number since the onset of the Covid pandemic in 2020.

Economic uncertainty was a factor that led companies to warn on profits, the research found, with more than a third of businesses citing delayed, reviewed or cancelled contracts in their updates to investors.

“Economic forecasts may have seen some improvement in recent months, however the extraordinary strength of headwinds over the last two years has left some businesses facing recession-like conditions,” said Jo Robinson, EY-Parthenon partner.

Volatility fuelled a surge in profit warnings in the technology and telecoms sectors, with the number almost tripling year-on-year to a three-year high of 16.

“Significant disruption and uncertainty, particularly in consumer-facing markets, is having a knock-on effect on the telecoms, media and technology sector as businesses re-evaluate their cost bases and delay purchasing decisions,” said Will Fisher, partner at EY.

Contract issues were mentioned in 69 per cent of warnings in the sector, which was hit by rounds of cost-cutting. Increased borrowing costs and turmoil in banking markets sparked by the collapse of technology-focused lender SVB also contributed to a challenging fundraising environment for tech companies.

The research also highlighted a higher than average market dropout rate for businesses that warned on profits multiple times since the start of 2022.

Almost 30 per cent of the 31 companies to have posted three such announcements since the start of last year have delisted or are in the process of being sold. Typically, one in five companies delist within a year of their third warning, mostly because of insolvency.

A total of 98 companies have warned on profits more than once since the beginning of last year, according to researchers. The coming year would be “crucial” said Robinson, as insolvency usually spikes about a year after a profit warning peak.

The beginning of the year brought a slight reprieve for the retail sector, which in 2022 reported the most profit warnings. Retailers issued five in the first three months of the year, down from nine in the final quarter of last year.

But inflation, higher borrowing costs and a tightening in consumer spending will continue to add pressure on a sector that is already under stress. Nearly a third of the UK’s listed retailers have warned on profits at least twice since January of last year, well above the 8 per cent cross-sector average.

Despite brightening economic data such as a rise in consumer confidence, businesses across the UK risked struggling with finance costs and increased working capital demands throughout 2023, Robinson warned.

Quarterly profit warnings have remained above the 10-year quarterly average, excluding 2020, for more than a year. UK companies issued 305 warnings in the first three months of 2020, their highest first-quarter number.

“While the UK economy appears to be turning a corner, recovery is not guaranteed,” said Robinson.