TMT perspectives: some subsegments are virus-resistant

We have all watched the current crisis unfold with dread, with a large toll on human life, the strains of confinement across the globe, uncertainty about the duration, and worry about what comes later.

Even though the situation remains highly volatile and evolves daily, some underlying market segments resist better than others. Among them, “technology, media & telecom (TMT) appears to be one of the most resilient for some of its verticals,” says Bertrand Hermez, head of Clairfield’s TMT group.

The coronavirus is impacting businesses and stock markets in an unprecedented way, and is likely to bring the European economy into recession this year. Most impacted countries are predicted to see a drop of 30% to 40% in monthly GDP, and stock markets have declined by around 30% since the highest peaks reached in February 2020 (as of April 2, the DJI was down 27% and the EuroStock 50, – 30.5%). In the next few weeks, this downturn will also impact the value of non-listed groups and private equity transactions due to the correlation of valuation methods to listed peers, but also to 2020 revenue erosion, worsened EBITDA margins, limited leverage from senior lenders, and unclear perspectives for the months to come.

TMT, appears to be one of the most resilient for some of its verticals. When compared to other industrial indices, the NASDAQ composite has decreased by “only” 23.9% since the February high, about 7 points less than other markets.

• Software and apps with a SaaS business model continue to benefit from recurring revenues. Once plugged in to clients’ IT systems, they represent a long-term commitment due to the inconvenience of switching, cost of new training, or implementation. Nevertheless, they could be affected in the medium term by the inability of some clients to make payments (bad debts). This vertical will also be directly linked to the US capacity to cope with the current crisis, as US players still represent more than 40% of the worldwide market for software and IT services (Western Europe accounts for 25%, and China only 5%). India, as the largest supplier of offshore services, will also be key for being able to ensure BPO and IT development services to international clients.
• Media: digital news outlets have seen a sharp increase in online subscriptions (for instance the online newspaper Le Monde had a +45% increase in March). This is also the case for television broadcasters, video platforms (AmazonPrime, AppleTV, Netflix, Hulu, Disney+), and traditional radio with an increasing audience.
• E-commerce and click & collect: the lock-down period encourages people to buy online, and to use click & collect from traditional retailers to be safer. Most food retailers have seen an increase of 30- 40% of click & collect sales in France since March 13.
• Telecom: people confined at home to work use 4G, and also favor the acceleration of fiber-optic deployment. Telecom apps are also considered instrumental in Singapore and South Korea to prevent new contamination and defeat the virus.

If we assume that the lock-down period is progressively relaxed in May for Western countries and hopefully including the USA, the economy could restart in the course of June. In this optimistic scenario, the software and IT services market should decline by only 1-5% in 2020, with a rebound expected in 2021. This has to be compared to a prior forecast of around +3.5% in 2020 in most western European countries. Still, it is a source of optimism if we compare TMT with other markets such as travel and airlines.

We also believe that recovery of the current situation will create new M&A opportunities for cash-rich TMT groups pursuing consolidation in an economy in need of more and more digitalization.