Hardware and software markets growing

Two Canadian IT market surveys were released on Wednesday, revealing that both the hardware and software markets are doing very well.

As part of its annual bi-yearly Canadian Industrial Outlook, the Conference Board of Canada released its new “Canada’s Computer and Electronic Product Manufacturing Industry – Spring 2007” report.

It revealed that profits for the industry nearly doubled to $2.1 billion in 2006, but, said Louis Thériault, co-author of the report and director of the Conference Board of Canada’s Canadian Industrial Outlook Service, these profits are nowhere near the highs of the tech boom several years ago.

He said that the report yielded no big surprises; it does, however, confirm the ongoing trend of a recovery from the tech bust. “We’re on solid footing financially,” he said. While the industry is now flourishing financially, he does not see profits hitting the all-time highs of the tech boom anytime soon. “Frankly,” he said, “That wouldn’t be desirable either.”

He predicts that 2007 will see profit margins rise six per cent, coming to rest just under those that were around during the tech boom. This is partly the result of capacity utilization coming about, said Thériault: “After things being put in during the boom, they have a lot of inventory to work off.”

Material and capital costs are also down, and prices are falling due to competition with products from overseas countries. But demand continues to be solid, both domestically and in terms of exports. “We’re making headway with import penetration-from China, Mexico, and Malaysia, it’s grown dramatically,” said Thériault.Price pressures will also have an impact on future profits. “Prices are not growing-in fact, they are declining quite substantially,” he said. This is partly attributable to the weaker dollar.

Another challenge facing the hardware industry, according to Thériault, will be wage pressures. “Labour costs are going up, and these wage pressures are having an effect on the Canadian economy,” he said.

The software industry seems to be meeting its challenges well, too. Sixty-three of Canada’s emerging software companies were profitable last year, according to a Price Waterhouse Coopers survey of 155 CEO’s titled “Report on Emerging Canadian Software Companies: The CEO Perspective.”

These results are consistent with the findings of the last few years, according to co-author of the survey, Price Waterhouse Cooper partner, and GTA leader of its emerging company practice, Peter Matutat. Sixty-five per cent of emerging software companies are making between $1-million and $10-million, while another 15 per cent were not profitable and six per cent surpassed revenues of $25-million.

A lot of these companies are making their money south of the border, according to Matutat. “One of the most surprising findings of the survey was their expectations to make more sales in the U.S. than in Canada,” he said. CEO’s expect 47 per cent of their sales to be U.S.-based, with less than 40 per cent coming from Canada.

Emerging software companies also continue to project mostly unattainable revenue goals. Many of them did not reach their forecasted revenues, even though 41 per cent of last year’s survey respondents indicating that they expected an increase of 50 per cent or more. Only about a third of them reached this goal, while over a third reported a revenue growth of 10 per cent or less. Matutat attributes these consistent revenue overestimations to the emerging software products themselves. He said, “It’s the nature of (the purportedly high profits from emerging software), and they do not have the history on which to base their expectations.”

The surveyed CEO’s almost unanimously agree on one thing – the future. Matutat said that he was surprised to find that 95 per cent expect to be acquired, while only five per cent expect to end up as an IPO.

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Jim Love, Chief Content Officer, IT World Canada

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