Tough time ahead for technology stocks

13 profit warnings were issued by 13 companies in the first quarter of 2008

Trading in technology shares could be in for a bumpy ride after a 44 per cent rise in profit warnings in the Software & Computer Services FTSE sector in the first quarter of 2008.

Ernst & Young said that 13 warnings were issued by 13 companies in the first quarter of 2008, reversing the trend of declining warnings in the sector throughout 2007 from 17 in the first quarter to just nine in the fourth quarter.

"2007 was a good year for most software and services stocks. This reflected strong growth in the marketplace and growth in global technology stocks," said James Bennet, technology director at Ernst & Young.

"But this has been marred with quite a challenging 2008. Technology stocks have been pretty hard hit, with organisations selling to the financial services sector particularly feeling the pinch as many projects have been put on hold.

"Confidence in the marketplace is affecting spend, and delays in projects going ahead will be affecting clients now and in the future."

In the first quarter of 2008, all companies in the sector which issued a warning had a turnover of under £200m. 'Sales short of forecast' was the biggest reason for all the warnings in the sector.

In related sectors, there were seven profit warnings from Technology Hardware & Equipment companies, up from three in the last quarter, marking a 133 per cent increase.

Although the trend is worrying, it is not surprising as customers continue to tighten their belts in light of the current market conditions, according to Bennet.

"The reason for so many profit warnings is a result of confidence in the marketplace being hit, instability in the financial markets and companies generally being cautious about committing to significant spend," he said.

"There is likely to be significant slippage with companies over the next six to 12 months."

Across all sectors, 114 profit warnings were issued by UK quoted companies, the highest first quarter figure since 2001 and up 11 per cent from the same quarter last year, a clear indication of the growing impact of the current downturn.