High Tech (Software, Hardware, and IT services)
SECTION 1: INDUSTRY OVERVIEW
BUSINESS SENSE ABSTRACT
The high-tech industry drives innovation, connects people, and powers businesses. The global information technology market grew from USD 8,179.48 billion in 2022 to USD 8,852.41 billion in 2023, reflecting a compound annual growth rate (CAGR) of 8.2%. By 2027, it is expected to grow to USD 11,995.97 billion in 2027 at a CAGR of 7.9%. The industry is characterized by rapid advancements, with emerging technologies like artificial intelligence (ChatGPT, DALL-E), quantum computing (Google, IBM), and augmented reality (Metaverse) reshaping the landscape. At its core, high-tech companies develop, produce, and sell technological products or provide tech-centric services. Their influence spans across sectors, from healthcare to entertainment.
SIGNIFICANCE
From using a smartphone, uploading photos to the cloud, or leveraging IT services at work, most people interact with high-tech products and services daily. Naturally, the IT/internet penetration rates are higher in developed economies whereas the developing regions present more room for growth. Jio recently launched Bharat Phone - a $12 phone providing a 4G network to more than 250 million people who still rely on 2G or no phones at all. With the strong presence of technology in our lives, understanding its supply chain (chip making, through assembly, to delivery) is essential too.
CASE STUDY TOPICS
Potential case studies could delve into the evolution of cloud computing, the ethical implications of AI, the rise of wearable tech, or the cybersecurity challenges in an interconnected world.
KEY TRENDS & EVENTS
The AI Revolution: The global artificial intelligence market size was estimated to reach USD 196.6 billion in 2023, up from USD 136.6 billion in 2022. This rapid growth showcases the transformative power of AI across various sectors. With OpenAI advances through ChatGPT and DALL-E, we’re looking at significant strides. While the US is a clear leader, countries like China, Canada, Japan, and South Korea are putting significant efforts into AI development as well.
5G Deployment: The global 5G market was valued at approximately USD 239.56 billion in 2022 and is expected to grow at a CAGR of 33.28%, indicating the rapid adoption and deployment of 5G networks worldwide. These networks are set to revolutionize connectivity, paving the way for innovations like the Internet of Things (IoT) and smart cities. The race for 6G has already started and by late 2020s, it is predicted to be developed and deployed.
Tech Cold War: The ongoing technological cold war, especially between the U.S. and China, has significant implications for the global tech industry. For instance, in February 2023, the U.S. government successfully pushed for the removal of certain Chinese tech companies from key markets, highlighting the geopolitical tensions and their impact on tech supply chains and data security. The situation intensified when Micron (a major American semiconductor company) faced a ban.
Remote Work Surge: As of 2023, 12.7% of full-time employees work entirely from home, while 28.2% follow a hybrid model. The COVID-19 pandemic played a pivotal role in this shift, accelerating the adoption of remote work tools and digital collaboration platforms. By 2025, it's projected that 32.6 million U.S. employees will be working remotely. This however is likely to vary regionally given the differences in working culture across the globe.
INFLUENCE AND HEADWINDS
Cybersecurity Concerns: The global cybersecurity market size was projected to grow from USD 172.32 billion in 2023 to a staggering USD 424.97 billion in the subsequent years, highlighting the increasing importance and investment in cybersecurity measures.
Regulatory Scrutiny: In 2023, the European Union outlined which tech giants have to comply with tougher rules, signaling the heightened regulatory scrutiny faced by Big Tech companies. More than a dozen of the world's biggest tech companies face unprecedented legal challenges, especially concerning antitrust issues.
Sustainability Push: The green technology and sustainability market was expected to reach USD 35.84 billion by 2027, growing at a CAGR of 23.8%. This indicates a significant emphasis on creating eco-friendly tech solutions and the industry's commitment to reducing electronic waste.
CASE STUDY EXAMPLES
Software: With the rise of cloud computing, many software companies transitioned from traditional licensing models to Software-as-a-Service (SaaS) models. This shift brought about challenges related to data privacy, security, and regulatory compliance. Companies like Salesforce and Adobe, which successfully transitioned to SaaS, saw significant revenue growth. However, they also faced scrutiny over data handling practices and had to invest heavily in security infrastructure. By adopting stringent data protection measures and ensuring transparency in their operations, these companies managed to gain trust and expand their customer base globally.
Hardware: The 2010s saw intense competition between tech giants like Apple, Samsung, and Huawei in the smartphone market. Intellectual property disputes, supply chain challenges, and market saturation became major concerns. Litigations, such as the Apple vs. Samsung patent battle, not only cost billions in settlements but also influenced product designs and market strategies. Companies started focusing on diversifying their product lines, investing in R&D for breakthrough technologies, and exploring new markets to maintain growth.
IT Services: As the demand for IT services grew, companies like IBM, Accenture, and Tata Consultancy Services (TCS) expanded their operations globally. This led to debates over outsourcing, job displacements, and the quality of IT services. While outsourcing allowed companies to offer competitive prices and 24/7 services, it also brought challenges related to cultural differences, communication barriers, and concerns over data security. Many IT service providers started 'in-sourcing' or establishing centers in their home countries to address these challenges. They also invested in training programs to bridge cultural and skill gaps.
SECTION 2: HIGHTECH FINANCIALS & METRICS
NOTABLE COMPANIES
IBM Global Services: Offer a wide range of services including expert services for the installation, training, and implementation of the products sold. Similar companies include Capita (UK), Etisalat Services Holding (Middle East), and Neusoft Corporation (Mainland China and Hongkong SAR).
Amazon Web Services: Offer a range of global cloud-based products including computing, storage, databases, analytics, and more (generally on a subscription basis). Similar companies include UKCloud (UK) and Alibaba Cloud (Mainland China).
Palantir Technologies: Specializes in big data analytics and provides platforms for data integration, visualization, and analysis. Similar companies include Quantexa (UK) and Baidu (Mainland China).
Accenture: Provides services in strategy, consulting, digital, technology, and operations, with a focus on technology integration. Similar companies include Deloitte UK, STS Arabia (Middle East), and Huawei (Mainland China).
Cisco: Engages in strategic partnerships to deliver integrated solutions in network, security, and collaboration. Similar companies include BT Group (UK) and Tencent (Mainland China).
3M: Invests heavily in R&D to create and license newly developed technologies and innovations.
JD.com: One of China’s leading e-commerce platforms, with a wide range of products and services. Comparable companies include Taobao (Mainland China), Amazon (Global), eBay (US), Alibaba (Mainland China), Flipkart (India), Souq/Amazon.ae (UAE), Lazada (Southeast Asia), and Coupang (South Korea) and deal in both B2B and B2C transactions.
Coursera: One of the world’s leading e-learning platforms overlapping into the online education industry. Comparable companies/services are all over the world and include LinkedIn Learning, Microsoft, Udemy, Byju’s, Khan Academy, and more.
Google Ad Services: Generate significant revenue from advertising through its search engine, YouTube platform, and other services. Similar companies include Baidu Advertising (Mainland China) and Yandex Advertising (Russia).
Adobe: Offers subscription-based access to its suite of creative tools and applications, as well as stock photos and other resources. Similar companies include Canva (Australia) and Autodesk (US).
Symantec: Provides cybersecurity products and services, including threat protection, information protection, and website security. Similar companies include McAfee (US), Kaspersky Lab (Russia), Avast (Czech Republic), and Bitdefender (Romania).
REVENUE DRIVERS
Software Subscriptions: Recurring revenue from software-as-a-service (SaaS) models.
Hardware Sales: Revenue from selling physical tech products like computers, servers, and smartphones.
IT Consultation: Fees from advising businesses on tech solutions and strategies.
Licensing: Income from licensing proprietary technology or software to third parties.
COST DRIVERS
Research & Development: Investing in innovation to stay competitive.
Manufacturing: Costs associated with producing hardware.
Marketing & Sales: Promoting products in a saturated market.
Infrastructure: Maintaining and hosting servers, data centers, and other essential tech infrastructure.
KEY METRICS
Monthly Active Users (MAU): Measures the number of unique users of a software or platform in a month.
Customer Acquisition Cost (CAC): The cost to acquire a new customer, is crucial for SaaS companies.
Hardware Gross Margin: The difference between hardware sales and the cost of producing the hardware.
Service Uptime: The percentage of time a service (like cloud storage) is operational and available to users.
New traffic: The number of new visitors or users to a platform or website.
Click-through Rate (CTR): The ratio of users who click on a specific link to the number of total users who view a page, email, or advertisement.
Bounce Rate: The percentage of visitors who navigate away from the site after viewing only one page.
Recurring Revenue: The revenue that a company can reasonably expect to earn in the future, especially for SaaS companies with subscription models.
Note: Click here for sources! 
SECTION III: Financial Analysis
Microsoft is one of the most well-known and successful technology companies in the world. We’re going to take a brief look at their income statement to learn a bit more about the company’s financials.
Looking at the top of the income statement, what’s immediately obvious is the huge revenue of $211,915 million in 2023 - in fact, Microsoft lies within the top 25 companies in the world by revenue. It had a sales growth of 6.88% in 2023 too, which is a very healthy number for a company of Microsoft’s size.
Going to the next lines on the income statement, we can now have a look at the firm’s COGS (cost of goods sold - costs directly associated with producing revenue). Its COGS including D&A (depreciation and amortization) is $65,863 million. This gives us a gross income of $146,052 (revenue minus COGS), and a gross profit margin of 68.92% (the portion of a firm’s revenue left after COGS is subtracted). This raises the question - what does this number tell us about Microsoft?
Firstly, 69% is quite a high gross profit margin, and this could imply a few things. It may be that Microsoft is very efficient with providing its goods/services to its customers, and doesn’t incur a large cost in delivering these products, which may also be due to its bargaining power as a huge company. This likely plays a part in their COGS being low relative to revenue, but the reason for this is more likely to do with Microsoft being a technology company.
When Microsoft sells a piece of software to someone, it costs the company very little to produce this ‘extra unit’ of software and deliver it to the consumer. For example, let’s say someone pays $60 to download a piece of Microsoft software online. Microsoft doesn’t need to spend money to ‘produce’ this extra unit of software, unlike if a consumer bought a t-shirt from a company, that company would need to pay to produce that extra unit. As well as this, there is no delivery cost associated with downloading this software, so Microsoft may keep almost all of this $60.
Of course, only some of Microsoft’s products are software that can be downloaded online, and they do sell products that do have a cost of producing each unit as well as a shipping cost. But this gives a good explanation as to why the firm’s gross profit margin is quite high.
However, the gross profit number doesn’t take into account the money Microsoft spent on creating the program in the first place through R&D (research & development) or employee wages, and only takes into account a small amount of the physical workspace or hardware used by employees to create the initial piece of software. We have to look a bit further into the financial statements to find out more about this.
Technology companies are typically going to have much higher R&D costs than most other firms. In fact, a lot of other companies don’t even have R&D show up on their income statement. For example, a company that sells t-shirts probably won’t have an R&D cost. Microsoft puts loads of resources into developing new software, software updates, and improving hardware, and this comes at quite a significant cost as can be seen. Of course, Microsoft also has a significant SG&A cost as it has to hire talented workers who demand high salaries to create new software, factories to produce their hardware, and expensive office space.
After this line, we can see the company’s EBIT (earnings before interest and tax). It’s interesting to see how this cost compares to gross profit - it’s about 60% of it. This means a significant portion of the firm’s operating expenses are not directly tied to producing its revenue, which again is quite typical of a technology company.
As you can probably tell, EBIT is a much better metric to find out about Microsoft’s profits than the gross profit as it takes into account SG&A and R&D. This EBIT figure is still incredibly high at almost $89 billion - ranked by EBITDA (this is EBIT but doesn’t take into account D&A), Microsoft is the 5th most profitable company worldwide. Clearly, the company is thriving financially.
Many people prefer to look at a company’s EBITDA rather than its EBIT. This is because EBITDA doesn’t take into account D&A, which is a non-cash expense, so it gives a better picture of a company’s actual cash flow, whereas EBIT gives a better picture of its operating profit. Both figures are important to take into account when looking at a company’s financials.
Overall, from the income statement alone, we can tell that Microsoft is likely doing extremely well financially. We could find out even more about their financial health by examining their cash flow statement too, which gives an idea of how much Microsoft’s actual cash flows change.
SOURCES:
[1] https://www.wsj.com/market-data/quotes/MSFT/financials/annual/income-statement
[2] https://companiesmarketcap.com/largest-companies-by-revenue/
[3]https://companiesmarketcap.com/most-profitable-companies/
