Report shows that companies in the software and computer services sectors are more at risk

Profit warnings in the UK have risen by 24 per cent in the past year, and the number of companies that have issued warnings in the software and computer services sectors has doubled.

According to the latest research from accountant Ernst & Young (E& Y), 381 UK-listed companies issued a profit warning in 2005, compared with 307 in 2004. However, for the first quarter of 2006, 85 profit warnings were issued. This is 11 per cent down on Q4 2005, and is the same number as in Q1 2005.

The software and computer services sectors issued 12 warnings, which was the highest number reported for a specific sector. However, this could be because there are more listed software and services companies, according to James Bennet, director of technology at E&Y.

“There are two main reasons why software and services came highest,” he said. “Lots of end-users involved with large contracts have delayed decisions. This could have been part of negotiations, especially if the supplier was nearing the end of its quarter.”

Second, he said, revenue recognition has become more difficult. For example, if PCs are delivered with a maintenance contract, it is not clear whether that revenue should be recognised when the PCs are delivered, or when the contract is completed.

“We are calling for greater transparency between sales and finance departments to help combat this,” Bennet said.

One channel player told CRN that when it comes to products, most resellers will recognise the revenue on delivery.

“With maintenance contracts it does become tougher,” he said. “If it is a third-party contract, we recognise it when it is delivered. If it is our services, we will bill monthly. A lot of VARs should be doing this.”