Insight

Hardware companies: Managing through market disruption and beyond

Taking action to protect revenue and support digital transformation during COVID-19

Per Edin

Per Edin

Principal, TMT Strategy, KPMG US

+1 408-367-6080

COVID-19 has caused a rapid, unprecedented impact to the Hardware industry, creating business continuity uncertainty driven by a dramatic shift in consumption. Response planning to the COVID-19 disruption will require a multi stage approach.

  1. Hardware companies lost 9% or more of their market cap in the 3 months since the beginning of the COVID-19 disruption – performing better than the market overall but worse than other Technology sectors, including Software
  2. The median hardware company has relatively strong liquidity but will be sensitive to declining sales – particularly those with a customer base concentrated in hard-hit sectors or SMBs. If monthly revenue falls by 50%, an average hardware company could run out of cash in < 2 quarters
  3. Most companies will need to cut costs to maintain efficiency. In prior recessions, those that addressed both growth and cost in a balanced manner outperformed others ~2x on sales & EBITDA CAGRs
  4. Hardware companies may be looking to reduce R&D expense in line with declining revenues. But if the 2008 downturn and recovery is a good analogy, hardware companies that increased R&D spend saw higher R&D productivity over time, mitigating topline impact
  5. Ultimately, hardware firms are taking action to protect revenue including launching new offerings to support digital transformation, adopting as-a-service commercial models, and supporting at-risk channel partners

What are the core stages and activites of response planning?

Response planning such as digital acceleration, commercial flexibility, channel and customer turnover, market consolidation, and risk sensitivity should address 3 distinct stages, that may overlap.

 

Resilience

Resilience: Rapid mobilization and stress testing

  • Safeguard employees/assets
  • Assess impact to revenue/payments
  • Protect customers and manage churn
  • Control use of cash
  • Stress test the business

Recovery

Recovery: Improve performance under new conditions

  • Adapt go-to-market to customer/partner needs & conditions
  • Take steps to reduce cost as appropriate
  • Manage working capital and debt
  • Re-prioritize capital investments
  • Evolve risk and compliance controls

New reality

New reality: Capture value from pervasive changes

  • Shift talent/capital towards growth
  • Adapt offers to new sources of demand
  • Innovate new capabilities and solutions
  • Enter adjacent markets to capture additional value
  • Take advantage of M&A opportunities