[February 27, 2017]

Tech Industry Braces for the Trump Effect - BDO Survey

Though President Trump's victory in the 2016 U.S. election cast a cloud of uncertainty over the business environment, technology industry executives are optimistic about growth prospects in 2017, a new survey reveals.

According to BDO USA, LLP's 2017 Technology Outlook Survey, 80 percent of technology CFOs expect higher total revenues in 2017, projecting an average increase of 10 percent over last year-more than 2016 and 2015 growth projections (8.8 and 9 percent, respectively). Just 3 percent expect revenues to decline.

The survey, conducted post-election, shows technology CFOs ranked U.S. economic growth as the most important factor to expansion of the sector, ranked first by a third (33 percent) of executives, compared to 18 percent in 2016 and 25 percent in 2015. Just 15 percent say consumer demand for innovative personal technology is the most important factor to drive growth in the U.S. technology sector-dropping from 32 percent and falling from its top spot in 2016.

And while tech IPOs struggled to get off the ground in 2016, the post-election market rally, in combination with pent-up demand, may see 2017 activity return to or even eclipse the highs of 2014. Seventeen percent of tech CFOs expect IPO activity to increase significantly, compared to 7 percent last year, and another 45 percent expect it to increase at least slightly.

As IPO expectations rebound, concerns around overvaluing 2016's class of unicorns are easing. Two-thirds (66 percent) of tech CFOs expect company valuations to increase this year, compared to just 48 percent last year.

But geopolitical ambiguity could put downward pressure on upbeat growth forecasts, and our survey suggests it is a concern weighing on the minds of CFOs. Forty-one percent of survey respondents expect political uncertainty, at home and abroad, to have the greatest impact on the U.S. IPO market, reflecting uneasiness around potential policy changes and the president's public censure of companies that offshore jobs.

Aftab Jamil, Assurance partner and national leader of BDO's Technology practice, said, "In an industry that garners a significant portion of its revenue from abroad, a strengthening U.S. dollar, paired with the anticipated decline in the global sales of smartphones nd a potential increase in trade barriers, presents certain challenges, making U.S. economic growth even more important. As our survey indicators illustrate, however, we are confident the industry is up to the task."

Tech Reacts to Trump Administration's Tax Reform and Immigration Priorities

Whether the new administration's vocal criticism will have an impact on companies' outsourcing plans remains to be seen. While just 10 percent of survey respondents cite trade and immigration policies as their biggest challenge in the year ahead, nearly a third (32 percent) say recruiting or retaining workforce talent is their greatest challenge.

The technology industry relies heavily on outsourcing overseas and importing international talent. In fact, 40 percent of tech CFOs report outsourcing services or manufacturing to subsidiaries or companies based outside the U.S. Only 4 percent of survey respondents expect to increase their outsourcing activities in the year ahead, down from 14 percent two years ago. However, just 14 percent plan to bring any of the work they currently offshore or outsource back to the U.S. this year.

As the new administration takes office, tax reform is also top of mind for U.S. technology executives. Twenty-five percent of tech CFOs predict tax changes will present the biggest economic challenge to their organizations this year.

When it comes to their tax reform wish lists, most tech CFOs (61 percent) say lowering corporate tax rates is their top priority. Incentives for research and innovation ranked second (19 percent), followed by incentives to repatriate foreign earnings (11 percent) and overhauling tax rules for international activities (9 percent).

"While lower corporate tax rates get the most fanfare, it is the international tax provisions that could have the most profound impact on tech companies," said David Yasukochi, Tax partner in BDO's Technology practice. "However, some of the proposed U.S. tax plans are intended to upend the status quo, and if they become reality, tech companies will need to be nimble to avoid getting burned."

Additional findings from the 2017 BDO Technology Outlook Survey include:

Tech M&A holds steady. Nearly three-quarters (72 percent) of tech CFOs expect deal volume to increase in 2017, with about a third (31 percent) citing expectations for their own organizations to pursue M&A this year. Just four percent expect deal-making in the industry to decline. When it comes to the biggest deal drivers, 31 percent say the primary motivation behind M&A will be technology assets and intellectual property, up from 25 percent in 2015, followed by revenue and profitability (28 percent), market share (24 percent), and engineering and research capabilities (16 percent).

Cloud computing and the IoT gain momentum. When asked what technology will have the most measurable impact on their business in 2017, most tech CFOs (74 percent) say cloud computing, while 58 percent say the Internet of Things. Meanwhile, 16 percent say artificial intelligence will have an impact, meanwhile, followed by 3D printing and virtual reality (14 percent each), and blockchain (8 percent).

Cybersecurity remains a double-edged sword. Tech CFOs say cybersecurity concerns will be the second-largest driver of growth in the technology industry, with 18 percent viewing it as the most important factor for industry growth. At the same time, 44 percent say data privacy laws are their most serious compliance concern in the year ahead, overtaking last year's top compliance concern, financial reporting (27 percent). Other concerns were export controls (15 percent), general fraud and corruption (14 percent), and bribery in foreign markets (1 percent).

These findings are from the tenth annual BDO Technology Outlook Survey, a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly to 100 chief financial officers at leading technology companies throughout the U.S. The survey was conducted from December 2016 to January 2017. Download the full report here.

About BDO's Technology Practice

BDO works with a wide variety of technology clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues.

About BDO USA

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 63 offices and more than 450 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,408 offices in 154 countries.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: www.bdo.com.

Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm's individual needs.

© 2017 BDO USA, LLP. All rights reserved.

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