Brexit Pounds Some Technology Companies

  • Pound’s drop versus the dollar may swamp currency hedges
  • U.K.’s ARM may see earnings benefit from overseas revenue

Technology companies are among the most global organizations around, and the high portion of revenue and profit they get outside their home turf exposes them to currency fluctuations. Those markets gyrated wildly after the U.K. voted to leave the European Union bringing potentially big financial implications for companies as different as ARM Holdings Plc and EBay Inc.

Online marketplace operator EBay sank as much as 8.2 percent on Friday, outpacing declines by the wider U.S. equity market as analysts singled it out for its large exposure to the U.K. and Germany. Chipmaker ARM, based in Cambridge, U.K., gained as much as 6.8 percent on calculations that a weaker British pound will make its repatriated earnings more valuable.

The pound sank more than 8 percent against the U.S. currency Friday, to its lowest level in 30 years. The U.S. dollar rose 2 percent against a basket of foreign currencies tracked by Bloomberg. A strong dollar hurts mainly when proceeds from goods and services sold in foreign currencies are exchanged into dollars. That can also make it more expensive to buy U.S. tech products.

EBay has the most significant exposure among U.S. internet companies to the U.K. and Europe, according a report by Needham & Co. The disruption caused by Britain’s exit from the EU and currency fluctuations could slow cross-border transactions on online marketplaces.

"EBay gets 31 percent of revenue from U.K. and Germany, more than Google or Amazon," said Needham analyst Kerry Rice. "This really impacts cross-border trade more than anything. It could shift spending behavior if currency fluctuations make a purchase cost-prohibitive."

ARM investors were quick to turn to its own calculations on the impact of currency moves and bet on an increase in profit. The company, which licenses chip technology and designs, gets more than a third of its sales from the U.S., 19 percent from China and another 25 percent from Taiwan and South Korea. Singapore and Switzerland supply it with more revenue than its home market at around 3 percent each, according to data compiled by Bloomberg.

According to a company presentation from April, more than 95 percent of ARM’s sales are in dollars. A 10 percent move in the value of the pound against the dollar moves earnings per share by 15 percent, it said. That suggests the recent drop in the British currency could boost profit by about 10 percent for the rest of this year.

Many companies with high overseas sales hedge currency fluctuations, but a drop of the magnitude the pound suffered goes beyond the typical range that would be covered by such insurance. Even before Friday’s Brexit-inspired currency moves, giant U.S. technology companies such as Apple Inc. and Alphabet Inc. have struggled to hedge all overseas revenue against a strong dollar.

"While the longer-term macro-economic implications of the Brexit referendum will unfold over time, as previously disclosed, EBay has hedging strategies in place that limit the potential quarterly volatility and minimize the effects of foreign exchange on current year earnings," a company spokesperson wrote in an email.

In addition, the underlying concern driving currency moves -- that the economy of the U.K. and Europe in general will be hurt by the exit of one of the largest members of the EU -- may weigh on some technology companies earnings and share prices.

International Business Machines Corp., at about 33 percent of revenue, has the biggest exposure to Europe among large technology companies, according to an estimate by RBC Capital Markets. HP Inc. relies on the region for 32 percent of sales, according to RBC. The most valuable technology company, Apple, gets 22 percent from there.

Cisco Systems Inc., which gets about 23 percent of its sales from Europe, is bracing for upheaval.

“We are accustomed to adapting our business around the challenges that the macroeconomic environment often delivers and we remain focused on delivering and maintaining a stable environment for our employees, customers and partners,” it said in a statement.

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