DOI:  10.36172/EKONOMISTI.2020.XVI.04.Gurbanov

Summary. Thanks to modern trends in informatization and globalization, the economies of many developed and developing countries are based on the development of the information and communication technology (ICT) industry. Innovative in nature, ICT companies create the infrastructure for the efficient operation in all sectors of the economy and are a source of technological and business innovation and progress. This research aims is to identify the specifics of the ICT sector, assess the risks for investors and analyze the investment attractiveness of 50 Georgian ICT companies based on metrics of their financial performance (for the period 2017-2018). The analysis is based on the use of the main financial ratios of companies' performance, taking into account the specifics of the IT sector companies.

Keywords: Information and communication technologies, ICT market, investments, financial indicators.

Actuality.  The high-tech market has been greatly developed during the last twenty years that contributed to the formation of era of globalization. Such technologies bring significant competitive advantage to the country and include nanotechnology, biotechnology, and information communication technology (IСT). Innovation activities in high-tech industries is much higher than in low-tech, which include food, paper, wood processing, metal-processing and others.

Innovation-based entrepreneurship is the process of creation and implementation of technological innovation than an entrepreneurial entity constantly focuses on innovation search in products and services, methods which creates new markets, promoting the satisfaction of new public needs to make a profit. Innovative technologies create a fundamentally new product, services or improve the technological process of manufacturing an existing product. Thus, innovative entrepreneurship carries out an important intermediary function between the scientific, technical and industrial spheres by commercializing technology and attracting investors financing the product. Innovative firms arise as a result of the public need to reduce costs associated with the process of introducing a product created in the scientific field into the economic sphere. Technological constraints and market conditions that are limitations for a regular company represent the environment in which an innovative entrepreneur works and makes investments.

IСT sector has a special place in the high-tech market. It has gone through several stages in its development. The first stage included the development of large universal high-performance servers with significant input and output resources (mainframes), the core developer of which was IBM Company in 1964. The second stage is the creation of a platform based on personal computers, client/server architecture, Internet. Social networks and cloud infrastructure was developed in the third stage. New social technologies, “big data” and new data sources drive forward the digital revolution and has made a significant contribution to the processes of globalization. The process of digitalization and informatization had a significant impact on ways of doing business, education and other aspects of social life. Therefore, development of ICT has been one of the priority areas of any country, including Georgia. 

Formulation of the problem. The implementation of innovative projects requires significant financial resources. A notable feature of innovation funding is a diversity of funding, the need for which is growing as the company goes through the appropriate stages of the innovation process. Also, financial need influenced by the type of innovation - whether innovation is radical or only involves the improvement of some product properties. Recently, there has been an increase in investor interest in Georgian companies. Investors choose small in size but the most promising assets. Due to the lack of development of the financial market, transactions are mostly non-public.

The attractiveness of an IT company for strategic investors is primarily determined by financial indicators common to all types of business - revenue, margin, debt burden. Other important indicators are business models used by the IT company, its competitiveness, the amount of value added created, historical growth rates and their forecast. The main problem in assessing the investment attractiveness of the industry is the refusal of companies to provide information on their activities. And, accordingly, rating companies try to assess the industry based on expert assessments. To overcome this problem, mixed financial and non-financial indicators are also used, based on the identification of a correlation analogue that allows to assess the scale of the company.

The main purpose of the research is to identify the specifics of the ICT sector, assess the risks for investors and analyze the investment attractiveness of 50 Georgian ICT companies based on metrics of their financial performance (for the period 2017-2018). The data and financial statements for the research was obtained from public information resource reportal.ge. 

Analysis of the ICT sector of Georgia.International trade of high-technology products, services and know-how become essential for the economies of all countries. The key indicator of its development is the level of high-technology export. High technology export are products with high research and development intensity, such as in aerospace, computers, pharmaceuticals, scientific instruments, and electrical machinery”.[1] As we can see in the table 1, Georgia ranks last in 2010-2018 period among CIS countries in terms of high-technology export with the average ratio 3,38 % and the leader was Kazakhstan with the average ratio 31,27%. It should be noted that the Georgian ICT sector is only a few decades old and companies operate in a high level of uncertainty with no performance benchmarks. This situation increases the risks of investors, and they refrain from investing in the sector. 

Table 1. High-technology exports in CIS countries for the period 2010-2018

(% of manufactured exports)*

       Source: World Bank data. URL: https://data.worldbank.org/indicator/TX.VAL.TECH.MF.ZS 

Georgia leads the Caucasian countries on ICT goods exports with 0,6 % in 2017 (see chart 1) which include computers and peripheral equipment, communication equipment, consumer electronic equipment, electronic components, and other information and technology goods.

Chart 1. ICT goods exports in Georgia, Armenia and Azerbaijan (% of total goods exports). Source: World Bank data. URL: https://data.worldbank.org 

According to National Statistics office of Georgia, there are 190 749 active enterprises in Georgia, and 1,3 % goes to ICT companies. And only 38% of all registered ICT companies were active by 2020. Our analysis shows (table 2.) that the assets of almost 60% of companies represented in this industry do not exceed CEL 1 mln. lari. And only 1 % of all ICT companies exceeds the revenue of GEL 100 mln. Lari. These companies are mainly involved in the telecommunications sector.  

Table 2. Classification of ICT Companies by different criteria

The analysis showed that, in contrast to the Western ICT market, sales of foreign-made equipment prevail in the market structure (70% of analyzed companies), and only 30% falls on the ICT services sector. Hardware sales, which account for more than 55% of the IСT market, reduce the opportunities for the formation of the IT services market and its attractiveness for investment. Eight percent (8%) of the value added created by companies of all economic sectors was created by companies in the ICT sector

As for the financial ratios of the analyzed companies, attention is drawn to the very low use of debt financial ratios in the period 2017-2018, especially the absence of long-term liabilities in the capital structure of most companies which belong to the second and third groups of classification. At the same time, the liquidity ratios of the analyzed companies are quite high, although the most liquid companies are engaged in the telecommunications sector and in the sale of IT equipment, where the liquidity ratio of individual companies exceeds – 5.

It should be noted that 60% of the analyzed companies were registered for the period 2014-2016, and the results showed that 30% of companies had negative ROA and 25 % of companies had negative ROE. When evaluating the performance of IT companies, in many cases, such traditional indicators of profit as profit before interest and taxes (EBIT - earnings before interests, taxes) and profit before interest, taxes and depreciation (EBITDA - earnings before interests, taxes, depreciation and amortization) are not applicable. In fact, EBITRAD earnings before interests, taxes, research and development, depreciation and amortization can be used for an objective analysis, since many newly established companies have high levels of spending on training, research and development.  The latter does not apply to companies that are distributors of IT equipment.

The most common and actually accessible indicator characterizing the activities of IT companies is gross income or turnover. The second, directly related to the first one, is the dynamics of the turnover indicator. When assessing this indicator, one should take into account at what stage of development the market is, since if the market grows, then the industry indicators grow. According to our research, for the period 2017-2018, almost all companies showed an increase in this indicator and, in general, its value increased by 5,6%. In the general structure of total turnover of the analyzed ICT companies, 62% falls on large companies, 18 % on medium-sized and 19 % on small companies. The value of output in ICT companies in 2017-2018 amounted to 3% of the total output by all sectors of economy.

In the absence of profit, which is typical for a developing industry, the ratio of price to income or price to sales has become widespread. In Western practice, the price / sales ratio applies even to more mature companies. Nevertheless, the replacement of the price / profit indicator with the price / sales indicator suggests that the sales volume more correctly characterizes the development of the industry. Although data for this indicator can be found in the company's financial statements, the problem is that it is applicable to joint-stock companies, the percentage of which is very low in the overall structure of Georgian IT companies.

Conclusion. The analysis showed that the market is at a development stage. The major category of the market is wholesale of ICT equipment. This tendency reduces attractiveness of the market to the industry. In the capital structure of the analyzed companies, short-term liabilities prevail, the level of long-term financing is quite low. In general, companies finance their assets primarily through equity, which may indicate problems in accessing debt financing. Nevertheless, the absence of high debt obligations, high liquidity ratios, increasing turnover trend can create the potential for growth in the company's income in the ICT industry, due to the additional use of financial leverage.