Wolf Richter: Corporate America’s Excuses Rise as Earnings and Revenues Fall

By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.

Some of the crown jewels of corporate America have reported declining revenues and earnings, and have lowered their forecasts, and in doing so, have unleashed a flood of obfuscation and excuses – from Easter falling on the wrong date to lazy sales reps. So when Caterpillar reported on Monday, it was almost refreshing in its unvarnished ugliness.

Sales plunged 17.7%, profits 44.6%. “A challenging first quarter,” Corporate Controller Mike DeWalt called it. Dealer sales had been less than expected, inventories had piled up on their lots, and they’d cut back their orders to bring down their inventories. End-user demand was down, along with sales of aftermarket parts. Everything was down. But manufacturing costs jumped, and profits sagged. The rest of 2013 would be tough, and revenue guidance was lowered by a chunk. Not a single excuse.

Then there’s IBM. Because it’s the world’s largest supplier of information technology, its earnings report is a harbinger of things to come… namely excuses. A technique it had picked up from Oracle last month. Oracle’s earnings call was a mess. Revenue dropped 1%, instead of being up. Revenues from new software licenses and cloud subscriptions dropped 2%, after the company had forecast an increase of 3% to 13%. Hardware sales were a disaster. Who did they blame? First, the government – the quarter “ended on the same day as the sequester deadline,” explained President and CFO Safra Catz – then the sales reps. Oracle had just hired 4,000 new reps around the world; that was the problem Catz and President Mark Hurd said in unison. They hadn’t been trained yet. It was just “sales execution.” Nothing else. Certainly not the economy, Catz pointed out.

“What we really saw was the lack of urgency we sometimes see in the sales force as Q3 deals fall into Q4,” Catz said. Those “new reps,” she said, “ran out of runway in Q3.” They just couldn’t close their deals. “The issue for us is simply conversion,” Hurd added. “Clearly we have work to do in training new reps on managing the sales processes,” Catz chimed in. What about the old reps? Where they all on vacation? They didn’t say. Not a good omen.

Thursday evening, it was IBM’s turn to report a first-quarter earnings shortfall and revenues that, instead of growing, had skidded 5% from a year ago. To get back on track, IBM would swing the axe, at a cost of $1 billion in the second quarter – “workforce rebalancing” was its newfangled term, “to better align our resources to opportunity.” There’d be a lot of “rebalancing.” The term was used 14 times during the call. And it would dump some businesses.

Why the drop in revenues? “We had a shortfall in sales execution in our software and mainframe businesses,” explained Mark Loughridge, Senior VP and CFO. These sales reps just hadn’t been able to close the deals in time, which then rolled over into the next quarter. The same disease that had afflicted Oracle reps. He blamed Easter, which fell into March, at the end of the quarter. He said most of those rollovers were in Europe and the US, countries impacted by Easter.

A few moments later he added that revenues in the Americas were down 3%, with steep declines in the US and Canada “mitigated by double-digit growth in Latin America.” Wait a minute. Easter – in fact the entire Holy Week – is a huge event in Latin America; yet Latin America had “double-digit growth?” Despite Easter? While rollovers due to Easter destroyed sales in the US where Easter isn’t that big?

Revenues were down in other places: Europe, the Middle East, and Africa saw a 4% tumble – most of the countries were down, but Spain “returned to modest growth,” he said, though Spain is precisely where the Holy Week and Easter are huge. In Asia-Pacific, revenue was down 1%, with white-hot China posting “modest declines” and with depressed Japan growing 3%.

At any rate, there’d be a good list of unfinished deals, the “rollover transactions,” that would kick-start the current quarter, and revenues should be up, right? Um, no. “I did not mean to indicate that all else would also be on the original performance track,” he said. “So, in fact, I still believe there are parts of our business that are in transition or have been underperforming that also were disappointing….”

What a tangle of obfuscation. Blaming sales reps, Easter, and whatnot to disguise what pulled the rug out from under IBM. It’s the same problem that other gauges of the global economy, such as Caterpillar and Oracle, have: declining demand in the US, Europe, and China, combined with tough competition.

A scary thought that the three largest markets in the world could weaken simultaneously – despite the prodigious amounts of money that central banks have printed and handed out. That phenomenon must be hidden under layers of lazy sales reps, sequester deadlines, and badly timed holidays. Yet, at the very end, something did slip out: “We are clearly not immune from changes in the global economy,” Loughridge said during his wrap-up, the most revealing sentence of the entire earnings call.

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  1. Can't Help It

    But, but the market will surely rally. Must … protect … stock … market at all cost.

  2. Klassy!

    Easter? Are you kidding me? So, when Easter does not fall at the end of the quarter and if earnings are up they will attribute that to the fortuitious timing of the holdiday?

  3. mad as hell.

    I’m wondering what is the going to be the first corporation to blame Boston’s lock down on missing revenues. I know for sure it will not be Dunkin Doughnuts.

    I will not be surprised if some economist blames Boston in April’s job report next month. Lot of cops on overtime though.

  4. OMF

    The only thing that is going to shut these clowns up is a shareholder revolt. The shareholders can and should remove under-performing boards.

    1. digi_owl

      At this point the largest holders are funds, meaning that things will be very very quiet…

  5. der

    Contractionary policy is contractionary. “Trickle-Up Austerity Economics Works”, (music and lyrics by Reinhart-Rogoff). Reagan was right.

  6. steve

    Of course all of these reasons for poor performance are under the direct control of the CEO, unlike abad economy. But somehow no one is sugesting those CEO’s be held acountable for their poor performance.

  7. fajensen

    Heh – My Pension Fund Manager just called last week and tried to persuade me to let them invest in stocks. I take that as a signal to stay the hell away from stocks!

  8. ambrit

    With all this “under performing” going on, the powers that be continue on their austerity pilgrimage. Slowing economies are exactly that, slowing. No amount of fancy sales talk is going to change it. Have none of these people read their history? This story has been done countless times in the past. The endings for various scenarios are known.
    I agree with OMF above; shareholder revolt is needed.

    1. NotTimothyGeithner

      “Have none of these people read their history?”

      This is part of the problem, or if they have its popcorn history written for the masses.

  9. Art Eclectic

    People with no money can’t buy things. The more you cut the incomes of the middle and working class, the less they can spend. Which part of “consumption economy” does our leadership not understand?

    1. NotTimothyGeithner

      Besides being greedy ignoramuses, the elites are shaped by their environment. Barack Obama is 51 and so was born in 1961. He spent his young adult life in the 1980’s when fortunes were being made on pillaging/slashed interest rates/deindustrialization/deregulation. Obama is on the younger end of the spectrum, but much of our current elite are people who came of age and succeeded in the 1980’s or set themselves up to succeed in the 90’s.

      Obama has repeatedly identified with Republicans from the 1980’s and Ronald Reagan. The 1980’s was a shallow period for culture. Everyone mocks kids today, but they are the targets of executives who were young in the 1980’s. Obama isn’t alone, and we are more or less being dominated by people who were successful in their youth largely for being “yes men” or stealing (Obama appealed to a faux PC sense; he could have easily married the old Cosby Show daughter and not been out of place on the show) and are applying the solutions which made them successful to current problems (stealing, free money to rich people, and flashier ad campaigns).

      Good policy ideas demand an acknowledgement that much of the new “wealth” created/stolen during the 1980’s wasn’t a result of good ideas but theft and luck. Its part of the reason they seem crazy. They aren’t in it for money as much as protecting their identity and sense of self-worth.

      Romney was egregious, but Obama and Romney are just 80’s guys. They probably thought Gordon Gekko was cool.

  10. Susan the other

    Strong earnings propaganda is the cork in the bottle. It’s prolly gonna blow pretty soon. Such a mistake to re-inflate banksters and the stock market – or maybe they planned for a second crash. Maybe it was just to buy time one last time. What for? We’re talking huge surpluses in everything (aka productivity) and virtually no distribution in anything (profit). On top of that idiocy we have a world that cannot absorb any more CO2, nor any more toxic exploitation, nor even our voracious eating habits, and certainly not any more of our garbage and effluent. The only thing left to do is eliminate the “growth and earnings” Fed and go with direct spending. But only on projects of high environmental and social value.

  11. jerry denim

    I have a feeling the revenue hits are the cumulative effective of many quarters of screwing employees and customers because the economy is bad and upper management MBA types have no idea how to actually run a REAL business. Sure the bean counters know how to cut, and the MBAs know how to outsource and use financial engineering but they have no ideas related to growing business or adding value. These executives may congratulate themselves on how clever they are for shorting/screwing their employees wages/benefits after they see the immediate results of one quarter or a couple of weeks but in the short-long term the operation is going to suffer and those chickens are going to come home to roost rather quickly. I see it with the new management of my company everyday. Cut a vital employee’s salary by $20,000 because they can, just to have the formerly good employee turn angry and disgruntled who then immediately starts costing the company thousands and thousands of dollars each day by with passive-aggressive sabotage and a “screw the company, I don’t care, and I don’t get paid enough to bust my ass for those jerks anymore” attitude.

    The screwed and abused customer just leaves. There are plenty of hungry little companies willing to treat customers decently. Investors care about blue-chip names like IBM. Customers don’t.

    1. Mr. Triffid

      Hallelujah! My experience exactly. At some point, these parasites are going to run out of hosts and grim reality will set in. Unfortunately, the ‘hosts’ will go first!

    2. H. Alexander Ivey

      My quick two bits:
      Quit calling them “investors”. Investors were drowned in Grover Norquist’s bathtub. Any one in stocks are speculators, pure and simple.

  12. Jeff N

    I do a lot of work with IBM products, and their tech support has noticably dropped off sometime within the past few weeks. I wonder if they had layoffs.

  13. RBHoughton

    Money is not circulating because banks are reducing lending at this stage of the cycle. Endebted manufacturers will have to sell stock at whatever price they can get. Some will leave the stage, others will amalgamate further, all will lay-off wage earners and recruit commission-only salesmen, but the basic problem is that consumers either don’t have the readies or are fearful of spending. Its scary.

  14. greg

    Business doesn’t get it. By corrupting government, they have destroyed the balance of power that is required to maintain their market. In the absence of independent government, representing the people, who are the market, business exploits the market to collapse. It exploits the people, by raising prices, on the one hand, and cutting wages and benefits, on the other. In an oligopolistic and oligopsonistic economy, pure competition cannot maintain the balance.Rent seekers plunder the market at a rate faster than it can be replenished.

    It’s the Tragedy of the Commons, the common market, on a world wide scale. Much business will go belly up, despite the money it pays to elect its cronies.

    To put it more personally: If the rich people have all the money, the other people can’t afford to buy anything from the rich people’s factories and stores. The factories and stores close, and then the bankers end up with everything.

    1. Brindle

      @greg Well done.

      “Rent seekers plunder the market at a rate faster than it can be replenished.”

    2. Doug Terpstra

      Yes, the Tragedy of the Commons: overgrazing, overfishing, over-mining, over-hunting, over-polluting, over-logging, over-farming, and over-looting — until finally the commons collapse.

      Jared Diamond’s “Collapse” shows that it can indeed happen here. We are on the brink.

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