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.