In 2002, earnings won't be sugar-coated
Bellwether firms change their public relations strategy
Monday, January 21, 2002
By GRETCHEN MORGENSON
THE NEW YORK TIMES
With only a few weeks under our belts in 2002, it is too soon to tell what the year's tone will be
either in the stock market or in corporate America. But with reports last week from two of the
nation's biggest bellwether companies -- IBM and Microsoft -- a pattern may be emerging for the
way the world will work going forward.
Both companies reported desultory results, and the stock market took note. The Standard & Poor's
500 index lost 1 percent of its value on Friday, and the Nasdaq fell 2.79 percent. All the major
indexes are down for the year.
Although IBM managed to beat analysts' per-share earnings estimates by the usual penny, the
company's revenue for 2001 was 3 percent below the total from a year earlier. In addition, hardware
revenue plummeted by 12 percent, while sales in the company's services business, its primary profit
center, grew by only 3 percent. Normally upbeat and swaggering on such earnings calls, Louis
Gerstner Jr., IBM's chairman, was solemn. "Business conditions remain difficult as we enter the new
year," he said.
Across the country at Microsoft, which reported its second-quarter results Thursday, net income fell
26 percent during the first six months of its fiscal year versus the period in 2000. According to the
company, demand for personal computers was disappointing. "We are concerned about the health of
the global economy and have yet to see a recovery in many of the world's largest markets," said John
Connors, Microsoft's chief financial officer. Connors speculated that even when the economy begins
to stir, it will not roar back to life.
Neither report was surprising; anyone willing to face reality in recent months has recognized that
sales of technology gear were dismal. There are no new, must-have products driving consumers into
electronics stores, and the economic malaise means that most companies and individuals are happy
to hang onto their old machines.
But the gloomy tunes being sung by these two technology executives are decidedly different from
the songs of last year. In 2001, managements of technology companies were relentlessly upbeat;
every month, it seemed, another executive would shine his crystal ball and profess to see a rebound
around the corner. And, of course, all accepted the conventional wisdom that the aggressive rate
cutting by the Federal Reserve would guarantee higher stock prices in the second half of 2001.
So the sober talk this year is, in a counterintuitive way, refreshing to any investors who prefer to have
their company reports straight rather than sugar-coated. Indeed, it is good news that corporate
executives are willing to discuss the bad news that is out there. It may be, in fact, bullish for stocks
that some corporate chiefs can acknowledge to shareholders that they are not residents of La-La
Land anymore.
AOL Time Warner was the first company to take this new approach to public relations. At the turn
of the year, it advised investors to lower their growth expectations. IBM and Microsoft make three.
Not all executives have shut down their spin factories. John Chambers, the CEO of Cisco Systems,
still talks of 30 percent growth at his company. But Scott McNealy at Sun Microsystems has been
quiet, as have the folks at EMC.
Maybe executives are learning that telling the truth about weak company prospects is not such a bad
thing. Maybe it is an Enron effect. As that mess has shown, telling lies and having to produce results
to meet them can have disastrous consequences. |
