Private-Company Optimism and Revenue Forecasts Dip as Economic Uncertainty Persists

PwC's Private Company Trendsetter Barometer tracks the business issues and best practices of privately held US growth businesses. It incorporates the views of 243 chief executive officers (CEOs/CFOs): 134 from companies in the product sector and 109 in the service sector, averaging $333 million in enterprise revenue/sales, and including large, $500M-plus private companies.

New York, August 14, 2012 — In the second quarter of 2012, half of leading private companies were optimistic about the US economy, few were pessimistic (12 percent), and a fair number remained uncertain (38 percent), according to PwC US’s Private Company Trendsetter Barometer. The biggest movement between the first and second quarters was in the percentage of Trendsetter executives reporting optimism about the US economy, down 10 points. The percentage of Trendsetter executives voicing uncertainty and pessimism, meanwhile, rose slightly, by 6 and 4 points respectively.

Among Trendsetter companies that sell abroad, 23 percent were optimistic about the world economy, while the same percentage (23 percent) registered pessimism. Uncertainty was the predominant sentiment expressed by private businesses selling internationally, with over half (54 percent) of international companies taking that view.

“Continued fluctuation in private-company optimism is to be expected while the US economic recovery remains slow and the Eurozone unsettled,” says Ken Esch, a partner with PwC’s Private Company Services practice. “This up-and-down movement in Trendsetter confidence has been a consistent pattern over the past several years and signals a prevailing sense of uncertainty. It may take a few consecutive quarters of sustained high confidence before private companies feel they've truly turned a corner and are ready to pursue growth more aggressively."

Domestic Companies Cut Back on Revenue Targets but Still Expect Growth
Trendsetter executives revised their 12-month revenue-growth forecasts downward from 9.5 percent to 8.3 percent. Estimated growth for calendar-year 2012 was notably higher than forecasted 12-month growth — 10.0 percent versus 8.3 percent. Nonetheless, most private companies (86 percent) do expect positive revenue growth over the next 12 months, with 33 percent forecasting double-digit growth and 53 percent forecasting single-digit growth.

Notably, the decrease in forecasted revenue growth is attributable solely to Trendsetter companies that do not sell outside the United States. Their projected revenue growth dropped to 6.9 percent, whereas Trendsetter companies that sell internationally projected 9.7 percent growth. For companies selling in China, India, and Brazil, the growth rate was even higher, at 11.3 percent. However, the expected 12-month contribution of international sales to total revenue for companies selling abroad declined slightly for the second quarter, dropping from 21 percent to 18 percent.

“Private companies are factoring a number of variables into their growth projections," says Esch. "In addition to the slow US recovery and ongoing Eurozone troubles, there's also the US presidential election, potential year-end legislation, and looming tax issues — all of which will affect the direction that the economy takes over the next 12 months. Against this backdrop, emerging and other fast-growth markets continue to be bright spots, offering attractive opportunities for US private companies that are finding it difficult to meet their growth objectives through domestic sales alone.”

International Companies Continue to Lead Operational Spending
Sixty-eight percent of Trendsetter companies plan to increase operational spending over the next 12 months, led by those doing business abroad — 77 percent of international companies versus 60 percent of domestic-only businesses). The percentage is even higher (87 percent) among Trendsetter companies doing business in China, India, and Brazil. The top areas of planned increased spending are information technology (38 percent) and new products and services (30 percent).

While overall there was a slight pullback in the percentage of Trendsetter companies planning major new investments of capital over the next 12 months, international companies again outpaced domestic-only companies in this area (38 percent versus 31 percent).

“What the Trendsetter data show us, and what we're seeing among our clients, is that when it comes to the top line, private companies are focusing on organic growth rather than relying on avenues such as mergers and acquisitions," notes Esch. "Consistently, we see information technology play a key role in driving and supporting this organic growth, particularly for Trendsetter companies in emerging markets. There the best way to identify, target, and reach customers is often through digital means, such as mobile devices."

The breakout of spending by international versus domestic-only companies is shown below, including a breakout of higher spending in key fast-growth markets abroad:

International Marketers
Domestic-Only Peers
Marketing in China/ India / Brazil
 
Plans over the Next 12 months
2Q 12
1Q 12
2Q 12
1Q 12
2Q 12
1Q 12
 
  • Major Capital Investments
38%
48%
31%
28%
36%
59%
  • Expansion to New Markets Abroad
38%
47%
5%
9%
39%
54%
Increased Operational Spending (net)
77%
81%
60%
61%
87%
81%
 
  • New Products/Services
36%
43%
24%
19%
37%
39%
  • Information Technology
47%
47%
30%
33%
54%
46%
  • Sales Promotion
23%
29%
19%
23%
22%
30%
  • R&D
19%
23%
8%
6%
28%
28%
  • Business Acquisitions
15%
16%
11%
15%
20%
22%

Slight Uptick in Hiring
The majority of private companies (54 percent) plan to add to their workforce over the next 12 months. Only 3 percent plan net layoffs and 43 percent expect their workforce to stay about the same. Overall, Trendsetter companies project a 2.4 percent increase in their headcount, up from 1.8 percent in the first quarter.

“Consistent with recent quarters, private businesses are continuing to add to their headcount, but only marginally,” says Esch. “Despite investing cautiously in this area, Trendsetter companies recognize the danger of having a talent shortfall when opportunity comes along — roughly one-quarter of themcite lack of qualified workers as a potential barrier to growth. Consequently, we don't expect hiring to wane, yet a significant uptick is unlikely until the economy shifts into a higher gear, which may depend, in part, on some resolution of matters such as the Eurozone debt crisis and the US fiscal cliff that looms at year-end.”

Decreasing Margins a Barrier to Growth
Similar to the beginning of the year, this past quarter the leading headwinds that Trendsetter executives cited for the next 12 months were concern about demand (cited by 68 percent of respondents), legislative/regulatory pressures (48 percent), and decreasing margins (31 percent). Concern about increased taxation (28 percent) dropped from the previous quarter. So did concern about oil/energy prices (29 percent). Indeed, costs and prices overall were moderately lower. Costs were higher for 17 percent of Trendsetter companies and lower for 13 percent, for a net 4 percent with higher costs. Prices, meanwhile, were higher for 16 percent, lower for 10 percent, for a net 6 percent of Trendsetter companies with higher prices.

“In the second quarter, we saw private companies adjust prices to meet the rise in costs,” says Esch. “With economic uncertainty continuing indefinitely, private-company executives need to stay flexible with their pricing models so that they can ride out fluctuations in the market.”

Bank Loans Remain Static
Limited lending activity was once again reported in the second quarter of 2012, with only 7 percent of Trendsetter companies reporting financing activity — 8 percent by domestic-only firms and 6 percent by international companies. Six percent of companies reported new loans from banks.

“Private companies continue to be conservative about outside financing, choosing instead to make liquidity a priority and fund investments through current cash flow,” says Esch. “This is likely to remain the case until economic growth picks up more steam.”

 

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