Commentary: The Lords of Tech: What Were They Thinking?

Remember the late 1990s when such high-tech CEOs as Cisco Systems' (CSCO ) John Chambers, Nortel Networks' (NT ) John Roth and Oracle's (ORCL ) Lawrence Ellison beat Wall Street's high expectations each quarter without breaking a sweat? Well, since the downturn hit last November, it seems they've been reading some far less accurate tea leaves. Despite awful economic indicators, each CEO continued to talk up stellar outlooks almost up until the day they dropped earnings bombshells on investors.

Indeed, the reversals were stunning. After reaffirming sales-growth projections of 50% to 60% in early December, on Feb. 6 Chambers reduced Cisco's 2001 estimate to 40%. On Feb. 15, one month after his last rosy reports, Roth halved his growth outlook from 30% to 15%. And Ellison? After telling BusinessWeek on Feb. 8 that Oracle could hit its 30% growth target for the year, Oracle posted just 9% sales growth in the quarter ended Feb. 28.

SUDDEN JOLTS. To hear many a tech exec tell it, such optimism was justified well into January and February. All over Silicon Valley, companies now say they saw solid-looking deals evaporate at the last minute as nervous customers killed projects.

While this downturn has admittedly been rapid, that's no excuse for giving wildly optimistic guidance to investors. Particularly when executives were themselves selling shares. Just ask William S. Lerach, a partner with Milberg Weiss Bershad Hynes & Lerach and the king of shareholder lawsuits. He is considering filing an insider-trading lawsuit against Oracle, based in part on Ellison's sale of 29 million shares of stock on Feb. 1, a month before Oracle slashed its growth prospects. "Why didn't he wait and take the benefit of the surprisingly good quarter he expected?" asks Lerach. He notes that this was Ellison's first stock sale in almost five years and that Chief Financial Officer Jeff Henley sold shares in January as well. Neither executive would comment, although a spokesperson explained that Ellison had a limited time to sell before his shares expired, and Henley sells shares every year at this time.

So how can companies improve their guidance? Mostly, by getting real about growth prospects. Only a handful of tech outfits trimmed forecasts as the economy soured. Many others naively assumed that their company was uniquely positioned to withstand a slowdown. "We're sort of recession-proof: As things get tougher, you need [servers] more," Sun Microsystems Inc. (SUNW ) CEO Scott G. McNealy told BusinessWeek in early December.

And even when customers started nixing deals, too many CEOs bet they could pull out the quarter by finding new ones. A top supplier to Cisco, for example, says of its late-year optimism: "We knew their order rate was already going down. It had to be unbelievable arrogance."

Nevertheless, lots of companies still need to ratchet down expectations. Most analysts say Cisco's and Nortel's revised growth plans remain far too optimistic. Others knock IBM (IBM ) for not backing off a bullish growth projection made in January. "This is not some nichey downturn," says Goldman, Sachs & Co. analyst Laura Conigliaro. "It's hard to see how your average $95 billion giant is going to slip gracefully by."

The most important step companies could take toward improvement may be to temper the practice of tying commissions to sky-high quotas and instead reward salespeople for bringing in business in a more predictable fashion throughout the quarter. Up to 40% of some tech companies' revenues now come in the last week of the quarter, as customers wait for big discounts from managements stretching to make their numbers. That game paid off hugely on the upswing. Unfortunately, the price on the downswing is just as big.

By Peter Burrows

Burrows covers technology from San Mateo.

With reporting from Jim Kerstetter and John Shinal in San Mateo and Roger Crockett in Chicago.

— With assistance by John Shinal, and Roger O Crockett

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