As levels of optimism stabilize, private companies plan additional spending

As markets continue to stabilize, 45 percent of chief executive officers interviewed for PricewaterhouseCoopers’ Private Company Trendsetter Barometer survey are optimistic about the United States economy over the next 12 months (up two points from the previous quarter), and 47% who market abroad are optimistic about the world economy. Additionally, an increasing number plan to raise operational spending over the next 12 months (62%), despite concerns of legislative and regulatory pressures.

Overall, own-company revenue forecasts for the next 12 months were up from 7.1% last quarter to 8.5%. Additionally, private company CEOs are planning more new hiring over the next 12 months than what was reported in the last quarter (up five points to 47%), with a primary interest in professionals and technicians.

The gap in projected revenue growth and hiring for small (less than $100 million annual revenue) versus large (more than $100 million annual revenue) private businesses has continued to widen this quarter with smaller firms projecting revenue growth at 11.7% vs. 3.9% for large firms; hiring was cited at 56 % vs. 34%. However, large private firms are planning for major capital investments at a larger percentage – 33% vs. 26% among small firms.

“The higher projected revenue growth rates and hiring for smaller companies versus large companies indicate smaller private companies will lead the economic rebound,” says Ken Esch, partner with PricewaterhouseCoopers Private Company Services practice. "Larger private companies will contribute to economic growth primarily through increased capital investment."

Despite continued concerns, participating CEOs are optimistic that they won’t finish 2010 on the downside for own-company revenue growth as was the case in 2009, where 41% of Trendsetter companies reported negative growth. In fact, looking ahead over the next 12 months, 71% forecast positive revenue growth for their own companies in 2010, with 38%, primarily small companies, anticipating growth in the double-digits.

Playing catch-up with spending
Private company CEOs’ spending plans for the next 12 months increased 5 points from the previous quarter to 62%, with a majority of this spending attributed to investments in infrastructure, particularly Information Technology, as well as Marketing and Sales. Information technology investments rose 9 points to 28% from the prior quarter. Increased spending on new product or service introductions remained high at 27%.

“Companies are using their increased confidence to catch-up on the capital expenditures they put on-hold in 2009,” adds Esch. “We’re also seeing that many companies are trying to work with their existing working capital and revolving lines of credit to finance capital expenditures, rather than going to banks for new loans.” 

Concerns about decreasing margins remain high as gross margins remain flat
Interestingly, although 24% of private company CEOs reported higher gross margins in the fourth quarter, net gross margins finished at only one percent (five points higher than the prior quarters minus four percent) – the result of 23% also reporting lower gross margins. Looking forward, overall concern about decreasing margins remained a high 45% as a potential barrier to private company growth over the next 12 months.

International marketers outpace domestic-only peers
Consistent with an increase in international sales in the fourth quarter of 2009, the contribution of international sales to total revenue among private companies selling abroad is forecasted at a confident 18% for 2010. Additionally, international marketers outpaced their domestic-only peers in revenue forecasts, jumping from 7.4% last quarter to 9.4% whereas domestic-only companies rose from 6.8% to 7.8%.

While those companies with international operations remain ahead of their domestic-only peers in revenue growth and spending projections, the one-third selling in the emerging markets of China/India/Brazil expect these markets to contribute to 28% of their total revenues.

“With emerging markets, such as China, focused on expanding their domestic market sector and the U.S. government encouraging export sales, we anticipate that many U.S,-based companies, including privately-held businesses, are repositioning themselves to leverage this momentum by either selling more U.S.-made goods or delivering their services into this fast growing China domestic market," says Alexander Pan, partner with PricewaterhouseCoopers Private Company Services practice.  

Concerns for barriers to growth remain with legislative/regulatory pressures growing
Despite their optimism, lack of demand remains the primary barrier to growth of the next months with a continuing high of 79% of private-company CEOs expressing concern in this area. Uncertainty about legislative and regulatory pressures became an even greater concern this quarter, rising seven points to 50%, especially high among those planning major new capital investments (61%). Other areas of concern were increased taxation (up 9 points to 44%) and profitability/decreased margins (up 2 points to 45%).

“Private companies are looking to Congress to provide some certainty in tax matters and regulatory policy, due to the significant impact they could have on business operations,” adds Esch. "The prospect of higher taxes and healthcare costs weigh heavily on CEOs' prospective plans to commit additional resources to new capital expenditures or hiring new employees."