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Also, check out: "IGS Profits, Productivity Surge," "EDS: Growth Slows, Equity Grows,"  "CSC: A Mouse That Roars?", "A Solid Quarter", "EDS Sets New Records", "Andersen: Another Super Year", "Cap Gemini: The Most Improved?"
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 Analysis of EDS' Second Quarter Results

EDS Sets New Records

Despite GM Woes, EDS Sets Revenue, New Sales High Water Markes

PHOENIX - Despite the woes with its $4 billion-and-shrinking General Motors business, exacerbated by the car maker's just ended seven-week strike which cost $2 billion-plus, EDS managed to set revenue and new sales records, while increasing its profits 10-fold from a year ago, and nearly equaling its best ever second quarter's net earnings.

So figure on its stock taking another tumble... (it dropped 9/16 points today to $34 7/8, in advance of its financial release). At least if Wall Street reacts in its typical way these days.

Surprised? Most logical thinkers would be. As most reasoned businessmen would also react upon learning that IBM stock, for example, set a new record today ($133 5/8) after reporting dismal second quarter results (see Annex Bulletin 98-27, 7/21/98). But logical thinkers and reasoned businessmen seem to be an extinct species on the greed-driven Wall Street, which has become almost totally decoupled from the economic performances of the companies whose stock it trades.

One reason EDS stock is being trashed is that its executives have so far refused to pay the Wall Street ransom in the form of stock buybacks. Unlike IBM, which has spent over $20 billion on such activities, EDS has bought back only $77 million of its stock, so as to fund its employee stock option plans. And even during today's teleconference, some Wall Street financial analysts pressed EDS executives if they intended to engage in share repurchases in the future. Gary Fernandes, EDS' vice chairman, replied that no such decision has been made so far, and that it was up to the EDS' Board of Directors to make it, should they find it advisable in the future.

Record Revenues, New Sales

Meanwhile, back to the real business from the world of fluff, EDS exceeded most people's revenue expectations, including yours truly, with a 24% surge in its second quarter "base" (non-GM) business. Adjusted for the foreign currency translations, such a revenue growth would have been almost 26% (versus the top five IT services companies' average of 17% - see Annex Bulletin 98-22, 5/24/98).

"I am particularly gratified by the strong base business revenue growth," said Fernandes during the analyst teleconference. He added that he was also encouraged by "a dramatically strengthened (EDS') balance sheet."

Europe was EDS' best geographic region with a 30% revenue surge. The non-U.S. Americas followed with a 29% increase, while the U.S. business grew at the top five leaders' average of 17%. EDS' Asia/ Pacific revenue was up 65%, but that's mostly due to the Commonwealth Bank (Australia) megadeal (which was not present in the 1997 figures).

In terms of the new contract sales, EDS' overseas units continued to perform better than their U.S. counterparts. The non-U.S. new business sales represented 50% of the second quarter's total, with 49% of the 50% coming from Europe. The non-U.S. Americas accounted for the remaining 1%. Which means that the A/P region, which in EDS' case means mostly the "P" rather than the "A," was basically dry during the second quarter.

The GM Drag

EDS' GM revenue declined by about 9% as reported, or about 8% if adjusted for foreign currency translations. But just as important as the revenue decline was the negative impact of GM's cost squeeze on EDS' margins. While the "base" business' gross margins increased in the second quarter, even after adjusting for one-time asset write-downs, the GM gross margins declined, and can be expected to continue to fall until the fourth quarter. That's when EDS' own cost reduction efforts are finally expected to kick in and start to offset the margin pressures which both EDS' GM divorce and the GM strike have brought on.

Fortunately for the EDS' shareholders, the fourth quarter is also when some strong margin improvements can be expected in their "base" business, too. One reason is the 1997 "megadeal" - Commonwealth Bank of Australia - which will be coming on stream with its profit contributions. Another is a result of EDS' "Future by Design" efforts, annunciated in 1997 (see Annex Bulletin 97-33, 8/08/97).

The other major EDS' 1997 "megadeal" - Bell South - is yet to produce its first cent of profit for the EDS' shareholders - such are the company's tight accounting standards. In 1999, however, the Bell South deal, along with the record $6.5 billion of new business which EDS had closed in the first half of 1998 will also be coming on stream. As will be the $1.5 billion or so of new contracts which the company has won or is close to closing in just the first month of the third quarter 1998.

In other words, the EDS ship is chugging along very well, thank you. When will Wall Street quit pulling the other way?

Happy bargain hunting!

Bob Djurdjevic

Charts

In Battle of Fluff vs. Substance,

Fluff Winning So Far...

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Other Charts

  • EDS Revenue Shares 1990-1998
  • EDS Quarterly New Contract Shares 1991-1998
  • EDS Quarterly New Contract Values 1991-1998

Tables

  • EDS Financial Results - P&L 1996-1998

Also, check out "Andersen: Another Super Year" Annex Bulletin.

Annex Research is a well respected consulting firm serving the information needs of today's senior IT executives, for over 28 years. For more information please call 602/824-8111.


Volume XIV, No. 98-28
July 30, 1998

Editor: Bob Djurdjevic
Published by Annex Research;
e-mail: annex@djurdjevic.com

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