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Analysis of EDS, CSC Third (Calendar) Quarter Business Results

Business Is Humming Nicely

EDS and CSC Report Solid Results, Post Record New Contract Signings

PHOENIX, Nov. 3  Both Electronic Data Systems (EDS) and Computer Sciences Corp. (CSC) reported solid third (calendar) quarter results. 

EDS’s net earnings increased 16% on a revenue rise of 2% (8% “organic growth’ - after the effect of currencies and contract “pruning” is removed).  CSC’s net was up 17% on a revenue jump of 12% (up 15% in constant currency).

But perhaps the best news in each company’s latest financial release was the new contract signings.  EDS closed $6.2 billion of new business in its third period this year, for its seventh consecutive record quarter (the figure does not include the mammoth $6.9 billion U.S. navy award - see EDS Takes Over U.S. Navy, Annex Bulletin 2000-22, Oct. 10, 2000).  CSC signed $4.3 billion of new deals in the latest three-month period, for a total of $7.7 billion in the first half of its fiscal year 2001, that ends March 31 - up 45% over the first six months last year.

Considering that IBM also had record second and third quarter new business signings, we asked the EDS chairman and CEO, Dick Brown, during a teleconference with analysts, if that means that, except for the megadeals, each competitor is more or less fishing in his own pond?

Brown replied that indeed EDS had signed a lot of new contracts with small and medium size customers that are new accounts to EDS.  According to the company’s release, in the third period alone, EDS won over 1,000 contracts, only 19 of which were over $100 million in value.

In other words, EDS is doing exactly what it needed to do to diversify away from the original “best” outsourcing customers - the Fortune/Forbes 500 companies - IBM’s traditional home turf. 

And EDS is also diversifying geographically.  During the third quarter, for example, the company’s new contract sales in Europe were up 132% over last year’s levels.  They are up 110% for the first nine months of this year. 

As in the past, EDS showed a particular strength in Great Britain, especially with government contracts (see Annex Bulletin 99-01).  And its e-commerce growth has also been strong.  The company’s E-solutions unit reported that its third quarter new contract signings were up 80% over last year, and were up 74% for 2000 year-to-date.

But “one man’s gain is another man’s loss,” as they say.  While EDS’s business in Europe went through the roof, CSC’s European revenues were down 6% in the latest quarter, and were down 3% for the first half of its fiscal year 2001. 

Text Box:  The company blamed the decline on foreign currency translations, saying the third period revenues would have been up 5% in constant currencies.  But that’s at best a partial explanation.  An unspoken reason for CSC’s disappointing European results is evidently the competitive edge that EDS and other competitors have enjoyed.

But CSC more than made up for its relative weakness in Europe in the U.S. and other international markets. 

The U.S. federal government revenues soared 18% in the third quarter and for the first six months of the current fiscal year.  The Defense Department revenues were up 9%, while the business from civil agencies of the federal government surged 38% over the same period a year ago.

The U.S. commercial revenues also grew in double digits - up 12% in the third period and for the first half of the fiscal 2001.

But the fastest growing CSC business segment has been the non-Europe international market.  Led by the stellar CSC Australia results, the revenues from this area soared by 38% during the last 12 months, from $403 million to $557 million. 

Unlike Wall Street’s erratic reaction that greeted last year’s third quarter reports by EDS and CSC (see “No Buybacks, No Kickbacks” - Annex Bulletin 99-34, Nov. 12, 1999), the stockmarket rightly applauded the latest financial releases from the two global IT services leaders. 

Both EDS and CSC stock surged the day after the latest results were announced.  The only company that received the erratic treatment this year was IBM.  For no new or apparent reason, Wall Street first trashed the Big Blue shares, just to push it up in the last week - again for no obvious reason (see the chart)









Volume XVI, No. 2000-26
November 3, 2000

Editor: Bob Djurdjevic
Published by Annex Research

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