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IT SERVICES 

Analysis of EDS Second Quarter Business Results

EDS Gaining Ground on IBM

Tenth Consecutive Quarter of Record New Contract Sales

PARIS, July 26 - “Once again, we delivered on our commitments to you,” a confident Electronic Data Systems (EDS) CEO and chairman, Dick Brown, told the analysts following the release of the company’s second quarter business results after the markets closed on July 25.  “We’ve continued to gain global share and momentum… It is clear services are the driving force in information technology.”

Brown went on to point out that the $7 billion in new business deals that EDS closed in the second period was the tenth consecutive quarter of record new contract sales.  This has now pushed the EDS backlog beyond the $80 billion level. 

At the same time, the EDS “pipeline” of new business opportunities has expanded by nearly 60% since the start of the year.  Brown said it was the largest single dollar-rise for a six-month period.

And here we are, hearing that the global IT industry is in trouble all over the world, except evidently in Plano, Texas.  To be sure, Brown acknowledged that, too.  “There is softness in the economy,” he said.  “However, our ability to grow and deliver value is not affected.”

And the proof was in the pudding. 

·        Second quarter earnings-per-share growth was the ninth consecutive period of double-digit increases; 

·        It was also the ninth consecutive quarter of year-over-year operating margin improvement;

·        It was the third consecutive quarter of “base organic revenue growth” above the industry average (13% to 16%). 

EDS’s actual revenue growth was 9%.  But when adjusted for the General Motors 5% decline, and the negative foreign currency impact, the “base organic revenue” in constant currency increased by 17% over the second period a year ago.

EDS has also been gaining ground on IBM in new business sales (see Annex Bulletin 2001-15, July 19, 2001).  We pointed out in February that EDS outsold IBM in the fourth quarter of 2000 ($15.8 billion vs. $12.5 billion - see Annex Bulletin 2001-04, Feb. 5, 2001).  It was only the second time in 11 years that this has happened.  But it was also twice in the five preceding quarters that EDS had outperformed the Big Blue (see the chart).  And that has never happened since IBM entered the IT services competition in 1989!

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Furthermore, EDS’s first half 2001 new sales of $14.5 billion were up 82% over its own running five-year average for the first two quarters of the year.

Such achievements helped put some teeth into a bullish statement that the then new EDS CEO and chairman made in April 1999, after barely four months on the job:

“Flashing back to the NYSE boardroom, (Dick) Brown summed up his end objective back in April 1999 by saying, "we won't be satisfied until we regain the leadership position in the industry we founded."

EDS’s geographic revenue market share gains against IBM were even more pervasive.

Business Segment Analysis

Geographies.  All three EDS geographic sectors reported double digit growth of base revenues at constant currency.  As a result, EDS has been gaining market share on its chief and the only larger competitor - IBM Global Services (IGS).

The U.S. business was up 12% (vs. flat for IGS).  Europe/Middle East/Africa was up 30% (vs. 7% for IGS).  Asia/Pacific was up 21% (vs. 10% for IGS).  Latin America was up 34% (vs. and unspecified DROP for IGS).

Lines of Business.  The Information Solutions unit was the best performer in the second quarter among the three EDS lines of business.  Its revenue increased 20% on a constant currency basis (up about 15% “as reported”).  It was followed by Business Process Management and Consulting with 11% (6%) growth. 

Within the latter segment, however, two opposite trends were discernible.  E-solutions reported an impressive 29% jump in revenues, while A.T. Kearney’s business shrank by 1% in constant currency (therefore by several percentage points more than that “as reported”).

EDS executives tried to reassure the analysts that the A.T. Kearney operation is on the mend, and that the steps that they have taken to right this listing ship are starting to take effect.  The next few quarters will show if that’s really happening.

EDS’s other problem area turns out to be its biggest customer - General Motors.  The GM revenues “came in softer than expected,” according to EDS executives.  They were down by 5% in the second quarter, and can be expected to decline further during the next two periods as the giant auto-maker tries to slash its costs and expenses in an effort to improve the efficiency of its operations.  

The best EDS could do is to try to win some new business at GM and minimize its impact on its business results.  EDS executives pointed out that the former EDS parent company now accounts for less than 18% of its revenues ($775 million out of $4,316 million second quarter revenues).  And that percentage is likely to go down even more as the double-digit “base revenue” growth more than offsets the GM revenue declines.

Summary

On the bright side, the GM and A.T. Kearney challenges notwithstanding, the EDS bottom line continues to grow in line with expectations, and sometimes even ahead of them.  In the latest period, EDS net earnings jumped by 18% compared to a year ago ($300 million vs. $254 million).

For the first six months of this year, the company’s net profit surged by 37% to $746 million.  Which means that EDS is well on its way to meeting or exceeding our net earnings forecast for 2001 of just over $1.5 billion.

Happy bargain hunting!

Bob Djurdjevic






 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Volume XVII, No. 2001-16
July 26, 2001

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

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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