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Analysis of Electronic Data Systems’ Fourth Quarter Results

Rebuilding Trust, Confidence

Revenue, Profit Down, But Stock Rises on Strong Cashflow, New Sales Surge

PHOENIX, Feb 10 - Good news travels fast, but bad news travels much faster.  Trust and confidence are hard to earn, and easy to lose.  That’s what EDS found out last fall when it issued an earnings warning (on Sep 18 - see Wall Street Legal Vultures Descend Upon EDS, Sep 27, 2002),  EDS Issues Earnings Warning, Sep 18, 2002).  Ever since, the EDS top management has been on a confidence-rebuilding track.  And finally, the effort seems to be getting some traction. 

After EDS released its fourth quarter results after the markets closed on Thursday (Feb 6), its stock moved up 5% on an otherwise down day for Wall Street.  Not that there was that much good news to cheer about in the company’s fourth quarter report, mind you.  It was the absence of any real bad news, coupled with several upside surprises, that evidently had a calming effect on EDS shareholders and investors.  After months of hitting their heads against a wall, it felt good when the pain stopped.


Our report then goes on to analyze the fourth quarter and full year 2002 EDS results - by industry, by geography and by lines of business.  

Here are some additional excerpts:

Business Segment Analysis

By Industry.  The “megadeals” EDS won at Bank of America and at ABN AMRO in December underscored that point.  They ended a long sales drought and put EDS back on the scoreboard in the global IT services major league. 


By Geography.  The gist of the changes that took place in 2002 around the EDS world was that EDS U.S. lost share of global revenues (from 57.5% to 55.5%) while EDS Europe gained it (from 30.0% to 32.5%).  The U.S. revenues declined by 3% to $12 billion, while European business jumped by 13% to $7.1 billion.  Revenues from other international markets declined by 5%.  Overall, revenues rose by just under 2%.


By Lines of Business.  The Operations Solutions LOB (outsourcing), EDS’s biggest business unit with $3.7 billion revenues in the fourth quarter and $14.1 billion for the year (66% of total), reported a decline of 4% in constant currency in the latest period versus the year-ago quarter.  That turned out also to be the best performance of the four lines.  The Solutions Consulting and PLM Solutions declined by 13% each, while A.T. Kearney dropped by 14% (see the chart). 


Summary & Outlook

Looking ahead to 2003, the EDS executives said they expected a low- to mid-single digit increase in “organic” (non-GM) revenues.  The GM business will continue to erode, perhaps in mid-teens to low-twenties percentage decline.  The full year free cashflow should be in the $700 million to $900 million range, EDS said.

The company has now also devised a new system of tracking and forecasting its deals so as to avoid the negative surprises that plagued it in the third quarter 2002.  

Altogether, it sounded as if EDS is now on a new warpath… the path to winning back and rebuilding the trust and confidence of its investors and clients.

“We will deliver on our commitments,” Brown, the CEO, reassured the analysts in conclusion of his Feb 6 remarks.

And just to put things in perspective, EDS made $1.1 billion in net profit at the end of a supposedly “bad” year.  Not bad, huh?


"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, and who are now reading the complete Annex Bulletin (12 pages in print edition), along with 2 tables and 18 charts which back up our analysis.

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Happy bargain hunting!

Bob Djurdjevic

2002: Wall Street Legal Vultures Descend Upon EDS (Sep 27, 2002),  EDS Issues Earnings Warning (Sep 18, 2002),  Wall Street-Main Street Chasm Widens (July 3, 2002),  Analysis of EDS 4Q01 Results (Feb 8, 2002)

A selection from prior years: Annex Research Analysis of EDS 4Q00 Results (Feb 7, 2001),  EDS Takes Over US Navy (Oct. 10, 2000),  EDS Second Quarter Results (July 28, 2000),  Annex Bulletin - 2000-02 (EDS' e-Price Clubs).

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Volume XIX, No. 2003-04
February 10, 2003

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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