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of Electronic Data Systems’ Fourth Quarter Business Results
Record New Contract Sales Mark End of a Gangbuster Year
PHOENIX, Feb. 7 - Back in April 1999, Electronic Data Systems (EDS) uncharacteristically invited analysts and investors to a face-to-face tête-à-tête in the plush New York Stock Exchange boardroom, at the very heart of Wall Street. Dick Brown, EDS's then new CEO and "change agent," told the assembled crowd that, "our real goal is to re-ignite the growth engines" (see Annex Bulletin 99-20, 6/26/1999). He then set the bar by which Wall Street should measure his goals.
Today (Feb. 7), Brown delivered on his promises. No longer a new CEO, and now a proven “change agent,” the EDS chairman spoke calmly and confidently about the just-released fourth quarter business results.
“We have achieved all three goals that we set out for ourselves” at the NYSE boardroom meeting, Brown said.
· The so-called “organic” base revenue growth (growth adjusted for currency changes and one-time events) is at or higher than the industry growth rate (16% vs. 13%).
· EDS has just exceeded the 10% operating margin (10.5% in 4Q00).
· Earnings per share are growing faster than revenue (19% vs. 10% “organic” growth in 2000).
Flashing back to the NYSE boardroom, 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."
Well, EDS still has a long way to go before reclaiming the poll position in the IT services industry from IBM, but the company did outsell the Big Blue in the fourth quarter. And by a country mile. EDS reported $15.8 billion in new business sales vs. IBM’s $12.5 billion. It was EDS’s eighth consecutive record quarter.
For all of 2000, however, IBM came out on top with $56.4 billion in new contracts vs. EDS’s $32.6 billion. The latter figure was another record for EDS that surpassed by 31%. the previous high water mark the company set in 1999 ($24.9 billion).
As a result of the surge of new contract signings, the EDS backlog is now almost $80 billion, or four times the company’s revenue. By contrast, IBM’s year-end 2000 backlog of $85 billion represents only three times the IBM Global Services’ revenue (excluding maintenance).
EDS competitive win rate also increased by more than 20% in the latest quarter, reaching the highest level in the company’s history, according to the CFO, Jim Daley. But as Brown pointed out three months ago, perhaps the best news for EDS shareholders is that much of the new business is coming from new, smaller customers in which there was little or no competition (see Annex Bulletin 2000-26, Nov. 3, 2000).
Which is exactly what Annex Research counseled the new EDS leaders to do as a new strategy tack in an April 1999 conversation (see Annex Bulletin 99-20, 6/26/1999).
Byrne Mulroney, an EDS executive in charge of partner relationships, said in a telephone interview this week that a year ago, the company created an indirect channels organization “to take our experience and management capability and enable channel partners to be successful.”
This organization has been addressing the fast growing segments of the market that EDS has not traditionally served, leveraging EDS’s strengths in the back end, and our partners’ strengths in the front end routes to new markets, Mulroney explained.
Some of the EDS new sales growth figures, especially during the second half of last year, are directly attributable to this new strategy.
“The EDS-Centerbeam alliance (in which EDS took a minority equity position in this Internet provider) is a perfect example of this initiative,” Mulroney said. It builds on the momentum EDS had established with partnership agreements with Hewlett-Packard in March and with Microsoft in July (for “Application on Demand” applications), and with EMC in May (for “Storage on Demand” applications).
The fourth quarter geographic distribution of EDS new contracts showed the full extent to which this vendor has become a global IT services provider. The Asia/Pacific region led all others with a 295% growth. Europe was second with a 141% spurt; the U.S., the largest segment, was third with a 33% growth rate.
At a first glance, the U.S. growth rate seems sluggish compared to the triple-digit surges in overseas markets. But a 33% increase in the world’s biggest and most mature IT services market is nothing to sneeze at. Especially not at a time when politicians and business leaders alike are fretting about the supposed slowdown of the U.S. economy.
Answering an analyst’s question to that effect in today’s teleconference that followed the EDS earnings release, the CEO Brown said that the company has studied carefully the impact of general economy on EDS’s business, and has concluded that it is “relatively neutral.”
“Some clients buy for growth; some clients buy to cut costs,” he said.
In other words, different strokes for different folks. Different segments of the EDS customer base buy the company’s services at different times for different reasons and purposes. But some do buy all the time.
In terms of horizontal segments, the EDS Business Process Management sales were up 86%, e-Solutions increased by 75%, and IT Solutions rose by 36% compared to the fourth quarter of 1999.
In terms of revenue, the Business Process Management increased by 7% in “organic” growth, while the e-Solutions and IT Solutions jumped by 43% and 20% respectively during the same period.
One fly in an otherwise resplendent EDS ointment was its consulting arm - A.T. Kearney. Its revenues dropped by 3% in the fourth period. But Brown and Daley were confident that with the new CEO and a new strategy tack in 2001, this part of EDS would also return to solid growth this year.
Speaking of this year’s growth, the CFO Daley said that the General Motors’s (GM) revenues, which have been declining ever since EDS won its independence from GM in June 1996, are expected to be flat or show modest growth in 2001.
The “organic” growth of the base revenue will be in the 13% to 16% range for the year, and in the low double digits in the first quarter.
Perhaps the best news is that the big new sales contracts that EDS closed in the second half of 2000 will start producing revenues and profits in the second half of this year. As a result, the company expects a double-digit earnings growth to continue in 2001.
Stand by for the stock to go up tomorrow.
Happy bargain hunting!
Volume XVII, No. 2001-04
Editor: Bob Djurdjevic
P.O. Box 97100, Phoenix, Arizona
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