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Analysis of Electronic Data Systems’ Third Quarter Business Results

EDS on a Roll…

What Terrorism?  What Economic Slowdown?  What Competition?

PHOENIX, Oct. 25 - What terrorism?  What economic slowdown?  What competitive pressures?  Electronic Data Systems (EDS) is on a roll, leaving in the dust any and all challengers - from high up, or low down.  The Plano, Texas-based company has once again set records left, right and center, despite the Sep. 11 blues that have plagued many of its customers, and most of its competitors.  Among the highlights, EDS has extended its…

·        Winning streak for record contract signings to 11 consecutive quarters ($6.8 billion in 3Q01);

·        Double-digit annual EPS growth to 10 consecutive quarters (+17% in 3Q01);

·        Operating margin improvement to 10 consecutive quarters (11.2% in 3Q01);

·        Organic revenue growth above market rate to four consecutive quarters (up 17% in 3Q01)

EDS has also recorded a double-digit organic revenue growth in ALL geographies during the third quarter, with Europe leading the way.  “We are seeing real strength in Europe,” said Dick Brown, EDS’s chairman and CEO, during a teleconference with analysts held after the markets closed on Oct. 24. 

In Europe, the EDS base organic revenues surged by 23% during the latest period.  Such a sharp increase is impressive not only because of a global slowdown due to the Sep. 11 terrorism attacks, but because Europeans have always taken their vacations seriously.  And never more seriously than during the third quarter, and the month of August in particular.

And even in the U.S., where the Sep. 11 events had the most dramatic negative effect - politically, psychologically and economically - EDS managed a 16% revenue rise.  Compare that with IBM’s 6% decline (!) in America, for example, which Wall Street cheered because… golly, it could have been worse (see “It Could Have Been Worse,” Annex Bulletin 2001-19, Oct. 16, 2001).

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Segment Analysis

Geographies.  Despite some contract signing deferrals due to the Sep. 11 events, EDS new business sales were strong right across its geographic units; its lines of business, and in most of its industries.

The supposedly beleaguered U.S. market, for example, accounted for about 62% of EDS new contract signings, a 107% increase since a year ago.  That makes the U.S. by far the biggest geographic unit.  During the third quarter, EDS closed 88 deals valued at $250 million or higher, with 58 of those contracts coming from the U.S.

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Europe was the second largest segment with 21% of total, while Asia/Pacific and Latin America/Canada accounted for 11% and 6% respectively of the third quarter new contracts.

Lines of Business.  Despite From the lines of business standpoint, the Information Solutions unit was BOTH the biggest and the fastest growing sector.  It represented about two-thirds of all new business signings, and its revenues grew by 21% since a year ago (up 29% on a constant currency basis).

Business Process Management (outsourcing) was the second largest and second fastest unit with an 18% share of new business, and a 19% revenue growth rate.

The Consulting Solutions segment delivered a mixture of good and bad news.  The A.T. Kearney unit suffered an 8% drop in revenues, while the e-Solutions revenues rose by a whopping 45% rate - for the seventh consecutive quarter of such rapid growth. 

Within that growth rate, the eSolutions unit produced $3.9 billion in hosting revenues; and processed two billion ATM transactions, and 50 million credit card transactions for two million merchants in 19 countries, according to Brown.

“No other company comes close to this kind of (e-commerce) growth,” he said.

In terms of new sales, the two Consulting operations accounted for 6% and 4% of the total respectively.

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Finally, boosted by some recent acquisitions, the Product Lifecycle Management (PLC) segment grew by 63% (15% on organic basis).  The PLM unit also accounted for about 5% of the new contract sales in the third quarter.

Industries.  Some of EDS’s industry sectors did suffer as a result of the Sep. 11 attacks.  Transportation and the auto Industry are two such examples.  The GM revenue declined by 10%.  EDS also did a charitable thing for its ailing airline customers by giving them an extra month to pay their bills.  Financial services area was also hurt.

More than offsetting those problem areas were other industries that continued to buy and grow.  And all customers, including the ailing industries, showed a surge of interest in EDS’s security service offerings.  Customer inquiries about those almost doubled, according to Brown.

So as we said in our commentary about the Sep. 11 events, they have proven the vulnerability of the industrial era systems, but also the resilience of the new information era creations (see “End of Folly, Not of World,” Annex Bulletin 2001-18, 9/26/01).

Strong Renewals

Another thing that stood out in EDS third quarter results was renewals, usually a good indicator of the quality of service customers receive.  “Our renewal rate with existing clients has reached unprecedented levels,” said Brown.

Indeed, the third quarter renewals accounted for 44% of the new contract sales, according to Myrna Vance, the company’s top investment relations officer, more than double the normal rate in the last two years (see the chart).

As a result, we estimate the EDS backlog to be now about $86 billion (about four times its revenues) and growing steadily.

So all around it was a very good quarter for EDS, the company on a roll that keeps on ticking, like the Energizer Bunny, no matter what hurdles it or its customers and competitors face.  So stand by for the EDS stock to rise in the wake of these results.

Happy bargain hunting!

Bob Djurdjevic














































Volume XVII, No. 2001-20
October 25, 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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