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Analysis of EDS Fourth Quarter 2001 Business Results

What “Recession?”

IBM vs. EDS Results Are As Different As Night and Day

PHOENIX, Feb. 8 - You’d think they are playing in different leagues, if not competing in entirely different sports.  The two top IT services companies’ fourth quarter report cards are as different as night and day. 

At IBM, most charts point south.  At EDS, most point north. 

At IBM, declining in single digits is considered “goodness.”  That’s because the recession-driven economy and the industry are doing worse by comparison, we are told.  That’s hogwash.  For, at EDS, growing in low double digits is considered not good enough by its ambitious management.  So they’ve boosted their sales force by 50% in the fourth quarter to bolster future growth.

At IBM, a supposed recession is an excuse for lack of growth.  At EDS, “what recession?” - would sum up its latest report card, released after the markets closed on Feb. 7.

The fourth quarter EDS revenues were a record $5.9 billion, up 13% from a strong year-end finish in 2000.  The corresponding earnings were up 16%, adjusted for various one-time factors. 

For the full year 2001, EDS grew by 12% despite the declining revenues at GM, a major client, and at A.T. Kearney, its consulting unit (its “base” revenue was up 17%).  The corresponding net profit surged by 19%.

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The fourth quarter new business sales were $10.1 billion, which would be another record if the $6.9 billion U.S. Navy contract were removed from the 4Q00 totals [the “curse of megadeals”… they always “hurt” the results (by comparison)… next year! J  And they usually “hurt” your bottom line, too, because of lower margins].

For the full 2001, the EDS new contract sales came in just shy of the record set in 2000 ($31.4 billion vs. $32.6 billion).

Segment Analysis

Geographies.  By contrast to IBM, the EDS success tale is evident by its geographic results, too.  While IBM’s business shrank by 9% in the U.S., the EDS U.S. revenue was up 13%. 

But the real story which debunks the IBM theory of the U.S. or IT “recession” comes from EDS’ new sales figures.  The U.S. market, which accounted for 57% of the company’s revenues, both in the fourth quarter and in 2001, contributed 71% of its new contract signings in the fourth quarter, and 64% for the year!

Also by contrast to IBM, where all geographic segments reported declining fourth quarter revenues (see Annex Bulletin 2002-02, Jan. 17, 2002), at EDS, all geographies grew in double digits.  The biggest increase was in Europe, where full year 2001 revenues were up by 17%.

Industries.  Boosted by recent acquisitions, the EDS transportation segment surged by more than 80% in 2001, surpassing the $1 billion revenue mark for the first time.  It was followed by energy and government sectors, which grew by about 40% and 30% respectively during the same period.  The energy sector has now also gone past the $1 billion-mark for the first time.


Looking ahead to 2002 and beyond, the EDS management sounded optimistic that it can sustain and even improve its rates of profitable growth.  The company is facing “unprecedented global opportunities,” according to Dick Brown, EDS’ chairman and CEO.

“We are stepping up to the next level (of performance),” he added in his comments to analysts during a teleconference which followed the earnings release.

Both Brown and Jim Daley, the EDS CFO, reiterated the fact that they expected EDS to grow profitably and generate positive cashflow along the way.  In 2002, the marketplace can expect EDS to have cashflow in the $700 million to $900 million range, Daley said.  This compares to just over $200 million in 2001, after the acquisition-related capital expenditures.

Speaking of balance sheet items such as capital expenditures, if there is one area that may give rise to some raised eyebrows, it is a sharp increase in debt and a related (lesser) rise in the EDS debt/equity ratio.  In 2001, EDS has funded $2.1 billion of acquisitions, and $1.3 billion of additional purchases of property and equipment.

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As a result, the long-term debt jumped from $2.6 billion at the end of 2000, to $4.7 billion at the close of last year.  Of course, the shareholders’ equity has also increased - from $5.1 billion to $6.4 billion during the same time frame. 

So the EDS debt/equity ratio has only rose from 50% to 73% (which compares favorably with IBM’s 115%).  But at the current levels, it is more than triple that in 1998, when it was only 20%, and more than double that of some of its other competitors (CGEY, for example - see the chart).

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Of course, the EDS management argues that this is the price one has to pay for growth.  And if EDS indeed generates $700 million to $900 million of positive cashflow this year, it can use some of that to pay down the debt and lower its carrying costs.  But this is an area of concern we will have to watch this year and beyond.


Overall, sorry Big Blue, while Armonk is singing the blues, the skies could not be bluer if one listens to the EDS management comments about the future.  “EDS financial position is rock-solid,” Brown said.  “And we have the largest pipeline (of potential new deals) we’ve ever had.”

With more than 250 new sales people on its global front lines, EDS is clearly expecting to convert many of the pipeline deals into orders. 

Looks like the new IBM CEO will have his work cut out for himself, while the former one rides off into a golfing sunset and oblivions.

Happy bargain hunting!

Bob Djurdjevic

P.S. In early trading today (Feb. 8), EDS was down three points.  IBM was up a point.  Go figure… If you can, you’d probably to well in Las Vegas, too.














































Volume XVIII, No. 2002-05
February 8, 2002

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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