Annex Bulletin 2006-08 February 7, 2006
Excerpts from CONFIDENTIAL client edition
Updated 2/09/06, 12:30PM MST, adds EDS Rocks...
Analysis of CSC's Third Quarter FY06 Business Results
Earnings Please Investors; Revenues Disappoint, As New Contract Sales Plummet
SCOTTSDALE, Feb 7 - Computer Sciences Corp. (CSC) became the latest IT company to vex investors. Its shares dropped 1.6% prior to the release of its third quarter fiscal year 2006 business results, after the markets closed today. They recovered about a point in after-hours trading, as the company's results sent mixed messages to the market place. Earnings came in slightly better than expected, but revenues, up only 2.5%, disappointed Wall Street.
To us, however, the most disappointing aspect of CSC's latest financial release was the implied cause of its slowing revenue growth - sharp declines in new contract bookings. For the quarter, they were down 42% relative to the same period a year ago. Year-to-date, they were down 32%.
But there was plenty of "softness" in CSC's sales numbers, the company's expansion into India is going great guns. The number of CSC employees based in India jumped 77% at the end of December compared to the same point a year earlier, according to Leon Level, the CFO.
The more demand for Indian labor, the higher the wages, and. therefore, the lesser allure of the Indian market (check out "A Passage to India," July 2003, for our forecast regarding that trend).
EDS Rocks: Fourth Quarter Results Exceed Expectations
SCOTTSDALE, Feb 9 - Electronic Data Systems (EDS) is rocking once again. The company returned to profitability in 2005 largely on the strength of the fourth quarter in which it made money for the first time on its beleaguered NMCI megadeal.
"We're back to profitability, and that profitability will grow significantly" in the next couple of years, CEO Mike Jordan said in an interview with the Wall Street Journal. He also declared the EDS turnaround to be "largely complete."
Not so fast. One quarter does not make a turnaround. Not anymore than one swallow makes a spring, especially in February. Jordan's optimism could be interpreted a "declare victory and run like hell" proclamation. Is the EDS CEO getting ready to head for the hills himself? The next several quarters will show if this was a lonely swallow or a sustained recovery.
Strong New Contract Sales
Perhaps the most encouraging positive EDS sign is its new contract sales. For a second quarter in a row, they were $5.3 billion. That lifted the total for the year to $20.5 billion, up 43% over the $14.3 billion the company closed in 2004, and the fourth quarter new contracts by 45% over the corresponding period a year ago.
Business Segment Analysis
Among EDS's geographic regions, Asia/Pacific, the smallest area, reported the best growth in the fourth quarter. Revenues were up 19% to $346 million.
We see EDS revenues growing slightly (up 1%) back to about a $20 billion level in 2006.
When you start out with a gross margin of only 12%, i.e., before you feed and take care for your employees, there is not much money left to flow to the bottom line. What EDS needs to do in order to improve its gross margins is to stop chasing the megadeals, and try to grow its business in SMB markets. Of course, that's the same advice we gave the company six years ago, but it evidently fell on deaf years (see "EDS e-Price Clubs," Jan 2000).
"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, who are now reading the complete Annex Newsflash, along with all charts which back up our story.
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Bulletin Index 2006 (including all prior years' indexes)
For additional Annex Research reports, check out... Annex Bulletin Index 2006 (including all prior years' indexes)