|Annex Research | Annex Bulletins | Quotes | Workshop | Feedback | Clips | Activism | Columns 
The copyright-protected information contained in the ANNEX BULLETINS is a component of the Comprehensive Market Service (CMS). It is intended for the exclusive use by those who have contracted for the entire CMS service.

   Confidential Annex Research Client Edition

IT SERVICES

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.

For EDS management, however, the end of 2002 was only the start of a new beginning.  They now face a long and daunting task of mending wounded expectations and rebuilding the lost trust and confidence.  Dick Brown, EDS’s chairman and CEO, seemed acutely aware of that. 

“We completed 2002 more selective in the business we take on and more mindful of market conditions,” he said.  “Our top priorities are meeting our service commitments to our clients and our financial commitments to our investors.” 

Perhaps the most cheery news in the EDS’s latest release was its cashflow story.  The fourth quarter free cashflow of $863 million was almost double that in the quarter a year ago ($453 million).  And since cashflow has been a worrying concern on many investors’ minds ever since EDS’s September 2002 warning, seeing the cashflow turnaround in fact and not just in words was rather encouraging.

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.  

Altogether, EDS signed $8.1 billion of new business in the fourth quarter, up from only $3 billion in the third, but down $10.1 billion in the fourth quarter 2001.

The December megadeal wins allowed EDS sales people in the financial sector to close the books on 2002 with their heads held high.  The EDS finance business unit accounted for 74% of all new contract sales in the fourth quarter, versus only 33% for the year as a whole, including the fourth quarter.  Which is up from only a 14% share in 2001 (see the chart).  

Since some of the year’s biggest financial sector deals were closed in the last month of the year, however, they had a marginal impact on EDS’s full year 2002 revenues.  The finance and insurance unit’s revenues declined 11% for the year to about $3 billion, as its share of global revenues dropped from 16% to 14%.

Among the industry units that increased their share of new business contracts were government, energy and health care, rising in 2002 from 13% in 2001 to 15%, from 4% to 6%, and from 4% to 7% respectively. 

Government and energy segments’ 2002 revenues also surged by 21% and 22% to $5.4 billion and $1.3 billion respectively.

All other EDS industry segments’ new business shares declined, led by a 16-point drop in transportation (from 19% in 2001 to 3%), and by a 10-point drop in manufacturing (from 30% in 2001, to 20% in 2002).

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%.

New contract sales tell a similar story.  The U.S. managed to hold on to its 64% share in 2002 (the same as in 2001), but Europe’s share increased from 23% to 26%. 

The biggest share drop occurred in the Asia/Pacific region.  New contract sales there all but dried up in the fourth quarter, accounting for only 1% of the EDS worldwide total (versus 6% in the fourth quarter 2001).  For the year, however, the Asia/Pacific area managed to hold on to a 4% share, down from 6% in 2001.

Latin America/Canada region also lost share last year (from 7% to 6%).

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?

Happy bargain hunting!

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)

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