Uncertainty surrounding EDS’ remaining business with its former parent General Motors is still holding the Texan IT services giant to ransom, despite the broadening scope of its activities. First quarter earnings presented few surprises to Wall Street but lingering doubts remain about the quality of business EDS does with its biggest customer. Just over 25% of revenues still derive solely from GM, and EDS’ vice chairman Gary Fernandez was determined to sweep all of the bad news this way. First quarter net profits fell by 5.1% to $184m on revenues up 24.3% to $3.9bn but the figures include a hefty $43m accounting charge for the write off of in process research and development at the recently purchased CAD/CAM unit of Intergraph Corp. Excluding this charge, earnings per share of $0.44 were just a penny short of expectations. But the bad news is that overall costs are growing faster than revenues. And according to Fernandez, the problems are all down to GM. EDS is gradually weaning itself away from its former parent, but while it succeeded in cutting GM-based revenues by 2.3% year on year, it forgot to reduce the corresponding cost base. Hence profit margins fell backwards in the quarter. The good news, however, lies in what CEO Les Alberthal calls the base business i.e. non-GM related contracts. Here, revenues grew by 14.5% with improving rather than shrinking profit margins. New contract signings in the second quarter have jumped, and helped by this surge in business, EDS expects operating margins to reach double figures overall from the current 7% range. Asked if continuing declines in business with GM would drag the profits down again in the second quarter, Fernandez said that significant uncertainties still remained but that overall, this was unlikely. Further good news was that EDS’ debt to equity has reduced to 26%, the lowest at any time since the split off from GM, leading to reducing interest charges. The rate of staff bailing out of the company voluntarily has also come down from a frightening 17% to around 13%.
