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October 28, 1999

EDS Earnings Up and On-Track, Sees Further Charges

By CBR Staff Writer

By Stephen Phillips

Computer services giant, Electronic Data Systems Corp, yesterday reported 47% growth in operational earnings for its third quarter, based on buoyant US orders and on-going cost-cutting efforts. But declining returns from the firm’s outsourcing contracts with largest client and former parent company, General Motors Corp, dragged down revenue growth to barely more than 50% of the market average.

Plano, Texas-based EDS reported a $257.3m profit for the three- month period to September 30, excluding restructuring costs and one-time divestment gains, equivalent to diluted earnings per share of 51 cents. Earnings bested the consensus estimate of analysts polled by First Call by two cents and compared to $174.5m, or 35 cents per share, in the corresponding period last year. But revenue for the period was up only 8.3% on the 1998 quarter at $4.71bn, languishing behind average revenue growth rate for the services industry of 14%-16%, quoted by the company itself. Excluding contracts with General Motors, from which EDS was spun off in May 1996, revenue growth was 11.4%. Revenue from EDS’s contracts with GM declined to $869.7m from $900.1m in the year-ago, as the Detroit motor giant continued to open the contracts up to competitive pricing pressure.

The company said base revenue (excluding GM) had been affected in the short term by a policy of axing contracts deemed to offer poor returns on investment. Revenue was also down, it said, because of a lack of focus during the fourth quarter of 1998 when few contracts were signed amid the succession of Dick Brown as chief executive officer to replace Lester Arburthal.

The firm boasted $5.1bn worth of new contract signings for the quarter laying a clear path to future revenue strength said Brown. Executives said the US accounted for 53% of new business, marking a significant improvement. Highlights included a global services contract signed with Continental Airlines, which the firm said would generate $1bn over its lifespan. EDS closed a $12.4bn mutual outsourcing deal with MCI WorldCom, earlier this week, under which the telecommunications giant will outsource its IT services to EDS for $6.4bn. Executives said revenue from the contract would come on stream in the first quarter of 2000. New contracts signed in Europe for the period were slightly down on the year-ago.

EDS incurred a restructuring charge of $236.3m in the quarter, primarily from severance pay to 3000 staff ushered into early retirement under the company’s mission to make itself $1bn cheaper to run. The charge also included $31m in asset write- downs arising from the pruning of unfavorable contracts. Meantime EDS registered a one-time $81.5m gain from the sale of what it called non-core investments.

Factoring in these non-trading costs and gains net income for the period was $158.2m, or 31 cents per diluted share, compared to net income, including equivalent charges, of $195.1m, or 39 cents per diluted share.

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Brown said the company was more than half way towards making good on a program to slice $1bn from EDS’s $17bn annual costs, initiated in July. He said the firm hoped to have completed the program by the end of the year, leaving EDS unencumbered to focus on external business.

Ex-Cable & Wireless Plc chairman, Brown took the helm at EDS last December vowing to displace IBM Global Services and return EDS to number one-status in the [outsourcing] industry we invented. He has since set about his task with alacrity, axing under- performing sales staff and announcing overall job cuts of 8,000 through the end of this year to cut costs. Executives said restructuring costs for the current (fourth) quarter to December would stack up to $400m, or be roughly equivalent to costs incurred in the first quarter to June ($380m).

Meantime EDS’s chief financial officer, James Daley said the firm was on track to meet consensus market earnings expectations for the fourth quarter and 2000. Analysts polled by First Call peg EDS to earn 58 cents a share in the fourth quarter and $2.25 per share for fiscal 2000. Daley said the firm was committed by the end of 2000 to increase base revenue above the market growth rate for services; increasing growth in earnings per share above revenue growth. And by the end of this year it hopes to improve operating profit margin to 10%. On the latter goal, the company said it had improved profit as a proportion of revenue to 8.7% – up 38% on 6.8% in the first quarter, an indication, it said, of the success of the restructuring program.

The firm said it was creating a cadre of what it called client executives to lavish personal attention on clients. Last month Brown rationalized the firm from 48 divisions into a quartet of business units, including a dedicated internet and e-commerce services wing, E.Solutions.

The company also unleashed its first global advertising campaign in September, spanning the internet, TV and print media. By year-end at $50m it will have cost as much as the firm has spent on advertising during the last decade.

Executives said a major stock buy-back program for which the firm issued a debt offering of $1.5bn last month would be used for employee stock option rewards under a staff incentive scheme.

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