Systems, services and technology outsourcing big-hitter EDS has reported a 13% earnings drop on a sluggish two percent rise in revenue for its fourth quarter, in the wake of what some analysts have described as a slump in technology outsourcing. Growth will continue at two percent this year, said the company, but new contracts are in the pipeline.
In reality, any confusion or argument over the results is partly a sign of the company trying to have its cake and eat it: on the one hand, some large contracts slipped from Q4 2007 into fiscal 2008, according to chairman, president and CEO Ron Rittenmeyer. "These are deals that we've already been chosen for,” he said, “we're just in the contracting phases and, quite candidly, it's just that December's not a month where you can always get everything brought to the table and fully contracted.”
On the other hand, however, Rittenmeyer later claimed that figures for the previous financial year, 2006, had been inflated by two major contract wins. “We came in at $19.5 billion [2007], and I know that'll be compared to the $26.5 [billion] in 2006, but I do think we have to consider those two very large mega-deals, both GM and Navy – which are very, very unusual, given their size – so we tried to keep those a little bit excluded so that we were looking at what I call our 'base business' year-over-year, and so our bookings [are] really up two percent on a year-over-year basis.”
In other words, the 2007 results aren't that bad compared with the previous year, as some pipelined contracts didn't make it onto the books in time, while the 2006 figures weren't really that good as some pipelined contracts did.
While all this word-play may be standard earnings-call practice to steady investors' nerves, perhaps companies should institute a new reporting practice: EBIMD (earnings before inflationary mega-deals).
Either way, it's clear that companies such as EDS stand or fall on major contract wins.
Behind the bear-market baiting (and the return of that old sport is the best sign yet that the US is entering recession), Rittenmeyer was characteristically bullish about the disappointing end to the year: “EPS [earnings per share] of $0.55, which is 17% on a year-over-year basis; revenue of $5.8 billion, two percent up. Organic was down three percent... but it is in line with our overall guidance and it really all came in appropriately,” he said.
Rittenmeyer was equally upbeat about a total contract value (TCV) of $6.1 billion for the fourth quarter 07. “The second half turned out actually to be the strongest sales performance period, the best second half really since 2001,” he said. “We did have a slow start to the year as everybody knows.We had a very strong finish in '06, and we came out a little bit slower [this year] because of that. But we ended up, again, very solidly.”
Just as BT's results showed glimmers of hope for outsourcing and services industries while other business arms faltered, the EDS BPO business posted 12% of the company's TCV, said the CEO. “When we look at it from a vertical industry standpoint, we had our strongest fourth quarter performance from healthcare and the financial services team.”
Inevitably, it fell two the second of the Two Rons – chief finance officer Ron Vargo – to provide a more granular and extensive assessment of the company's sums, here reported verbatim. “Just a brief word on our new share repurchase programme,” he said. “The board authorised a $1 billion programme in December of 2007. We got off to a modest start to that programme, and we purchased a little under $60 million worth of shares – a little under three million shares – and expect to continue to repurchase shares during the 18-month program from December [2007].
“Now for just a brief update on that early retirement offer,” he continued. “As you recall this was a US-only programme. It was principally a non-cash charge because the funding will come from the US pension plan. The financial impact in the fourth quarter was a pretax charge of $154 million relating to the approximate 2,400 individuals who took early retirement, or $0.18 per share on an EPS impact.
“Cash flow, again immaterial due to the funded status of our EDS US retirement plan. And as we look out into 2008 and beyond, we expect to backfill approximately 25% of those positions, and that should generate savings of greater than $125 million annually and obviously help offset some of the Verizon impact in 2008,” he concluded.
“On a full-year 2007 basis, you know, [we made] significant year-over-year progress in financial metrics,” said the CFO. “Revenue is $22.1 billion, up four percent and flat organically. Adjusted earnings of $1.56, up 58%. Our full-year operating margin was 5.8%, and we fell a little short of our own goal of six percent or greater in part due to some contract weakness and in part due to some of the signings that occurred a little bit later in the year rather than earlier,” said Vargo.
“And again, I think as we look out in 2008 we would expect the turnaround in that contract weakness as well as benefits from strong signings in the second half of 2007. We generated $892 million of free cash flow, and signings were $19.5 billion.”
Finally, Vargo turned to the all-important fiscal 2008 for the company's guidance: “Top-line growth, we expect approximately a two percent year-over-year increase in revenues as growth should more than offset the impact of the Verizon termination and higher runoff and pricing impacts compared to 2007 versus 2006.
“And again, we expect TCV to be greater than $20 billion in the year, and we're targeting a 1:1 book-to-bill ratio.
”Operating margin, we're looking to expand margins before the impact of workforce management charges. And again, we do have the impact from the Verizon termination and runoff as well as workforce charges which we have told you would be in the range of $200 to $250 million.”
So 2008 currently looks like 2007 for EDS in terms of single-digit growth, but with one exception: those all-important contract wins will be shoe-horned into the year come hell or high water.
