EDS`s financial results contain a sharp lesson for outsourcing companies trying to hook the one big deal as the US Navy Marine Corps intranet (NMCI) project effectively torpedoed the company`s earnings, causing a net loss of $354 million.
One of the world`s largest outsourcing businesses, EDS last week released fourth quarter results that showed its contract to build the NMCI was effectively haemorrhaging money and management time from other key projects. When EDS landed the contract three years ago, it was considered "the one big deal".
Instead, EDS posted a net loss of 74 US cents per share after writing down the entire $559 million in deferred costs related to the NMCI project.
It also had to recognise $84 million of previously disclosed pre-tax restructuring charges and after-tax losses of $7 million from discontinued operations.
According to the company`s press release, EDS posted fourth quarter net income of $59 million, or 12c per share, excluding the write-down, restructuring charges and discontinued operations. Comparable fourth quarter 2002 net income was $194 million, or 40c per share, excluding income from discontinued operations of $107 million and a restructuring credit of $3 million.
On a worldwide basis, EDS says its results were either slightly down or flat. In the Americas, fourth quarter revenue was $2.35 billion, down 4% from the same period last year, reflecting lower gross margin revenue, a divestiture and renegotiated contracts. Operating profit was $287 million, down 13%.
In the Europe, Middle East and Africa regions, including the group`s SA operations, fourth quarter revenue was $1.50 billion, down 1% from the same period last year, as financial services growth was offset by client run-off. Operating profit declined 1% to $149 million, reflecting client run-off and the stabilisation of key accounts.
EDS says it is working closely with the Department of the Navy to stabilise the NMCI project and is making significant progress improving its other focus accounts.
EDS forecasts the NMCI contract will generate $800 million to $1 billion in free cash flow through 2007. To achieve this goal, EDS is working with the Navy on a more controlled roll-out. The revised deployment schedule and revenue assumptions required the write-down of $559 million in deferred costs in the fourth quarter.
"We are continuing to put EDS`s house in order," says chairman and CEO Mike Jordan. "Our fourth quarter results, excluding NMCI, met expectations. Operationally, we completed our management team and solidified our technology and marketing strategies."
However, this failed to stop some negative comment about EDS`s prospects. Standard & Poor`s put EDS debt on CreditWatch with negative implications, citing reduced cash flow. Investment banks UBS and SG Cowen trimmed their ratings on the stock.
EDS reported fourth quarter total revenue rose 8% to $5.76 billion in the year-ago quarter, driven by growth in IT outsourcing services revenue and favourable foreign exchange rates.
EDS signed $4.3 billion in contracts in the fourth quarter, versus $8.1 billion a year ago. Signings for the full-year 2003 totalled $14 billion, versus $24.4 billion in 2002. Jordan says an expected uptick in overall IT services spending in the second half of 2004 and EDS`s improving competitive position should provide the company with sales momentum in the third and fourth quarters.
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