Following a strong fourth-quarter financial report but modest growth guidance for 2007, EDS said yesterday that it would undertake "act two" of a plan to grow the company more aggressively.
Commenting on the company's guidance of 3%-5% revenue growth for 2007, EDS chairman and chief executive Mike Jordan, who joined EDS four years ago to pull the technology services giant out of a slump, said the company now needs to move to the next phase in the business transformation and improvement plan he initiated in 2003.
"We do need to shift to a more aggressive growth posture," Jordan said during a call with financials analysts yesterday. The long-term growth target is "7% or so," he said, and will be based on a number of factors, including better utilization of the company's balance sheet, as well as expansion in key industry segments, and in product offerings.
"A high percentage of act two focus will be in infrastructure and applications — areas with less capital intensity," Jordan said. "We will change significantly our business mix going forward." He also said that EDS will consider "bolt-on acquisitions at a higher pace."
Jordan's comments, which he said he will expand on at a financial analysts meeting in New York on February 20, came as EDS blew past its fourth-quarter financial guidance yesterday, posting a 124% increase in earnings per share on an 11% gain in revenues to $5.7 billion.
The big technology services provider said that adjusted net income for the quarter ended Dec. 31, 2006, spiked to $254 million, or 47 cents per share, compared with adjusted net income of $111 million, or 21 cents per share, a year ago. At the end of its third quarter, EDS had anticipated EPS of 33 cents to 38 cents and revenue in the range of $5.5 billion to $5.7 billion.
Revenues from the manufacturing sector came in at $913 million for the fourth quarter, slightly under the $917 million reported in the fourth quarter of 2005.
EDS executives expressed satisfaction with the quarter's results but also tried to explain why earnings exceeded guidance. "This was the best quarter at EDS since I joined four years ago," Jordan said. Chief Financial Officer Ron Vargo said the results came in higher than expected due to higher revenue, improved contract execution, slightly lower investment spending, and a "significant contract amendment payment" from Verizon as a result of a contract termination.
In the manufacturing market, which represents about 16% of EDS's overall revenues, the company signed 13 contracts with new customers during 2006, said Darl Davidson, vice president of the Manufacturing Industry business for EDS in the U.S.
In an interview, Davidson said a number of these new contracts involve assessments and preliminary project work, particularly in software application modernization including ERP and PLM. This early work, he predicted, would lead to other opportunities for EDS. "That's the seed corn you plant for 2007 and 2008," he said.
The new contract work in the applications area also reflects a major trend among many companies to consolidate systems. For example, one of the 13 companies, which Davidson said he could not identify, has 51 instances of SAP software. The company wants to reduce this to somewhere between five and 10 instances, he said. EDS has been beefing up its capabilities in the SAP market, he noted.
Davidson also said that a new initiative for EDS, called Integrated Manufacturing Operations (IMO), is on track for second-quarter delivery. IMO's objective is to help manufacturers update and integrate information systems in plants and factories, and extends to the MES layer. Davidson said that EDS is now having dialogues with client groups about IMO.
In its fourth-quarter and full-year 2006 financial statement yesterday, EDS said that fourth-quarter adjusted net income excludes net after-tax losses associated with discontinued operations of $10 million and such pre-tax items as a reversal of previously recognized restructuring expenses of $2 million and a loss on divestiture of $23 million.
Based on generally accepted accounting principles (GAAP), reported fourth-quarter net income was $112 million, or 21 cents per share. Fourth-quarter revenue, on an organic basis, grew 7%.
For the full year of 2006, earnings were $470 million, or 89 cents per share, compared with $150 million, or 28 cents per share, in 2005. Revenue for 2006 reached $21.3 billion, compared with $19.8 billion last year.
EDS said it expects first-quarter 2007 revenue to range between $5.1 billion and $5.3 billion and EPS to range between 17 cents and 22 cents. For the full year, the company said it expects revenue of $22 billion to $22.5 billion.