Table Of Content

Vol.VII,No.5 August1996 EDS Strategic Imperatives for Exhibit1 EDS will also emphasize its consulting EDS-STRATEGICDIRECTIONS business:here,too,thestrategicreasonis because consulting 5rields relatively high • Targethighmargininternational margins.EDS'acquisitionofA.T.Kearney contracts in1995hasstrengthenedthisbusinessfor EDSsignificantly. • EmphasizeA.T.Kearneyconsulting EDS will seek out contracts with total • Seeksub-$200rncontracts revenues of under $200M, particularly • Partnerwithtelecomoperator overseas,becausethesecontractsaremore lucrative than the megacontractsjwhich Source:INPUT are characterized byintense competition, andinthecaseofU.S.Federalcontracts, AnalysisofEDS'Q2resultsandmanagement narrowmargins. review, presented on July 16, 1996, reveal5 fourkeyelementstoEDS'strategicdirection A continuing goal appears to be a (seeExhibit1): partnership (non-exclusive) with a telecommunications company. Thiswould • EDSîll target international contracts^ position EDS to provide network-based -^^Bftftt-thesecontracts arecharacterized by services, leveraging an outsourcing less competition and higher margins. segmentofstronggrowth,andenableEDS Privatization and strong outsourcing toofferabroadercontinuumofservicesto demand are driving these opportunities, future customers. Such a partnership, particularly in Europe. EDS is likely to according to Grant, might involve target the large amount of outsourcing reciprocal IT and network services revenues available from the UK betweenthetwopartnersaswellastheir Government, which CFO Jody Grant joint marketing of comprehensive, estimatestobepotentially$10Boverthe integratedofferingstooutsidecustomers. nextyear. EDS may view such a partnership as a meanstostrengthenitsInternet/intranet serviceofferingsaswell. ©1996byINPUT.Reproductionprohibited. OSPR INPUTResearchBulletin EDSplanstoincreaseinvestmentinthe • EDS is working on reducing its G&A training of its staff in client-server expenses, which were running at 12% computing. EDS will also increase threetofouryearsagq^ndwerebrought spendingon advertisingtopromoteitself downto8.8%duringQ2. apsartannerisnhdieppsenadsewnetllcoasmpoanneythoaptenimtporonveews NewContracts theproductivityofitscustomers. EDS won $1.536B in contract awards in EDS may move its Electronic Commercej^ Q21996.Thistotalrevenuerepresents44 ,ouarngdlaeinkriezlaaytvieporlnta,icceaclufSrorBreUn.tthlIiysNhPgoUrrTiozubopenltiwaeolvlueyls-dbtahbsae^t hdEeaDallSfs,cvoinmeoiwnnsegithnfiresoxmacsecsoasnotpfroas$ic2tti0sv0euMn,tdrweeirntdh$d1au0be0oMut.to Barry Sullivan's Internet & New Media the higher margins on these smaller SBU,whichisunder-theJCommunicat contracts. Industiy-Group*, Ofthe 44 contracts won during Q2, 21 Financialdataandnewcontractinformation wereU.S.and23,international. areincludedonthefollowingpages. RecentcontractshighlightedduringEDS' FinancialOverview announcement included EDS' recent desktopservicesoutsourcingcontractwith • EDS' Q2 operating revenues were up Citibank,whichhasavalueof$240Mand nearly 19%, while net income increased adurationof3years, andamultimillion nearly9%to$246.6M,beforeadjustingfor retailcontractwithKellwood,amarketer split-off-related charges. Due to these andmanufacturerofapparel.Thelatteris charges, EDS reported a Q2 net loss of an example of CoSourcing, which EDS $326.5M. definesasa"collaborative,value-enhanced service that focuses on improving the • Afewclientswithfinancialproblems,such business performance of customers as as Spectradyne, which is in bankruptcy, measured by agreed-upon business negativelyaffectedQ2revenues. metrics." • Whilecostsofthesplit-offfromGMhave Duringthefirsttwoweeks ofJuly, EDS depressed operating margins somewhat signedanother$800Minnewbusiness. (11.6% as compared to 12.6% in 1995), grossmargins areactuallyup. Operating EDS projects that its revenues from marginsareexpectedtoregaintheir12% consulting (resulting from both the levelsin1997. A.T.Kearney acquisition and EDS' other consultingservices)willtotalabout$750M • EDS'largecontractbacklogof$76.6Bisa for 1996. These revenues tend to be stabilizing influence on these margins. characterizedbyhighermargins. ^ GM'sportionofthebacklog,currently $36.8B, willdiminish now that EDS has become an independent company. EDS' debt,usedtopaythedividendtoGM,has increasedfrom$370Mto$2.7B. 2 ©1996byINPUT.Reproductionprohibited. INPUTResearchBulletin The Q2 geographic revenue breakdown is Q2revenuegrowthwasverystronginthe indicatedinExhibit2. Government sector, boosted by contracts with foreign governments which have Exhibit2 higher margins. Key sector revenue Q2GeographicRevenueShares growthratesareindicatedinExhibit3. Reaion %ofTotalRevf^ Exhibit3 Q2SectorGrowth U.S. 71% Europe 21% Sector Q2%Change Other(non-U.S.) 8% Government 41% Source:EDS Finance 27% Base business revenues grew 24.6%, Communications 20+% boostedbystronggrowthinAsia(up71%) Manufacturing 16% and Europe (56%). The growth surge in the Asia-Pacific region, as compared to Source:EDS 33% during Ql, reflects new revenues fromEDS'SouthAustraUacontract. ThisResearchBulletinisissuedaspartofINPUT'SU.S.OutsourcingServicesProgram.Ifyouhave questionsorcommentsonthisbulletin,pleasecallyourlocalINPUTorganizationorSherrySumits ([email protected])atINPUT,1881LandingsDrive,MountainView,CA94043-0848,(415)961-3300. 3 ©1996byINPUT.Reproductionprohibited. •7 Aêlr-XXX,No.V July1996 Strategic EDS will seek out contracts with total revenues of under $200M, particularly Imperatives for overseas,becausethesecontractsaremore lucrative than the megacontracts which EDS are characterizedbyintense competition, andinthecaseofU.S.Federalcontracts, narrowmargins. A continuing goal appears to be a AnalysisofEDS'Q2resultsandmanagement partnership (non-exclusive) with a review, presented on July 16, 1996, reveal telecommunications company. This would fourkeyelementstoEDS'strategicdirection position EDS to provide network-based (seeExhibit1): services, leveraging an outsourcing segmentofstronggrowth,andenableEDS Exhibit1 toofferabroadercontinuumofservicesto EDS-STRATEGICDIRECTIONS fauctcuorredincgustotmoersG.ranStu,ch maighpatrtneirnsvhoilpv,e • TARGETINGHIGHMARGIN reciprocal IT and network services INTERNATIONALCONTRACTS ^-•êtweenthetwopartnersaswellastheir joint marketing of comprehensive, • EMPHASISONA.T.KEARNEY integratedofferingstooutsidecustomers. CONSULTING EDS may view such a partnership as a EMPHASISSWITCHESTOSUB-$200M meanstostrengthenits Internet/intranet CONTRACTS serviceofferingsaswell. PARTNERINGWITHTELECOMOPERATOR EDS plans toincrease investmentinthe training of its staff in cHent-server EDS will target international contracts, computing. EDS will also increase thatthese contracts are characterizedby spendingon advertising topromote itself less competition and higher margins. as anindependentcompanyopento new Privatization and strong outsourcing partnershipsaswellasonethatimproves demand are driving these opportunities, theproductivityofitscustomers. ptaarrtgiectultahrelylianrgeEuraompoeu.ntEDoSf iosutlsiokuerlcyintgo EorDgSanimzaatyionm,ovceurirtesntEllyecthroorniizcontCaoUmym-bearscee, reGseotvvieemnrauntemesesntto,avbaeiwlhpaiobtclehentiCaflFrlGoym$1J0otBdhyeoveGrrUa.tKnh.te uBaanrdlreikyrelaSyuvleplrlitaivccaeanl'sfSoBrIUn.ttehrIinsNePtgUr&ToubpNeleiwweovuelMsdetdhibaaet nextyear. SBU,whichisundertheCommunications EDS will also emphasize its consulting IndustryGroup. business:here,too,thestrategicreasonis because consulting yields relatively high margins. EDS' acquisitionofA.T.Kearney Financialdataandnewcontractinformation in1995hasstrengthenedthisbusinessfor areincludedonthefollowingpages. EDSsignificantly. (ffiSSîUyINPUT.Reproductionprohibited. FinancialOverview • RecentcontractshighlightedduringEDS' announcement included EDS' recent • EDS' Q2 operating revenues were up desktopservicesoutsourcingcontractwith nearly 19%, while net income increased Citibank,whichhasavalueof$240Mand nearly9%to$246.6M,beforeadjustingfor adurationof3years, andamultimillion split-off-related charges. Due to these retailcontractwithKeUwood, amarketer charges, EDS reported a Q2 net loss of andmanufacturerofapparel.Thelatteris $326.5M. an example of CoSourcing, which EDS • AansegfaeStwpievcceUtlerynatdasfyfnweeic,ttehwdfhQiin2cahnrceiivaselnipunreosb.balnekmrsu,pstcuyc,h dsbeeurfsviiinnceeesssatshpaaet"rcfofolorlcamubasonercsaetioveno,fviacmlupusreto-oveminenhrgasnctehades measured by agreed-upon business • Whilecostsofthespht-offfromGMhave metrics." d(gre1op1sr.se6%smsaeardsgiocnposemrpaaarterienagdctutmoaalrl1gy2i.nu6ps.%sOiponemre1aw9t9hi5an)t,g • Dsiugrniendgatnhoethfeirrs$t8t0w0oMwienenkeswobfusJiunleys,s.EDS marginsareexpectedtoregaintheir 12% • EDS projects that its revenues from levelsin1997. consulting (resulting from both the • EstDaSb'iUlzairnggecionnftlruaecntcebacoknlogthoefse$76m.a6rBgiinss.a Aco.nTs.uKletairnngesyervaiccqeusi)siwtiilolntoatanldabEoDuSt'$7ot5h0eMr GM's portion of the backlog, currently for 1996. These revenues tend to be $36.8B, willdiminish now thatEDS has characterizedbyhighermargins. become an independent company. EDS' • The Q2geographicrevenuebreakdownis debt,usedtopaythedividendtoGM,has indicatedinExhibit2. increasedfrom$370Mto$2.7B. • EDS is working on reducing its G&A Exhibit2 ^^-^^g^Gjg.ocyo^^^"^'s^'-ieA.v^.^^^Vjs.^^jLA expenses, which were running at 12% Region %ofTotalRev. threetofouryearsagoandwerebrought downto8.8%duringQ2. U.S. 71% Europe 21% NewContracts Other(non-U.S.) 8% I • EDS won $1.536B in contract awards in Base business revenues grew 24.6%, Q21996.Thistotalrevenuerepresents44 boostedbystronggrowthinAsia(up71%) deals,noneinexcessof$200M,withabout and Europe (56%). The growth surge in halfcomingfromcontractsunder$100M. the Asia-Pacific region, as compared to EDSviewsthisasapositivetrenddueto 33% during Ql, reflects new revenues the higher margins on these smaller fromEDS'SouthAustraliacontract. contracts. Of the 44 contracts won during Q2, 21 wereU.S.and23,international.