Updated from July 23
Business is crashing like a faulty computer at
, and investors are paying the price.
The computer services giant, which rose to prominence by landing massive outsourcing deals, saw new contracts and quarterly profits tumble by roughly half in the latest period. Excluding special charges, the company did manage to meet Wall Street expectations and hit the low end of its own guidance by mustering a second-quarter profit of 34 cents a share. But industry experts nevertheless saw little reason for celebration -- and plenty of cause for concern -- in the company's latest results.
"They need some hotshot salespeople to run the show," said Bob Djurdevic, a market consultant for Annex Research in Phoenix. "This is just not good enough for the long-term growth of the company."
The market was disappointed as well. Shares of EDS slipped 7% Thursday, dropping $1.56 to $21.39.
To be sure, EDS presented little good news to investors. The company has spent the past two quarters generating about the same amount of business that it snagged in the second quarter alone last year. EDS's second-quarter contract signings, totaling $3.4 billion, were down 45% from a year ago. And profits fell off even more sharply, spiraling 56% lower to $138 million, or 28 cents a share.
Meanwhile, free cash flow -- a crucial measure of the company's health -- all but dried up. EDS reported an 88% drop in second-quarter cash flow to just $25 million. Even after tacking on a $98 million late payment from MCI, which came in a week after the quarter closed, free cash flow was just over half of what it was a year ago.
"At the end of the day, they're lowering their free cash flow estimate -- again -- for 2003," said Christopher Penny, an analyst at Friedman, Billing, Ramsey with no position in the stock. "It's not a big surprise, but it continues to be disappointing."
Although EDS maintained its revenue and profit guidance for the second half of 2003, it scaled back its cash flow projections dramatically. The company, which originally promised cash flow of $400 million to $600 million, now expects second-half payments for software and restructuring charges to leave only $100 million of free cash at the end of the year.
In addition to the slump in new contracts, EDS blamed its current slowdown on dwindling business from its former parent and largest customer,
, as well as underperforming and renegotiated contracts with several other major clients. The company did stress that it is working hard to improve its financial condition, however.
"We are taking aggressive steps through our ongoing transformational process to improve our cost structure, productivity and competitiveness," said CEO Mike Jordan, hired a few months ago to replace Dick Brown and turn the company around. "Now we must translate our improved competitive position into greater marketplace success."
Djurdjevic, who has studied EDS and its competitors for years, said it is time for the company to shift its focus away from the balance sheet and on to the sales force.
EDS's new executive leaders are "excellent at running the company from a general management standpoint," said Djurdjevic, who has no position in the stock. "But
they won't set the world on fire with sales. And that's what the company needs.
"If they don't have a sales leader after a few more months, I will be concerned."
Penny blamed some of EDS's problems on a tough market in general, while admitting that the company faces bigger challenges than most. But he also gave EDS's leadership decent marks for its performance so far.
"I think they inherited a lot of troubles," he said. "Do they have all the answers? Probably not. But I don't think they're pretending to have all the answers, either. So I give them credit for that."