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Tracey Shi

EDS AT A GLANCE

P/E ► 0   EV/EBITDA ► -0.0344   ROA ► -3.4% VERY LOW ROE ► -5.3% LOW Debt to Equity ► 0.573 LOW Current Ratio ► 13.4 VERY HIGH Interest Coverage Ratio ► 6.41 AVG

 

 

 

 

 

 

Electronic Data Systems Corporation (EDS) is a global technological services company. Forty years ago, Ross Perot founded EDS and, in doing so, created the information technology outsourcing industry. Today, EDS offers a range of IT and business process outsourcing services to clients in fields as diverse as Healthcare , financial services, manufacturing, and government. For example, EDS helps businesses process credit card transactions, manages 65,000 servers around the world, and provides technical support for 3 million desktop computers. EDS also runs both the technology and staffing for Human Resources departments for 400 organizations in the western hemisphere, including payroll services and employee relations. Headquartered in Plano, TX, the company has approximately 131,000 employees located in the U.S. and around the world.

EDS focuses heavily on innovation in order to create new technology services to offer to its clients and potential clients. In 2006, EDS completed its new Global Services Network, an essential part of the Global Delivery System, to help EDS integrate its services more smoothly and efficiently with clients' operations. The new system also helped EDS itself operate more productively, contributing to an increase in the company's gross margins to 12.6% in 2006, compared to 11.8% the year before.

An important, and growing, portion of EDS's offices are located outside of the United States. EDS is continuing to expand its offshore offices, which help the company cut costs to be more competitive. By the end of 2006, EDS employed 32,000 persons overseas in lower-cost areas, such as India, Latin America, China, Hungary, Poland.

Business Model

Electronic Data Systems is in the process of developing and improving a new technology platform called the EDS Agile Enterprise platform. This network-based platform is intended to increase EDS' flexibility and reduce costs by providing a new way for clients to structure their IT systems. The key feature of this platform is its adaptability to the changing technological environment: while it does not create any new services on its own, the Agile Enterprise platform is designed to accept and integrate additions and new services with the existing services, instead of merely mashing old and new together as many other infrastructures do. A related initiative is the formation of the EDS Agility Alliance, a cooperative group of technology companies including EDS, Cisco Systems, Dell, and Microsoft. The companies in the Agility Alliance have teamed together to promote the Agile Enterprise platform, and the platform supports the services of all Alliance companies, in order for them to best tailor their offerings to client needs.

In 2006, EDS acquired a majority equity stake in MphasiS, an applications and business processing outsourcing firm based in Bangalore, India. The acquisition of MphasiS improved EDS's global delivery model, and also more than tripled the number of EDS employees in India. This acquisition was consistent with EDS's major initiative to increase its global presence.

The total value of all of EDS's contracts increased 32 percent from 2005 to $26.5 billion in 2006. Business sold to new customers was $4.2 billion – an increase of nearly 70 percent. EDS also won several important contract modifications and extensions, including one from General Motors, its largest single client. Because most of EDS revenue depends on long-term contracts, there is a lag between changes in total contract value and changes in revenue and income.

Note: The $1.7 billion net loss reported by EDS for 2003 was primarily written off as the "cumulative effect on prior years of changes in accounting principles."

Information Technology Outsourcing Services (ITO)

IT Outsourcing is EDS' largest business segment. This division is split into several subdivisions: Data Center Services, Workplace Services, Security and Privacy Services, and Networking Services.

Data Center Services provides hosting and storage services, including both the technology and business services. These services provide a common infrastructure for the client that is easily replicated and can be used with minor variations for several different clients. This structure helps EDS customize its services to clients without needing to develop completely new modules and platforms for each individual client, which contributes to EDS's operating efficiency.

EDS Workplace Services manages and supports the client's infrastructure. This includes everything from supporting the software applications that the clients use to conduct their business to administering the underlying network communications infrastructure.

Security and Privacy Services protects the clients' workplaces by integrating security and privacy features with other EDS services in order to improve business continuity. This task is accomplished via a team of EDS employees dedicated to maintaining security and privacy at levels sufficient to meet industry-specific regulations.

EDS Networking Services helps clients manage communications and outside interactions, and integrates the communications network with the client's overall goals for information technology outsourcing. EDS provides a global network with a joint computing and networking space.

Applications Services (Apps)

EDS's application services is a quickly-growing division. Total contract values of rose by nearly 50 percent in 2006. This business segment creates and manages custom-designed applications, including packaged software, for its clients. Electronic Data Systems' role in application development can range from involvement in the entire applications development process and to the management and implementation of EDS-owned or third-party industry applications. By offering these services, EDS can help clients reduce costs and adapt more quickly and appropriately to market changes.

Business Process Outsourcing Services (BPO)

Business Process Outsourcing (BPO) services help clients to improve business performance by standardizing and streamlining business processes. BPO includes Customer Relationship Management, Human Resources, and Finance and Accounting services. EDS manages each of these services in its entirety for the client, including the provision of necessary technologies, administration and customer service, and third-party relationships.

The key to this business segment is the achievement of economies of scale. Since many BPO services are supported by a single reusable, utility platform, this one platform can be used by multiple clients. This allows EDS to provide the same or highly similar services to a larger group of end users than each individual client could do alone, which makes EDS's approach more cost-effective.

Trends and Forces

Increasing Outsourcing of Technology Jobs

The net outflow of information technology jobs from the United States and into areas with developing economies has been occurring for several years. Firms are outsourcing more and more of their technology-related needs to offshore offices, many of which are owned and operated by third party firms such as EDS. Electronic Data Systems is taking advantage of this trend by opening many of its new offices in offshore locations, which allows EDS to enjoy the benefits of lower labor costs. EDS has been expanding most rapidly in India, but has also opened branches in China, Latin America, Hungary, and Poland.

Furthermore, EDS has already spent more than $3 billion over the past three years on capital investments, primarily in the form of building a solid global technological infrastructure, which should allow EDS to serve its clients' needs from nearly any location around the world.

Rapid Growth of Technology

The extreme speed at which technological advances are made has serious repercussions for Electronic Data Systems. The infrastructure business, currently the largest division of EDS, faces sizeable depreciation charges every year, as the existing technology becomes outdated and slower, less efficient, or less accurate than newer technology. EDS constantly spends large amounts of capital on research and development of new technologies, and on implementing the new networks and service platforms that are developed.

EDS is somewhat cushioned, however, from the rapid pace of technological development by its business process outsourcing (BPO) services. BPO is much less dependent on technology than the infrastructure division, and requires less capital investment to maintain competitiveness. As EDS continues to expand its BPO division, the firm will become less depending on the capital-intensive IT division and can realize higher margins and greater market stability.

The speed of technology turnover is overall good for EDS, as it creates barriers to entry for potential competitors. EDS has the experience and existing research procedures to keep on top of new developments that newer companies may lack. Furthermore, the growing uses of technology, by both consumers and businesses, contributes to continued demand for EDS's services.

Economies of Scale Help Cut Costs and Improve Service

EDS has been active in soliciting other technology companies to cooperate as part of the EDS Agility Alliance. The Alliance was active in jointly developing EDS's Agile Enterprise Platform, which will be integrated with the Alliance members' products and services as well as EDS's own. This allows all the Alliance members to split research and implementation costs, as well as offer a larger number of clients a wider range of functionality on the same service platform than any one firm could do alone.

Competition

EDS has the 2nd highest revenue in the Information Technology Services industry, trailing only IBM Global Services, a division of International Business Machines (IBM). IBM is ahead by a large margin, with almost 5 times EDS's earnings, but only about half of revenue and a third of gross profit comes from the Global Services division. Even so, IBM's larger overall size allows it to take advantage of economies of scale better than EDS. When compared to competitors closer to its own size, EDS has higher revenues than both Accenture (ACN) and Computer Sciences (CSC), but has a relatively low gross profit. In recent years, however, Electronic Data Systems has seen margin expansion as EDS continues to move into less capital-intensive business segments, such as BPO. In terms of cash flow, EDS has seen increasing net flows, which turned positive in 2006. By contrast, EDS's competitors have seen more sporadic cash flows, with no consistently positive trend.

References