EDS Reports 2007 Second Quarter Results

Second quarter revenue increased 5 percent to $5.45 billion from $5.19 billion in the year-ago quarter(1). Second quarter revenue increased 1 percent on an organic basis, which excludes the impact of currency fluctuations, acquisitions and divestitures.

“EDS continued to make significant operational progress in the second quarter,” said Mike Jordan, chairman and chief executive officer. “Earnings and revenues were solid and keep us on pace to achieve our full-year guidance. We improved our competitiveness by building on our capabilities in applications services, deploying our Global Services Network and continuing to drive leverage, standardization and quality in our global delivery system.”

Jordan indicated that, as a result of the capital requirements of new business transitions and intensified investment in upgrading and automating facilities, EDS’ full-year 2007 free cash flow will now most likely be in the range of $900 million to $1 billion.

EDS signed $4.3 billion in contracts in the second quarter of 2007 versus $5.4 billion in the year-ago quarter. EDS signed six deals in the second quarter of 2007 with contract values greater than $100 million with clients in the communications, government, financial services and consumer goods industries – including an eight-year, approximately $1 billion applications and IT services contract with Germany-based KarstadtQuelle AG, Europe’s leading retail and tourism group.

“EDS is increasingly well positioned in the marketplace. Our sales pipeline is strong, especially in applications services, a priority growth area for the company, and we are winning an increasing percentage of new logos,” said President and Chief Operating Officer Ron Rittenmeyer, who will become president and chief executive officer, effective September 1.

“At the same time, we are intensifying our current change management programs to further build out our applications business and capabilities, while achieving incremental, productivity-related savings,” said Rittenmeyer.

“In applications, we will continue to expand our presence – both organically and through targeted acquisitions – in areas such as SAP and industry-related applications. To drive increased productivity and competitiveness, we will also continue to aggressively deploy offshore programming and delivery resources,” said Rittenmeyer.

“The company’s accelerated cost-reduction program should result in additional long-term margin expansion,” said Rittenmeyer. “However, even with these investments and productivity-related initiatives, we expect to produce 2008 free cash flow in line with 2006 and 2007 full-year totals.”

Second quarter 2007 operating margin was 4.3 percent on an adjusted basis versus 2.9 percent in the year-ago quarter (see GAAP Reconciliation below).

Free cash flow was $156 million in the second quarter of 2007 versus $362 million for the year-ago period, when EDS benefited from two large one-time client payments (See discussion of free cash flow under “Non-GAAP Financial Measures” below).
GAAP Reconciliation

Reported second quarter 2007 net income was $138 million, or 26 cents per diluted share, in accordance with U.S. Generally Accepted Accounting Principles (GAAP), versus net income of $104 million, or 20 cents per diluted share, in the prior year's second quarter. Second quarter 2007 adjusted net income excludes net after-tax losses associated with discontinued operations of $6 million and pre-tax reversal of $1 million of previously recognized restructuring expenses. Second quarter 2006 adjusted net income excluded net after-tax losses associated with discontinued operations of $5 million and pre-tax reversal of $4 million of previously recognized restructuring expenses (net 0 cents per share). A statement reconciling GAAP and adjusted results follows this release.
Second Quarter Results by Segment

* Americas: Second quarter revenue was $2.57 billion, down 2 percent compared to the prior-year period. Operating profit was $374 million, down 8 percent from $408 million in the prior-year period. Adjusting for a large contract termination that was previously disclosed, segment revenue would have increased by 2 percent, and operating profit would have increased by 5 percent.
* EMEA: Second quarter revenue was $1.63 billion, up 1 percent compared to the prior-year period, and up 6 percent on an organic basis. Operating profit was $243 million, up 10 percent from $221 million in the prior-year period.
* Asia-Pacific: Second quarter revenue was $445 million, up 26 percent compared to the prior-year period, primarily due to MphasiS revenues. Operating profit was $31 million, down 16 percent from $37 million in the prior-year period.
* U.S. Government: Second quarter revenue was $620 million, up 10 percent compared to the prior-year period. Operating profit was $127 million, up 110 percent from $61 million in the prior-year period.

All segment comparisons are at constant currency and exclude corporate expenses.
2007 Updated Guidance

* Reaffirm prior revenue guidance of $22.0 billion to $22.5 billion.
* Reaffirm adjusted EPS of $1.55 to $1.60 (see discussion of adjusted EPS under Non-GAAP Financial Measures below).
* Adjust free cash flow guidance to a range of $900 million to $1 billion.
* Adjust total contract value guidance from $23 billion-plus to approximately $23 billion.

For the third quarter of 2007, EDS currently expects:

* Revenue of $5.6 billion to $5.8 billion.
* Adjusted EPS of $0.37 to $0.43 (see discussion of adjusted EPS under Non-GAAP Financial Measures below).

Source: EDC release