At EDS, Another Exercise in Spin Control
By Herb Greenberg
Senior Columnist
04/24/2002 08:21 AM EDT
Editor's Note: Herb Greenberg's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was published April 23 on RealMoney.
EDS erosion: To hear EDS' (EDS:NYSE - news - commentary - research - analysis) CEO and CFO tell it (on the conference call), all is well and will only get better for the technology-services company.
Never mind those little issues like revenue, which was lower than expectations. Or receivable days outstanding -- the amount of time it takes for customers to pay their bills -- which rose by 13 days from the prior quarter, to 99 days. Or free cash flow (cash flow from operations minus capital spending), which most analysts had expected to be zero; it was a negative $181 million.
Never mind, I say, because the company says it had a record backlog. (That's the good news, but as UBS Warburg analyst Adam Frisch points out, while bookings were up they dropped 4% from the year-earlier quarter. "More importantly, in our view," he writes in a report this morning, "the percentage of bookings from renewals was 35%, down compared to the past couple of quarters but almost double last year's 1Q level of 20%, well above our comfort zone of less than 20% and higher than our expectation of 20-30%. As a result, bookings from new contracts actually declined 19% year over year." Interesting to note: The company put a positive spin on the renewal rate, saying that it proves customers still like doing business with EDS. Also interesting to note, Frisch has long been the lone critical wolf on EDS; last year he initiated coverage with a "hold" when most analysts rated it, at worst, as a buy.)
Never mind, I say, because the company says receivables are up, because they include revenue that has been recognized but not yet billed. (Unbilled receivables, the focus of this column in the past, rose 18% from the prior quarter, while revenue fell 9.6%. Put another way, the increase in unbilled receivables, mostly from a large Navy contract, accounted for around 6% of total revenue in the fourth quarter, up from the prior quarter. The amount unbilled is up to management; it's best when it grows in tandem with revenue.)
And never mind, I say, because while free cash flow was much lower than expected, the company stresses it was higher than a year earlier. What's more, if EDS didn't have the Navy contract, the company points out, free cash flow would have been much higher.
(If it didn't have the Navy contract its cash flow would've been higher?! Who are they trying to kid? If there was no Navy contract, what would the income statement look like?! Big contracts with the government cut into cash flow, and that's the business they're in. If they don't like the business, they don't have to take it on, but certainly they shouldn't complain. When a company the size of EDS starts making excuses, maybe investors should start making other plans.) |
