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EDS expected softer quarter
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May 4, 1998: 6:10 p.m. ET
Margins matched or beat competition, says CEO; he predicts strong year
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NEW YORK (CNNfn) - Shares of Electronic Data Systems (EDS) rose slightly on Monday. But the rise may not have aided investor confidence following a very rough session on Friday, when EDS shares plunged 10 percent after a number of analysts cut their ratings on the stock. Many are expressing concern about EDS' business with its former parent, General Motors.
Les Alberthal, chief executive of EDS, shared his perspective on the company with CNNfn anchor Sasha Salama on Monday's edition of "In Play." A partial transcript of their conversation follows:
SASHA SALAMA, CNNfn ANCHOR: Your earnings last week came in slightly lower than . . . a year ago. Thirty-seven cents a share. Gross and operating margins, much lower this time around. What were the main factors behind your lower margins?
LES ALBERTHAL, CEO, ELECTRONIC DATA SERVICES: I think there's a couple of things to keep in mind. First and foremost, our margins are at or above all of our competition. So it's not like there is a disaster. We are capable of higher margins. But we have chosen at this time to be investing a lot in sales and marketing in new product and in a number of different areas that we think are going to pay big dividends to our shareholders in the future.
SALAMA: Areas such as . . .?
ALBERTHAL: Oh, Web sites, and Internet and desktop technology. All of the new technologies we are investing heavily in. And as you know, it takes a lot more of sales and marketing to make sure and reach all of the consumers in all of the marketplace.
SALAMA: Some of the analysts that either cut ratings on your company or cut earnings estimates said that they thought your company was caught off guard by those profit numbers. Were you caught off guard? Or, were you expecting?
ALBERTHAL: No. We were not caught off guard…. We had been telling the market all along that we expected the first two quarters of this year to be a little softer than usual because we were investing in new things for the future. And, so, this isn't a surprise to us. We had been in a transition period ever since spinning out from General Motors. And I think it's really, really important to keep in mind that, you know, 10 years ago, GM was 75 percent of our revenue. Today, they are 25 percent of our revenue. And we are continuing to grow very strong, very rapidly. In fact, in the first quarter, our non-GM business grew at 15 percent. And this is business growing all over the globe.
SALAMA: That certainly is going to be key to the future growth of your company. Even though your revenues from GM have come down considerably, they are still your biggest client, right?
ALBERTHAL: They still are our largest client, and while GM revenues have come down some, the real issue is: Our non-GM revenue has continued to grow very rapidly and outpaced it. So, from 1986, when GM was 75 percent of our revenue, we were a $4 billion company. We are $16 billion today in revenue, and that's come from growing our business away from GM.
SALAMA: And do you expect to continue to do that in the future?
ALBERTHAL: Absolutely.
SALAMA: After all, GM is going through a lot of cost-cutting -- no doubt, hurting your business with them.
ALBERTHAL: Oh, absolutely. . . . See, our business is to help each customer more efficiently leverage information technology. And they go through ups and downs in the marketplace. And in a case like this, where you have one very large customer, it has a bigger impact on us. But as we continue to grow and become much larger, one customer won't be big enough to have this same impact.
SALAMA: What kind of shift are you going to be seeing in terms of revenues, domestically versus globally? Are you moving toward global operations?
ALBERTHAL: Absolutely. Our fastest growing marketplace right now is Europe. And, it's being tracked by Asia Pacific also. Yet, we strongly have very significant growth here in the U.S. As…business becomes more global, then leveraging information technology globally is really the key in the importance. And, the lion's share of that movement right now, with large companies, is taking place throughout the U.S., throughout Europe, and it is starting to take place in Asia Pacific.
SALAMA: You mentioned the importance of Europe. How important is Asia Pacific to your future revenues and profits? And, are you at all concerned about the declines that we are seeing from that region?
ALBERTHAL: Well, I think you always pay attention to what's going on in the economic sector. However, leveraging information technology as a service is all about the changes in economy and the changes that companies have to go through to be more competitive. So, while it may be a negative if you are selling product in Asia Pacific, it can be a very strong positive as governments and companies decide they have to do things differently….
SALAMA: Given your strategy, right now your stock is at 38-1/2 after being well above 60 a couple of years ago. When do you hope that the stock is really going to be moving back toward that level?
ALBERTHAL: Well, you always hope for it to move there as rapidly as it can. But I think that what the market is looking for is consistency in a number of quarters of performance. Which we are about; we have a number of quarters of performance behind us. And we are looking for a very strong year, a very strong 1999. And so, we're quite upbeat and quite positive about the opportunities of the company.
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EDS
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