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Tide Turns for Big IT Companies

Bill Loomis

The latest quarter of financial results in information technology services can be characterized as revenge of the big companies. After three years of watching their stocks underperform, their businesses challenged by e-business services startups and their key employees leaving to join those startups, large companies are seeing the tide turn.

While larger integrators, such as Electronic Data Systems, Computer Sciences Corp. and Affiliated Computer Services Inc., have not been immune to the economic slowdown, so far they have been hurt much less than their smaller competitors.

Investors, customers and employees now view these companies as more stable than e-business firms. This view will probably last until the next significant surge in IT spending begins, and the big companies once again find themselves a couple of years behind smaller competitors on adapting aggressively to new trends and technologies.

Size is now in favor with investors. KPMG Consulting, with $2.8 billion in annual revenue, managed to complete its initial public offering in a very difficult IT services IPO market.

We will likely see other ex-Big Five consulting firms come public over the next year, particularly Accenture (previously Andersen Consulting), which has about $10 billion in revenue.

It appears that IT service company stocks may have reached their bottom at the end of 2000, though fundamentals do not yet seem to have bottomed.

E-business solutions companies announced mixed first quarter 2001 projections, with most of the large e-business companies ? Sapient Corp. and Cambridge Technology Partners Inc., for instance ? expecting higher revenue in first quarter 2001 vs. fourth quarter 2000. Many of the smaller e-business solutions companies, such as Scient Corp. and Viant Corp., are looking for further sequential declines in revenue in the first quarter.

EDS reported earnings per share of 70 cents (68 cents including charges and credits) vs. 61 cents a year earlier, up 15 percent. Revenue increased 6 percent to $5.2 billion.

Investors sent EDS shares up 12 percent the day the company announced earnings. Despite relatively lackluster revenue growth of 6 percent, it beat most investors' expectations of revenue growth of about 2 percent to 3 percent.

Also, the company announced a record $15.9 billion in contract wins in the quarter, including the previously announced $6.9 billion Navy-Marine Corps Intranet contract. EDS also pleased investors by stating it sees no signs of IT budget cuts, no slowdown in its business and believes an economic slowdown could help its business, not hurt it.

While we don't think any large company is immune to an economic slowdown, it was just what investors wanted to hear, and many analysts upgraded their rating on the stock as a result.

CSC reported earnings per share of 72 cents (34 cents including charges) vs. 66 cents a year earlier, up 9 percent. Revenue climbed 13 percent to $2.7 billion.

Investors were not too excited about CSC's results, because the consensus estimate was 74 cents, and most analysts expected a little more revenue growth. Also, the company then guided analyst estimates lower for the next quarter.

CSC also announced only $1.8 billion in contract wins in the quarter, about half of what many analysts were looking for going into the quarter. CSC management remained optimistic, but did indicate it was seeing the effects of a slowing economy.

A highlight of CSC's results was the strong federal government business, which represented 24 percent of revenue. CSC federal business was up 19 percent, with defense revenue up 17 percent and civilian revenue up 22 percent.

Affiliated Computer Services announced earnings per share of 59 cents vs. 50 cents, up 18 percent. ACS had revenue of $501 million, up 5 percent (up 14 percent excluding divested operations from a year ago). ACS' government revenue was up only 3 percent following a contract loss and represented 37 percent of total revenue.

Bill Loomis is managing director of the technology research group at Legg Mason Wood Walker Inc., Baltimore. He can be reached at wrloomis@leggmason.com. Legg Mason Wood Walker Inc. makes a market in the shares of Art Technology Group, Cambridge Technology Partners, E.piphany, Scient and Viant. Electronic Data Systems Corp. is a Legg Mason Select List core holding. This information is based on sources believed to be reliable but is not guaranteed as to completeness or accuracy and is not intended to be an offer to buy or sell any security. Opinions expressed are subject to change.

About the Author

Bill Loomis is a managing director at Stifel Nicolaus.

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