EDS is slated to release its first-quarter earnings tomorrow. After the market closes, Brown is expected to detail his much-anticipated plans for the Plano, Texas-based services and consulting giant during a two-hour meeting in New York.
Wall Street analysts expect EDS to earn 36 cents a share for the quarter, according to First Call, a decline from year-ago profits of 43 cents a share. An announcement of layoffs and possibly a plan to close several facilities and divest of underperforming businesses are also expected, as well as Brown's vow to step up future acquisitions, which was his legacy as former head of Cable & Wireless.
"I think there are a lot of larger initiatives for change underway," said Jeffrey Newman, analyst at Wheat First Union. Newman said investors should be looking for better execution and earnings growth from EDS--and for the firm to consistently post profits and revenues that meet expectations, noting the company's several recent disappointing quarters. Last quarter, EDS took a $200 million write-down, partly due to losses related to a Xerox contract payment dispute.
To date, Wall Street has learned little of Brown's road map for the $16.9 billion company. But analysts believe the firm, through its restructuring plan, will take a charge of up to $500 million for the quarter to cover a decrease of between 4 to 6 percent of the worldwide EDS workforce of 120,000.
EDS already has said it plans to cut up to 600 jobs at its Plano headquarters by the end of May, and is leaving employees whose jobs are eliminated the time to reapply for other jobs internally or relocate.
"The company has divided employees into quartiles and obviously the people on the bottom are either going to be reassigned [or let go]," said William Loomis, analyst at Legg Mason Wood Walker, who called a 5 to 6 percent reduction of the workforce "reasonable." "Clearly, when we've talked to some groups at EDS there have already been some layoffs."
The company is also expected to discuss its plan to invest in e-commerce initiatives, where EDS currently lags behind IBM Global Services. IBM Global, which now holds EDS's former No. 1 slot in the worldwide services market, is also pulling ahead of EDS on outsourcing deals.
In a research report, Morgan Stanley Dean Witter stated that EDS is losing share to IBM in data center outsourcing, noting that Big Blue signed $33 billion in outsourcing contracts in 1999, triple that of EDS.
EDS also faces ongoing challenges posed by dwindling revenue from General Motors, its largest customer and former parent company. By the end of 1999, 50 percent of EDS's contracted work to GM will be up for renewal, according to Morgan Stanley.
At that time, GM, which has stated plans to cut $4 billion in operating costs in 1999, is expected to reprice those contract renewals with EDS aggressively, and could possibly outsource some of the work to another vendor. EDS now depends on GM for one quarter--or about $4 billion--of its revenues, Legg Mason's Loomis said. Though GM is market-testing some outsourcing agreements with other firms, Loomis said it's hard for the automaker to make the shift away from long-time partner EDS.
And it will take time for Brown to execute on a plan to move EDS further away from dependency on GM, analysts said.
Since Brown accepted the job as chairman and CEO of EDS last December, the firm's stock price has steadily climbed more than 25 percent. The firm's share's were trading at $53.43 a share this afternoon, up from a 52-week low of $30.4375.
Brown's arrival has also inspired an expected house-cleaning in top EDS ranks, with a group of seasoned executives retiring or resigning in recent months.
Today, the company said executive vice president John Castle, a key architect of EDS's community outreach programs and an EDS Management Board member, is retiring at the end of May. Executive vice president Stuart Reeves, who was the head of EDS health care and energy divisions, will retire May 1, along with vice presidents Robert Sharpe and Anthony Weynand, who resigned last week.
Chief information officer Gary Rudin and veteran director of corporate marketing John Harris stepped down last month. And in March, Bob Mintz, executive vice president of human resources at EDS since April 1998, left the company for personal reasons.