Verizon in the fourth quarter decided to bring its technology services in house as it integrates the infrastructure from the MCI acquisition.
The news was disclosed on Electronic Data Systems' earnings conference call. EDS topped estimates with strong earnings of $254 million, or 47 cents a share, and proved its turnaround is well underway.
Historically, Verizon ran its own IT operations, but MCI outsourced to EDS. The EDS contract with MCI was set to expire in early 2008.
According to EDS CFO Ron Vargo:
"Verizon made the strategic decision to handle IT system support in-house, including the MCI IT services work that was being managed by EDS. The IT services contract between MCI and EDS included minimum annual purchase obligations that ran through January of 2008. However, it was amended to reflect the change in Verizon's strategy and contemplate a significant reduction in services that we've provided to MCI. In addition, the network agreement under which we procure telecommunications networks services from MCI was also amended to among other things, reduce our minimum annual spend commitment and offer us additional flexibility. As a result of the contract amendments, EDS transitioned most IT services back to the client in December of 2006 and received $90 million for assets and transition services."
While the Verizon move is notable, it doesn't reflect on EDS' prospects. For starters, EDS has been through this drill before. When US Airways and America West merged EDS was displaced for some services.
However, analysts are still trying to figure out the impact of the Verizon deal on EDS' outlook. UBS Equities analyst Adam B. Frisch said "EDS failed to explain the impact of the Verizon deal."
Perhaps more explanation will come when EDS meets with analysts Feb. 20.
Other EDS takeaways:
- EDS is deploying workers in low-cost locales. EDS had about 32,000 people in "cost advantaged location" more than double a year ago. "India is a primary beneficiary, as you know, but we continue to migrate workforces to other cost advantage areas in Brazil, Argentina, China and Hungary," said EDS chief operating officer Ron Rittenmeyer.
- EDS' Navy contract is driving revenue now. "The 7 percent increase in organic revenues was driven primarily by US Government, continuing theme of strong NMCI contract revenues, in the Americas improvement in select large accounts, and finally, in EMEA, UK Government mega-deal execution," said Vargo. For anyone tracking EDS, that's quite a turnabout. The NMCI deal had been a disaster, but EDS mopped up execution issues to save the deal.