March 14, 2002

Technology Research

KPMG Consulting, Inc.

2002 Recovery Trending Shallower in High-End .&,1
Consulting and Systems Integration 5DWLQJ 0DUNHW
8QGHUSHUIRUP
Investment Conclusion: Checks across the industry continue to
point to considerable tire kicking but little more in terms of significant, Joseph A. Vafi 415.248.4977
Douglas N. MacBean 415.248.4888
new private sector spending on IT consulting and systems integration
so far this year. Thus, as the first quarter draws to a close, we believe Change In... Yes/No Was Is
Rating: No MU
any ramp in new spending on discretionary consulting work will be EPS F2002E: No $0.55
pushed out once again. While KPMG Consulting is effectively cutting EPS F2003E: No $0.73
costs to protect earnings, the weak demand environment will likely Rev F2002E: No $1,832.4
Rev F2003E: No $2,075.0
make any meaningful top-line organic growth prohibitively difficult this 12-Month Price Target: No $13.00
calendar year, in our view. We maintain our belief that Street 52-Week Range (NASDAQ) $21.49-9.11
consensus remains too optimistic for KPMG Consulting, and that at FD Shares Outstanding 158.3 MM
32x our C2002 EPS estimate of $0.62, shares are overvalued. Market Cap $3,162.8 MM
Avg Daily Volume (000) 1,074
Book Value/Share 12/01 $3.57
5yr Hist. EPS Growth Rate NM
Key Points 5yr Proj. EPS Growth Rate
ROA 2002E:
15%
8%
• Our industry checks point to little positive movement so far this Dividend/Yield NONE/ NONE
year in terms of improved demand for discretionary spending on Price/Book Value 12/01: 5.6x
Cash 12/01: $101.0 MM
consulting and systems integration services. We continue to talk ROE 2002E: 13%
to private companies in the sector and monitor activity levels on ROIC 2002E: 13%
IT-specific job boards (e.g. dice.coma) to look for early signs of
FY June F2001 A F2002 E F2003 E
better demand. EPS:
1Q $0.17 $0.14 A $0.17
• In addition, we also closely follow demand for Indian-based 2Q $0.13 $0.12 A $0.17
3Q $0.27 $0.14 E $0.19
applications development services, as we believe these less 4Q $0.21 $0.14 E $0.21
expensive offerings will rebound before higher-end consulting. Year $0.79 $0.55 $0.73
Across all these very different types of channel checking, we have P/E NM 36.3x 27.4x
uncovered little to suggest improved top-line results for project- CY EPS $0.74 $0.62 $0.83
CY P/E NM 32.2x 24.1x
based IT services firms.
Rev (MM): F2001 A F2002 E F2003 E
1Q $529.5 $464.7 A $495.0
• Given that new projects take several months to ramp, we believe 2Q $506.0 $437.7 A $500.0
any top-line recovery in demand continues to be pushed out. At 3Q $550.4 $460.0 E $530.0
this point, the scale is likely tipping more toward a real recovery in 4Q $518.0 $470.0 E $550.0
Year $2,103.9 $1,832.4 $2,075.0
C2003 rather than late C2002. While KPMG Consultinga enjoys CY $1,970.8 $1,925.0 $2,190.0
some insulation from the weak demand environment due to 35- Mkt Cap/Rev NM 1.7x 1.5x
40% exposure to the government vertical, business within the Mkt Cap/CY Rev NM 1.6x 1.4x
commercial sector remains concentrated in some of the most Unless otherwise noted, all references to KPMG Consulting’s
EPS figures and estimates are stated pro forma and exclude,
problematic verticals such as telecom, high-tech and financial among other things, one-time charges and gains and non-
services. cash charges related to the redemption of the company’s
Series A preferred stock.
• Finally, should KPMG Consulting decide to accelerate its
rebranding efforts, as was indicated yesterday, we believe GAAP
EPS could be negatively effected by approximately three to five
cents per quarter, equivalent to 2-3% of revenue. In its rebranding
efforts, Accenture incurred costs equivalent to approximately 3%
of revenue for over one year. While any rebranding expense will
likely be considered one-time in nature, reduction in GAAP
earnings associated with any such effort is a negative to the
investment case, in our view.
Company Info
The Company
With approximately 8,700 consultants working across nearly 150 offices in 17 countries, KPMG Consulting is
one of the largest consulting operations in the world. Specializing in six industries, including a highly-
successful public services practice, the company represents the first of the Big 5 consulting giants to
become a public entity after spinning out from its parent, KPMG LLC, on December 29, 1999 and completing
its IPO on February 8, 2001. Core competencies in business and design strategy, systems design and
architecture, applications implementation, and network and systems integration make for a compelling, end-
to-end value proposition.

Investment Thesis
While a marquis name in IT consulting services, KPMG Consulting faces the same soft demand
environment as every other player in the industry. We therefore expect revenue and earnings pressure to
continue weighing on the stock. The company s premiere customer base should position it to continue
capturing market share from weaker players; this strong, domestic market position, however, is
counterbalanced by several company-specific challenges including a small international footprint, the need to
rebrand, and limited balance sheet flexibility.

Investment Risks
Among the risks are (1) a weak demand environment for IT services; (2) potential fluctuations in future
operating results due to the timing, number and scope of customer engagements; (3) intense competition
from companies including technology consulting firms, Web design firms, online marketing firms, strategy
consulting shops, and the in-house IT departments of potential clients; (4) potential costs associated with a
rebranding campaign and operating risks associated with aggressive overseas expansion; and (5) the
company’s ability to attract and retain skilled IT professionals.
Our rating system is based upon 12-month price targets that assume a flat market.

For stocks with market cap of $2 billion or greater:

Strong Buy describes stocks that we expect to appreciate by 25% or more.
Buy describes stocks that we expect to appreciate by 10-25%.
Market Perform describes stocks that we expect to change plus or minus 10%.
Market Underperform describes stocks that we expect to decline by more than 10%.

For stocks with market cap of less than $2 billion:

Strong Buy describes stocks that we expect to appreciate by 50% or more.
Buy describes stocks that we expect to appreciate by 20-50%.
Market Perform describes stocks that we expect to change plus or minus 20%.
Market Underperform describes stocks that we expect to decline by more than 20%.

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Unless otherwise noted, prices are as of Wednesday, March 13, 2002.

Copyright  2002 Robertson Stephens

 Joseph A. Vafi
Joseph, a vice president, joined the firm as a senior
research analyst focusing on consulting and IT
services companies. Previously, Joseph was
director of corporate development at Navigant
Consulting and vice president of technology
research at Brean Murray & Company. He holds an
MBA in finance and marketing from Columbia
University and a BA, magna cum laude, in
mathematics and economics from Vanderbilt
University.

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