Three months ago, package delivery giant FedEx (FDX -0.71%) posted excellent fourth-quarter results, soaring well past analysts' expectations. At the time, FedEx's management was very optimistic about the 2018 fiscal year. As CFO Alan Graf noted, the company's outlook for the new fiscal year called for strong earnings growth.
However, the very next week, a ransomware cyberattack devastated the IT systems at FedEx's recently acquired TNT Express subsidiary. This attack caused FedEx's earnings to plunge last quarter -- and could continue to have negative impacts in the second quarter and beyond.
Earnings go into reverse
For the first quarter of fiscal 2018, FedEx reported earnings per share of $2.19 and adjusted EPS of $2.51. For comparison, EPS was $2.65 and adjusted EPS was $2.82 in the year-earlier period. (The main adjustments in both quarters related to TNT Express integration expenses.) By either measure, FedEx's earnings declined by double digits on a year-over-year basis. Prior to the cyberattack in June, analysts had expected FedEx to post adjusted EPS of $3.19 in Q1.
FedEx reported a double-digit earnings decline last quarter. Image source: FedEx.
The earnings damage all came from the express segment, which represents the bulk of FedEx's business. Adjusted operating income for FedEx Express plummeted by 20% year over year, from $652 million to $521 million, mainly due to lost revenue caused by the cyberattack.
Meanwhile, FedEx's other main business segments are performing well. The ground segment posted a solid (though not stellar) 13.5% operating margin. Operating income reached $626 million, up 3% from $610 million a year earlier.
Finally, the FedEx Freight segment rebounded in a big way last quarter, with operating income of $176 million (up 30% year over year) and a 10% operating margin. The freight segment has been a serial underperformer for the past couple of years, bottoming out with a dreadful 2.7% operating margin in Q3 of fiscal 2017. Management has finally gotten the freight segment's cost structure in line with current demand.
The cyberattack's damage lingers
TNT Express experienced severe disruption across its operations for weeks following the June ransomware attack on its IT systems, as detailed by the BBC. In many cases, TNT Express had to resort to manual processes, dramatically slowing the processing of packages -- and making it impossible for customers to track their shipments.
Not surprisingly, many TNT Express customers have become thoroughly exasperated with the company. Some are taking their business to competitors, primarily UPS and DHL.
FedEx says that nearly all of the TNT IT systems are finally up and running and that all hubs, depots, and other facilities are fully operational. Still, it took months to get to this point. As a result, the cyberattack reduced operating income by about $300 million last quarter -- and it is expected to have lingering negative effects going forward due to market share losses.
Looking ahead
The cyberattack's damage forced FedEx to slash its guidance for fiscal 2018. Originally, it had forecast that adjusted EPS would reach a range of $13.20-$14.00. Now the company is calling for adjusted EPS of $12.00-$12.80, roughly in line with last year's result ($12.30). This implies that the cyberattack will continue to have a meaningful impact on earnings beyond Q1.
FedEx founder and CEO Fred Smith tried to keep investors focused on the big picture. He stated that the company still expects to improve operating income in the combined express segment by $1.2 billion-$1.5 billion by fiscal 2020 (relative to fiscal 2017). Still, with FedEx shares trading just a few percent below their all-time high, investors may want to wait for confirmation that FedEx and TNT Express are winning back customers before buying the stock.
