EDS Posts Net Loss as Contracts Slump

NEW YORK May 7, 2003; Eric Auchard writing for Reuters reports that Electronic Data Systems Corp. , the embattled computer services supplier, on Wednesday reported a first-quarter loss after charges and said that contract signings on new business fell by nearly two-thirds.

The Plano, Texas company, which is fending off a cash crunch under new management, reported a first-quarter net loss of $126 million, or 26 cents per share, sharply down from a profit of $354 million, or 72 cents a share, in the year-earlier period.

The latest quarter included a $334 million, or 46 cents per share, cumulative loss on its biggest contract, a $6.9 billion deal to build and manage a shared internal computer network for the U.S. Navy and Marine Corps.

Excluding the impact of the Navy contract loss and another 10 cents in charges to cover, among other items, the severance package of former CEO Dick Brown, first quarter operating income would have totaled $144 million, or 30 cents a share.

First-quarter adjusted profits fell just shy of the average analyst forecast of 31 cents per share among analysts surveyed by Reuters Research, formerly known as Multex.

'Despite the write-off we took in first quarter I am very encouraged by what I have seen in the first six weeks at EDS,' said Michael Jordan, who was named in March as EDS chairman and CEO. Jordan led television broadcaster CBS in the 1990s.

'The real story is our need to accelerate our growth,' said Jordan, who replaced former CEO Dick Brown.

Revenue edged up to $5.37 billion from $5.3 billion in the first quarter of 2002.

But sales dipped to General Motors Corp. , its former parent and still its biggest customer, accounting for 10.6 percent of total sales, down from around 12 percent last year.

Hurt by loss-making contracts with major customers including bankrupt airlines and phone companies, No. 2 ranked computer services supplier EDS has had to forgo bidding on big contracts that better-funded rivals IBM and Hewlett-Packard have snapped up in recent quarters.

But the noose has tightened on EDS as customers have begun to take advantage of its weakened financial condition to strike tough new bargains on existing EDS contracts.

'How does it grow going forward?' asked UBS Warbug analyst Adam Frisch, who rates the stock as neutral.

'The model of accessing capital markets to fund new contracts is broken,' he said, pointing to the cash crunch EDS faces with what he estimates is only $550 million of available cash after paying off debts due later this year.

Shares of EDS closed down 3.7 percent, or 68 cents, at $17.64 on the New York Stock Exchange (News - Websites), ahead of the results. In extended hours trading, the stock traded back up to $18.40, erasing earlier losses during the regular trading session.

'By not giving guidance they are obviously lowering it, but they are not saying how low,' Frisch said.

EDS signed $3 billion in contracts in the quarter, down from $7.2 billion a year ago, as the company decided to forgo potentially unprofitable deals.

Free cash flow during the first quarter totaled $122 million, as EDS took tough measures to conserve cash.

As a result of renegotiating pricing of its contract with the U.S. Navy down by 4 percent, Swan said he expects 2003 free cash flow to be cut by $100 million and that he does not see the contract turning cash flow positive until mid-2004.