EDS earnings drop in ‘tepid’ market

With new-contract signings down in an IT services market that company officials called “tepid,” beleaguered Electronic Data Systems Corp. (EDS) on Wednesday reported second-quarter earnings that were less than half of what they were a year earlier.

EDS reported net income of US$138 million, or $0.28 per share, for the quarter ending June 30, compared to $316 million or $0.64 per share one year earlier.

Excluding one-time charges such as asset write-downs and executive severance pay, earnings were $167 million, or $0.34 per share, in line with recent company guidance and analyst expectations as reported by Thomson First Call.

Revenue for the quarter was $5.52 billion, up 2 percent from $5.40 billion for the year-earlier period, but company officials noted that the higher figure for the 2003 quarter takes into account the weak dollar, and that revenue was down by 3 percent in constant-currency terms.

For the rest of the year, EDS’ guidance remains at the levels previously announced. Revenue is forecast to be approximately $11 billion for the last six months of the year and EPS is expected to be in the $0.70 to $0.80 range, albeit potentially at the lower end of the range, according to officials speaking during a conference call with analysts.

“Market conditions continue to be challenging,” EDS Chief Executive Officer Michael Jordan said during the call. “We did see an uptick in the number of new contracts up for bid in Q2, but that seems to have dropped off some as we look forward to Q3. Overall IT services spending remains tepid and sales cycles are still pretty much stretched out.”

However, Jordan told analysts that “despite all the problems, EDS remains to be a very strong franchise. We’ve got a solid pipeline, good backlog, high customer satisfaction and, as you all know, a very much improved cash position.”

Jordan pointed to contracts with Philip Morris Companies Inc. and Barclays Bank PLC as proof of the company’s ability to win big clients, and he said he hoped the Philip Morris contract would lead to more work with the company. However, EDS signed only $3.4 billion in contracts during the second quarter, compared to $6.2 billion for the year-earlier period.

The company, which is the second largest provider of IT services behind IBM Corp., has been hit with a U.S. Securities and Exchange Commission (SEC) investigation, the need for layoffs to cut costs, and the loss of some high-profile deals. In addition, the company has had “problem contracts” with financially ailing customers such as telecommunications carrier MCI (the reorganized WorldCom Inc.) and other companies that have gone into bankruptcy. In an effort to clean house, former CEO Dick Brown was replaced by the company board earlier this year.

The company’s goals for the rest of the year include a continuation of efforts to improve cost structure and productivity, Jordan said. EDS ultimately needs to translate its improved productivity and competitive position into greater marketplace success, Jordan acknowledged.