EDS narrows Q1 losses

27 Apr 2004

Computer services outsourcing giant EDS has narrowed its losses in the first quarter to US$12m, but disappointed the market by lowering its 2004 earnings estimates on the back of a sale of a business and the fact that its contract with the US Navy is losing the company money.

EDS reported a loss for the first quarter of US$12m, or 2 cents a share, compared with a loss of US$1.4bn, or US$3 a share, a year earlier.

Apart from the 19 cents a share loss from the Navy contract, first quarter results reflect an operating loss and asset write-down of US$94m, or 12 cents per share, related to an unidentified commercial contract. EDS said a termination of the contract may result in some impairment of the contract’s remaining US$123m assets and additional losses in the second quarter.

EDS said that it expects second-quarter revenue, excluding the planned sale of software unit UGS PLM, of US$5.1bn to US$5.2bn. It also anticipates a loss between 6 cents a share and break-even, weighed down by 19 cents to 21 cents a share loss from the US$6bn navy contract.

For 2004, EDS sees revenue of US$20bn to US$21bn, and earnings per share of 20 cents to 40 cents, compared with its earlier view of a profit of 50 cents to 60 cents a share.

Market observers attribute EDS’s problems to problems winning new contracts because of its high cost structure. Over the past year, management has moved to cut jobs and slash costs across the organisation. However, the legacy of unprofitable contracts are still hurting the organisation. EDS shares fell 4 cents in after hours trading following the results’ disclosure last night.

“The quarter’s results show we are executing against the plan we outlined last year,” said Bob Swan, executive vice president and CFO. “We’re implementing plans to strengthen our balance sheet, improve our cost competitiveness and bolster our win rate. We announced the agreement to sell UGS PLM Solutions and commenced an exchange offer for our mandatory convertible debt. We are on track to de-lever the balance sheet and end 2004 with zero net debt and over US$5bn in liquidity – including nearly US$4bn in unrestricted cash and marketable securities.”

By John Kennedy