EDS exceeds revenue forecast, problem contracts linger

EDS exceeds revenue forecast, problem contracts linger

Electronic Data Systems Corp. (EDS) tripled its net income and exceeded revenue expectations in its second quarter of fiscal 2004, while its chief executive acknowledged that past missteps continue to afflict the company, particularly its problematic and gargantuan U.S. Navy/Marine Corps Intranet (N/MCI) project, the company announced Wednesday.

EDS, in Plano, Texas, posted net income of US$270 million, or $0.54 per share, up from net income of $88 million, or $0.18 per share in last year's second quarter. Excluding certain one-time items, such as a gain of $0.81 per share related to the company's divestiture of its UGS PLM Solutions unit, EDS posted a net loss of $16 million, or $0.03 per share, in line with the consensus expectation from analysts polled by Thomson First Call and below net income of $100 million, or $0.21 per share, in last year's second quarter on a comparable basis.

EDS' quarterly revenue grew 4 percent to $5.24 billion, above consensus expectations of $5.17 billion, thanks in part by solid execution in the U.S. and Europe and in vertical sectors such as communications, government and retail, the company said. Excluding the impact of currency fluctuations, acquisitions and divestitures, revenue remained flat. Revenue figures for both periods exclude UGS PLM Solutions.

The N/MCI contract generated an operating loss of $171 million, or $0.21 per share, in line with EDS expectations, but the company has updated its full year forecast for this project to an operating loss of between $0.59 per share and $0.63 per share, whereas it had previously been expecting a loss of between $0.51 and $0.61.

EDS won the N/MCI contract in October 2000 and it was valued at $4.1 billion over five years with an additional three-year option that could put its value at around $6.9 billion. It was extended in 2002 to seven years with a three-year option and its value rose to $8.8 billion. The project has been plagued by delays and has drained a lot of cash from EDS.

Uncertainty related to aspects of N/MCI prompted EDS to narrow its full-year earnings forecast to between $0.20 and $0.30, as opposed to previous guidance of between $0.20 and $0.40, and to lower its free cash flow expectation to between $200 million and $300 million, from a previous range of $300 million to $500 million. Revenue expectations remained unchanged to between $20 billion and $21 billion.

"EDS remains a tale of two cities," said Chairman and Chief Executive Officer Michael Jordan in the statement. Changes implemented in the past 15 months or so by him and his management team have spurred sales, leading EDS to sign $4 billion in contract in the quarter, up 25 percent, he said. However, he added that problem contracts predating his arrival in March 2003 continue to hobble EDS.

EDS, which is the world's second largest IT services vendor, had seen its shares rise 5.27 percent to $18.18 in midafternoon trading on the New York Stock Exchange on Thursday.

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