EDS narrows loss in Q1

Electronic Data Systems (EDS) posted a significantly smaller net loss in the first quarter, ended March 31, compared with last year's first quarter, and exceeded Wall Street's revenue expectation, a performance that pleased company executives, EDS said on Monday.

EDS, which has been struggling with sagging sales, problematic contracts and an ongoing U.S. Securities and Exchange Commission (SEC) investigation, reported a net loss of US$12 million, or $0.02 per share, compared with a net loss of $1.4 billion, or $3.00 per share, in last year's first quarter.

Excluding one-time items, the net loss was of $3 million, or about a penny per share, meeting the consensus expectations of analysts polled by Thomson First Call. This compares with net income of $33 million, or $0.07 per share, in last year's first quarter.

Revenue came in at $5.43 billion, up 4 percent from $5.22 billion in last year's first quarter.

Excluding the company's UGS PLM Solutions software unit, which was sold during the first quarter, revenue was $5.20 billion, also up 4 percent compared with last year's first quarter. The company thus exceeded consensus expectations of analysts polled by Thomson First Call of $5.1 billion.

EDS signed $4.0 billion in contracts, compared with $3.0 billion in last year's first quarter.

EDS did well winning contracts valued at under $250 million, and from the financial services, government and communications industry sectors. The company highlighted a sequential increase of 32 percent for its business process outsourcing (BPO) contracts.

Chairman and Chief Executive Officer (CEO) Michael Jordan, who joined EDS in March 2003 and has broadly revamped the company's executive ranks since then, said EDS finds itself much stronger financially, enjoys a stronger competitive position and has problem contracts under control. "I feel good about where we are today," he said in a conference call to discuss the financial results.

Essentially, the company has cut the number of major problem contracts down to two.

One, the multiyear, multibillion dollar Navy Marine Corps Intranet (NMCI) contract, is now under control both in terms of its deployment and its cost, he said. The NMCI contract generated an operating loss of $145 million, or $0.19 per share, in the quarter, in line with plan, he said. When it was signed in October 2000, the NMCI contract was valued at more than $4.1 billion over five years, with an additional three-year option that could have put its value at more than $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 contract, which Jordan described earlier this year as "the elephant in the living room," has been marked by delays and has drained significant amounts of cash from the Plano, Texas, IT services provider. For example, EDS wrote down $559 million in deferred costs related to the NMCI contract for its fourth quarter of 2003, ended Dec. 31, which it closed with a net loss of US$354 million, or $0.74 per share.

The other major problem contract, with a client Jordan didn't identify, yielded an operating loss and asset write-down of $94 million, or $0.12 per share. EDS is seeking a settlement with the client that may result in the contract's termination, Jordan said.

The company is on track to end 2004 with zero net debt and over $5 billion in liquidity, including nearly $4 billion in unrestricted cash and marketable securities, EDS said. The company's ongoing restructuring and cost-cutting measures are expected to generate savings of about $1 billion in 2004.

The agreement to sell UGS PLM Solutions for $2.05 billion in cash is expected to close in the second quarter, which is why, for the purposes of the first quarter results, the unit's performance is treated as a discontinued operation.

Looking ahead to the second quarter, EDS expects to generate between $5.1 billion and $5.2 billion in revenue, and to report earnings of between a loss of $0.06 per share and break-even, excluding UGS PLM Solutions. For the full year, also excluding UGS PLM Solutions, EDS expects revenue of between $20 billion and $21 billion and earnings per share of between $0.20 and $0.40.

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