EDS Hunkers Down on IT Costs

As further evidence of the bleak outlook confronting most of the computer services sector, IT outsourcing giant Electronic Data Systems Corp. , hit by a
59-percent drop of its third quarter profit, plans to trim its workforce by up to 5,600 jobs and sell off over $500 million worth of “non-strategic” assets.

The actions were due in part to write-offs on contracts of bankrupt customers such as US Airways and WorldCom as well as a tougher quarter for closing IT contract sales. EDS declared a profit of $86 million (18 cents per share) for the third quarter, down by 59.4 percent compared to the same time last year when its net income came in at $212 million.

The Plano, Texas-based company said it will start the workforce reduction with between
800 and 1,000 positions by year’s end.

Dick Brown, chairman and CEO, called the results disappointing:

“EDS is a strong company with exceptional talent and a solid financial base.
We are taking the steps necessary to align our business with current market
realities and put this company back on a path to greater profitability.”

Although costs kept eating into what the company could keep, its sales
generally held up in a difficult selling climate for IT contracts. Third
quarter revenue slid by 3 percent to $5.41 billion for the quarter, compared
to $5.56 billion during the same time last year.

EDS did stress, however, that the company was able to renegotiate its landmark outsourcing agreement with the U.S. Navy — a contract which had been seen as a strain on the company’s liquidity.

But analysts weren’t convinced that the revised Naval contract would have immediate, measurable benefits. “We think the biggest negative from the earnings call was the news of the NMCI contract extension. The latest guidance from management was that the contract was to turn cash flow positive in early calendar year 2003. Now with the extension, cash flow from the contract seems to again be somewhat of a moving target,” according to research from Deutsche Bank.

EDS also said it would divest several “non-core, non-strategic assets” in
order to raise over $500 million over the next 6-8 months. Other
cost-cutting measures would be to slash $75 million from overhead during
2003.

It also said it would shift a minimum of 1,500 applications development and
client contact center positions to other offices as a result of overhead
reduction and layoffs.

Brown stressed that customer service would not be affected by the cuts and
that overall, the company’s balance sheet is strong.

“EDS has all the resources it needs from its operations to serve current
clients and pursue new business,” he said. “However, in this economic
climate, we are focusing on new business opportunities, including megadeals,
that generate near-term revenue, earnings and cash flow.”