EDS Gets Greenlight on Navy Contract

Computer services provider EDS had some good news for a change Tuesday when it announced that the U.S. Navy had greenlighted its $6 billion IT services contract.

The contract had been held up for internal review by the Department of Defense, which the Plano, Texas company had not anticipated.

The contract news appeared as a bright spot amid some cloudy months for the number-two computer services company. Not only has its outsourcing rival IBM snatched recent headlines by edging out EDS on mega-contract wins, but EDS has had to revise its outlook for the year, due in part to bankruptcies of major customers. Analysts had also flagged concern that the hold-up on the Navy contract was becoming a strain on EDS’s cash flow.

But on Tuesday, just minutes after it concluded a day-long analyst presentation at its headquarters, EDS said it had received the greenlight to continue work on the project.

That means that EDS can begin transferring, or “cutting over” to the Navy’s network, 160,000 computer terminals that had been upgraded but held up for testing. EDS officials describe “cutover” as a point at which NMCI network users actually receive new desktop computers, operating systems and software and are fully connected to the network services of the new intranet. It also marks a point at which it can calculate its revenues from the contract.

With testing on the project complete, the Department of Defense (DOD) also gave its approval for 150,000 more computers to be upgraded as part of the Navy Marine Corps Intranet (NMCI) project. As a result, EDS will be linking up over 300,000 computer desktops as part of a project to offer upgraded networking and information services to sailors and marines.

“The results from four months of testing clearly demonstrated that the NMCI is ready to move to the next level,” said Rear Admiral Charles L. Munns, director, Navy Marine Corps Intranet.

The news came on a day that shares of EDS were under slight pressure after the computer services company’s chief financial officer warned that market risks could get in the way of its earnings expectations for the year.

Separately, it also confirmed that negotiations on an outsourcing contract with a French company had been called off.

During an analyst day meeting Tuesday at its headquarters, Bob Swan, who recently took over the CFO role for EDS, noted “more risks than opportunities” in meeting its earnings expectations it made for 2003.

But he didn’t change the company’s outlook for 2003, such as expecting earnings per share of between $1.80 and $2 a share and cash earnings of between $700 million and $900 million.

However, the presentation did offer a straightforward discussion of a year in which EDS expects its first quarter revenue to be between 3 percent to 6 percent lower than the same, year-ago quarter. The cautious outlook for the year is due to sluggish expectations for IT spending among major companies, the uncertainties in the business climate over a possible war with Iraq, and the impact of the bankruptcies of some major clients, such as WorldCom and US Airways.

Company officials also confirmed that EDS was no longer negotiating for an outsourcing deal with French power-distribution company Alstom . CEO Dick Brown said the decision was mutual, partly because the company’s priorities were different than EDS’s.

Prior to the announcement about the Navy contract, senior company officials had been cautious about when they thought it would start throwing off cash. In addition, Admiral Munns told analysts that although the country is not officially at war, the situation is different with Department of Defense computer networks, which he said have fended off thousands of network attacks this year.

Shares of EDS closed down about 4 percent at $15.75 Tuesday before the Navy contract announcement was released but were edging upwards in after-hours trading.

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