EDS Sinks Navy Estimates

IT services giant EDS wrote off $375 million of its
ever-shrinking $7 billion contract with the U.S. Navy after reporting
third-quarter 2004 results Tuesday.

The write-off contributed to a third-quarter, $153 million net loss for the
Plano, Texas-based company; officials also indicated they would restate
their quarterly statement from fiscal year 2003 to revise bonus expense
allocations throughout the effected year.

Last year, EDS had to take a $334 million
pre-tax loss on the Navy Marine Corps Intranet (NMCI) contract, as the
company struggled to get past delays in performance service levels and
contract modifications, a slow-down in customer satisfaction improvement
rates and failures in getting military service members switched over to
workstations on the new intranet.

Operating losses on the NMCI contract amounted to $106 million in the third
quarter of 2004, a figure that’s not part of the company’s $375 million
write off.

Until EDS meets service performance levels, it won’t receive full
value for its contract, either. Part of the contract stipulates the
company can’t charge more than 85 percent of the “per-seat” costs until
certain service performance levels have been met. Officials say that as of
Sept. 30, no seats have been billed at 100 percent, and only 217,000 seats
have been transitioned over to the new intranet.

Still, officials are looking for something positive to come from the whole
affair. Michael Jordan, EDS chairman of the board and CEO,
told analysts at a conference Tuesday morning the company is
looking at re-negotiating with the Navy to gain better terms on the
$200 million yearly cost to maintain legacy system before they’re switched
to the NMCI.

“We’re in the process of negotiating with the Navy, some modifications,” he
said. “These are to recover the cost of doing that or, where the Navy
doesn’t seem to think they want to pay for it, to stop doing it,” he said.

Other bright spots in an otherwise gloomy fiscal quarter include a four
percent increase, to $3.2 billion, in contracts. Also, the company realized
after-tax gains of $18 million for the sale of its mobile telecom
clearinghouse, Interoperator Services,
in August. However, third-quarter revenues were down 1
percent to $4.95 billion.

The company, along with its financial difficulties, is also working to shift
its strategy to compete globally. In January, the company announced it
would eliminate jobs
in the United States to make room for more IT centers in Europe and the
Asia-Pacific region, as well as to compete with the IT services provide by low-cost
outfits local to the regions.

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