IT Spending Woes: EDS Profits Slide 56%

Computer services giant meets expectations as it works through a sharp drop in IT spending and braces for more charges due to accounting changes.

Profits for computer services giant EDS plunged by 56 percent for the second quarter, as the company weathered a sharp drop in IT spending and braced for more charges because of accounting rule changes.

The Plano, Texas-based EDS said net income for the quarter was $138 million, (28 cents per share), which was down 56 percent from its profit of $316 million (64 cents per share) during last year's second quarter.

Not counting asset write-downs and a restructuring charge for executive severance, second-quarter profits were $167 million (34 cents per share).

The results were within the guidance that EDS had provided, but also reflected the difficult year the outsourcing giant has faced since the last year, as the slowdown in IT spending was starting to take its toll on the company's balance sheet.

EDS' total revenue rose 2 percent to $5.52 billion, which got a boost from currency exchange rates on the weaker dollar. At constant currency rates, however, revenues actually fell by 3 percent, due in part to fewer revenues from its contract with General Motors.

In another tell-tale sign of what EDS called a "tepid" IT spending environment, the company notched $3.4 billion worth of contracts in the second quarter, close of half the $6.2 billion worth of contracts it had in the till a year ago.

In addition, signings for the first-half of the year are so far $6.4 billion, compared with $13.4 billion in the comparable 2002 period.

Because of new accounting rules on how service-related fees are recognized, EDS said it would restate some revenues retroactive to January of this year; as a result, it may have to take a charge in the third quarter within a range of $1.9 billion to $2.2 billion on a pre-tax basis.

The EITF (Emerging Issues Task Force of the Financial Accounting Standards Board) 00-21 rule charge impacts the way all companies recognize revenue on contracts with multiple deliverables, EDS said.

EDS said it is now reviewing its interpretation of new rule with the Securities and Exchange Commission staff, particularly the deferral of system construction costs, which is currently estimated at $1 billion.

The restatement and expected charge in the third quarter are expected to "significantly reduce full-year 2003 earnings but will have a positive earnings impact in 2004," the company said.

"While we met our financial commitments in the quarter, the results highlight continuing issues in our sales and operating efficiency," said EDS Chairman and CEO Mike Jordan on Wednesday.

"We are taking aggressive steps through our ongoing transformational process to improve our cost structure, productivity and competitiveness. We also fortified our balance sheet with a significant infusion of capital. Now we must translate our improved competitive position into greater marketplace success."

As of June 30, EDS listed $3 billion in unrestricted cash on hand, excluding its undrawn committed credit lines.

As for its outlook for the second half of the year, the company stuck by its prior guidance of earnings per share of 70-80 cents on revenue of approximately $11 billion, not counting the impact of restructuring and other charges, divestitures and accounting changes.






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