IT Spending Woes: EDS Profits Slide 56%

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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.