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EDS reports falling revenues, profits

EDS reports falling revenues, profits

Embattled IT services vendor, Electronic Data Systems (EDS), under investigation by the U.S. Securities and Exchange Commission, struggling with a credibility crisis and suffering from big-client bankruptcies, has reported that its 2002 fiscal fourth quarter earnings and revenue fell, as customers once again spent less than expected.

EDS, the world's second largest provider of IT services behind IBM's Global Services division, reported net income of $US360 million compared with net income of $US405 million in 2001's fourth fiscal quarter.

Adjusted for discontinued operations and a restructuring credit, net income came in at $US246 million. However, those results were way down from comparably adjusted net income of $US427 million in 2001's fourth fiscal quarter, the company said.

Fourth quarter total revenue decreased to $US5.5 billion from $US5.8 billion for the same period in 2001. The company signed contracts worth $US8.1 billion during the quarter compared with $US10.1 billion a year ago. Free cash flow, an area of concern over the past year, improved to $US863 million compared with $US453 million.

The SEC is conducting a formal investigation of EDS that is focusing partly on a gigantic earnings and revenue shortfall the company announced in September for its third and fourth fiscal quarters of fiscal 2002. That warning shocked the market, hurt top management's credibility with investors, clients and Wall Street analysts, and affected the company's stock price. The shortfall is also blamed for prompting Procter & Gamble to pull back from what seemed a done deal to award EDS a multi-billion dollar outsourcing contract believed to be among the largest in IT history.

EDS' business in 2002 also suffered from the bankruptcies of some big clients such as WorldCom and UAL. For example, EDS took a $US41 million provision to write down its investment associated with leveraged aircraft leases with UAL's United Airlines during the fourth quarter.

The company also announced plans in October to reduce its workforce by between 3 per cent and 4 per cent, or up to 5,520 jobs from the total of about 138,000 at that time, and to implement other cost-cutting measures.

As the company has struggled, IT analysts have warned clients to keep a close eye on their EDS engagements, to make sure that service quality doesn't slip as the company cuts costs and reduces its workforce.

For the full 2002 fiscal year, EDS's revenue grew slightly to $US21.5 billion from $US21.1 billion in 2001. Net income fell to $US1.12 billion from $US1.36 billion. Excluding one-time items, net income was $US1.01 billion, down from comparable results from the year-ago quarter of $US1.4 billion. The total value for contracts signed in 2002 was $US24.4 billion compared to $US31.4 billion a year ago.

Looking ahead, EDS provided what it billed as a "cautious" view due to a continued slump in client spending and a general weak economy.


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