EDS Announces Earnings Plunge, Layoffs

EDS isn't the only one in the IT consulting arena hurt by the downturn in IT spending.

A handful of players in the battered IT consulting arena posted weak financial results as a result of the downturn in IT spending and other woes.

Electronic Data Systems Corp., after signaling in September that its third-quarter earnings would be way off its earlier guidance, posted slightly better results than projected in the September adjustment.

The Plano, Texas, outsourcer posted a net income of $86 million, or 18 cents a share, on declining revenues of $5.41 billion. It anticipated in September that earnings would range between 12 to 15 cents a share, with revenues between $5.3 billion and $5.5 billion.

Along with the 59 percent earnings plunge and 3 percent revenue decline, EDS announced that it will lay off 3 percent to 4 percent of its work force over the next several quarters, beginning with between 800 to 1,000 jobs by years end.

EDS also intends to sell off non-core assets to generate an expected $500 million or more, and it intends to reduce "corporate overhead" by $75 million in 2003, said Dick Brown, chairman and CEO, in the earnings call this afternoon.

At the same time, EDS intends to accelerate the pace of its plan to shift some 1,500 application development and client contact center jobs to international locations.

EDS for the third quarter saw a 56 percent drop in contract signings, which were valued at $3 billion, compared with $6.8 billion in the same quarter of 2001.

Liquidity concerns continued to dog EDS after it revised in September its projections for free cash flow for the year from between $700 million to $900 million down to $200 million to $400 million. For the quarter, EDS reported free cash flow of $118 million, and Brown said that EDS is confident of the projections for the year.

Although analysts are worried about the impact such concerns might have on new contract signings and EDS ability to handle megadeal outsourcing contracts, Brown sought to assure investors and prospective clients. "We are not stepping away from megadeals. We are, however, more conscious of our cash position as we look at megadeals. We are operating with more a selective and prioritized pursuit agenda … targeting deals with more near-term profitability and manageable cash positions. Were expecting solid bookings in the fourth quarter," he said.

In one of its more well-known megadeals--the Navy Marine Corps Intranet--EDS during the quarter signed a two-year extension to the outsourcing deal, extending it to seven years.

EDS blamed the bleak quarter on reduced discretionary spending with existing contracts, lower new sales and higher sales costs. And the near-term outlook continues to look dismal. "We dont expect much improvement in discretionary spending till at least the second half of 2003," said Brown. That said, EDS projected that it will earn between $2.05 to $2.10 per share for the full fiscal year.