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Analyst: Weak demand dings IT services

The industry struggled in the first quarter, says a Prudential Securities analyst, who also predicts that computer services giant EDS may lower its forecast.

The computer services and consulting industry struggled in the first quarter of this year, said a Prudential Securities analyst who also predicted that industry giant Electronic Data Systems is likely to lower its forecast.

Analyst Bryan Keane on Tuesday said information technology services firms faced a tough economy and sluggish IT spending.

"Global consulting and SI (system integration) demand continue to remain weak as demand for short-term project work has languished, (although) we do expect to see sequential improvement in consulting work." Keane wrote in a report.

Plano, Texas-based EDS is having a particularly hard time, Keane suggested. He reiterated a "hold" rating on shares of the embattled company, which recently replaced its CEO after a string of bad news including a dramatic earnings warning in September, a formal SEC probe into the warning and stock hedging activity, and the revelation that the company has invested $430 million in a troubled contract.

"While we were encouraged by the recent replacement of CEO Dick Brown with the hiring of a proven leader in Michael Jordan, we still believe the company is far from out of the woods," Keane wrote. "In our opinion, EDS is still feeling the effects of weak IT spending through increased pricing pressure and delayed decision making, and we would not be surprised to see guidance revised downward."

EDS has forecast first-quarter earnings of 30 cents to 35 cents per share, excluding the impact of discontinued operations. Keane predicted EDS would report earnings per share of 34 cents--not including a 6 cents per share charge associated with former CEO Dick Brown's severance package. Analysts on average expect EDS to post earnings of 31 cents per share for the quarter, according to earnings tracking firm First Call.

An EDS representative declined to comment on the report.

Some analysts have identified IT outsourcing as a promising field. But Keane sees trouble with outsourcing deals, which involve one company taking over portions of another company's IT operations, such as managing a data center. "IT outsourcing has been clouded by rising troubled contracts and elongated sales cycles," Keane said.

Keane said one problem facing domestic IT services firms is increased pricing pressure from offshore providers. To respond to this competitive threat, U.S. IT players have been expanding their operations overseas.

A silver lining to the stormy business climate for IT services firms, Keane suggested, is "business process outsourcing." This type of outsourcing involves companies letting service providers take over business tasks such as accounting, human resources and call center operations.

Shares of EDS fell 18 cents, or 1.02 percent, to close at $17.42 on Tuesday. The stock has fallen from a 52-week high of $57.05.