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EDS beats the Street by a cent

The services and consulting giant beats Wall Street consensus estimates but said revenue was lowered from its ongoing lawsuit against Xerox.

Electronic Data Systems today reported fourth-quarter earnings that beat Wall Street consensus estimates, but said revenue was reduced by a contractual dispute with Xerox.

EDS earned $264.1 million in the quarter, or 53 cents a share, a penny greater than analysts' consensus estimates, according to First Call. The company earned $308.2 million, or 62 cents a share, a year ago.

The Plano, Texas-based services and consulting giant said fourth-quarter revenue increased 9 percent to $4.6 billion, compared with $4.2 billion a year ago. But EDS said quarterly revenue was cut by $200 million as a result of a write-down accounting for both Xerox and an unrelated lawsuit.

The company declined comment on the second case.

New contract sales for the fourth quarter of 1998 were $2.5 billion, short of the company's expected $3 to $4 billion in signed deals. Myrna Vance, EDS's vice president of investor relations, said the company is still negotiating several million in contracts it failed to settle by the end of 1998. Total new contract sales for the year were $11.8 billion.

Costs of the company's disagreement with Xerox hit especially hard in the fourth quarter. After more than a year of unsuccessful negotiations, EDS said it filed suit against Xerox Thursday in New York.

The complaint alleges Xerox failed to pay for certain infrastructure services, though EDS does not specify damages sought. The lawsuit involves just part of the contract, under which EDS continues to work.

Vance said the lawsuit is a last resort after negotiations with Xerox broke down in December. Litigation was the best thing EDS could do to protect its shareholders, she said.

"We've taken an action that for us was very difficult to do," she said during a press conference. "It's part disappointing for us and for me that we've filed a suit against Xerox."

The company last sued a client, the State of Florida, in 1992, resolving the case four years later in arbitration, a spokesman said.

For the year ended December 31, EDS reported $16.9 billion in revenue, up from $15.2 billion a year ago. Excluding charges, the company earned $840.1 million, or $1.70 per share, down from $1.91 per share a year ago. Including charges, net income for 1998 was $734.4 million, or $1.50 a share.

EDS is still feeling the pinch of dwindling business from its former parent, General Motors, the nation's biggest automaker.

Revenue from GM declined $700,000 in 1998 to $1.1 billion, significantly less than the company expected. "We had an uptick between the third and fourth quarter and believe this is now stabilized," Vance said.

EDS was spun off from GM in 1996. GM remains EDS's biggest customer, accounting for roughly a quarter of its total revenue.

Executive expectations
Investors are looking for changes from new chairman Richard Brown, who took over as the company's third chief executive last month. Many expect Brown to aggressively pursue new contracts to boost sales and earnings as he gets tough with rivals like International Business Machines and Computer Sciences.

"Investors will look more forward than backward," said Thomas Browne, an analyst with Prudential Securities in New York, who has an "accumulate" rating on the stock. "There has been some expectation that things are going to change."

Brown, who started work January 8, said he has spent the past several weeks getting to know the services market and the company.

Brown said he sent out notes to company employees today asking them how they can help cut costs. Acutely aware of his role as an agent of change in the company, he said cutting costs does not mean sacrificing growth.

Bloomberg contributed to this report.