EDS shares plunge on revenue warning

Shares of EDS plunged nearly 25 percent today after the computer services giant warned second-quarter revenues would be lower than expected.

Its shares shed $14.81 this morning, falling nearly 25 percent, to $43. Trading of the company's shares was halted this morning after the stock went into freefall following a number of analysts' downgrades. Yesterday, the stock closed down $5.38, losing nearly 9 percent, at $57.81.

In pre-market trading, shares of EDS shed $7.81, or about 14 percent, to $46.

EDS announced today it expects second-quarter

Gartner analyst Lorrie Scardino says that EDS should look to balance its efforts going forward between new ventures and its customer base. see commentary

revenues to be in the low single-digits compared with the previously forecasted growth rate in the mid single-digits. This is a temporary slowdown, and revenue will improve in the second half of the year, EDS said in a statement.

Company executives were not immediately available for comment.

At least five investment houses, including Merrill Lynch, Morgan Stanley, Legg Mason, Goldman Sachs and PaineWebber, responded by lowering their profit forecasts, issuing downgrades or cutting price targets on EDS.

In research notes released yesterday, Merrill Lynch analyst Stephen McClellan said he expects EDS to report lower-than-expected second-quarter revenues growth. McClellan said he expects EDS to report second-quarter revenues growth of 6 percent vs. the previously forecasted 10 percent growth, which does not include revenues from EDS' largest client, General Motors. McClellan cut his 12-month stock price target to $81 from $90 a share.

"We previously believed there might be some material upside in our EPS estimates," he wrote. "This is no longer the case." McClellan cut his fiscal 2001 earnings estimates to $2.65 from $2.70 per share and said he expects to use the lower end of profit projections for the second half of the year.

McClellan noted that while EDS has booked a number of new contracts in the last year, projects are "seemingly being prolonged." He also lowered his rating on the company's stock to a "buy" from a "strong buy."

Like other old-line computer services firms including rivals IBM Global Services, Computer Sciences and some of the Big Five consulting firms, EDS has been scrambling to add new revenues from e-commerce related services. For the past few years, the Plano, Texas,-based company has been revamping its strategy to focus on more lucrative Internet engagements, such as Web design, development and strategy.

In its latest quarter, EDS rival IBM Global, the consulting unit that contributes a whopping 39 percent of IBM's overall revenues, surprised analysts by reporting flat year-over-year revenue growth, compared with analysts' expectations of 6.5 percent growth for the quarter. Meanwhile, a number of the smaller and more agile Web consulting firms including Scient, Viant and Sapient continue to post strong consecutive quarterly growth despite increasing competition from its behemoth counterparts.

Morgan Stanley analyst David Togut also lowered his revenues growth targets on EDS and downgraded the company's stock to an "outperform" rating from "strong buy." In research notes, Togut said he expects EDS to report non-GM revenues growth for the second-quarter of 1 percent vs. prior forecasts of 7 percent. For the year, Togut said he estimates non-GM revenues growth will come in at 5 percent compared with their prior 11 percent growth forecast.

"Our downgrade reflects our view that EDS' transition to a growth-oriented investment will be deferred by six months," Togut wrote.

Part of the driving force behind slower profit growth is the company's efforts in expanding its sales force, according to the notes. Despite EDS' ability to book more contracts, the company has been "less aggressive cross-selling its services into its existing customer base" which has led to declining revenues, he wrote.

Togut also reduced his price target to $75 per share from $90.

Meanwhile, PaineWebber maintained its "buy" rating on the company's stock and kept its 2000 and 2001 earnings per share estimates at $2.27 and $2.70, respectively. However, PaineWebber lowered revenues estimates for the second quarter from $4.9 billion to $4.7 billion because of recent reorganization in the sales force resulting in slower sales from existing clients.