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Falling profits, 5,200 layoffs at EDS

Making good on a promise of change, new EDS head Dick Brown cuts 5,200 jobs and plans to reduce $1 billion in costs, as the company reports profit fell 14 percent.

Making good on a promise of change, new EDS head Dick Brown today said the firm is slashing 5,200 jobs, reducing $1 billion in costs, and starting a new division targeting e-business in hopes of fueling a renaissance at the sluggish services and consulting giant.

Details of cutbacks came in the wake of the Plano, Texas-based company's report today that profit for the first quarter dipped 14 percent to $181.8 million, or 36 cents a share. That's down from $211.3 million, or 43 cents, a year earlier.

Sales climbed 9.7 percent to $4.33 billion from $3.94 billion in the year-ago quarter. Earnings per share matched Wall Street analysts expectations, according to First Call.

But company executives said they were not pleased with the results as they outlined the firm's restructuring plans.

"This is not the kind of quarter we want to repeat," chairman and chief executive Brown told industry analysts during a face-to-face meeting in New York after the stock market closed today. He added: "We won't be satisfied until we retain our leadership," which EDS lost to IBM Global Services.

EDS reported growth of just 3 percent in the United States for the quarter, which new chief financial officer James Daley called a "big disappointment." The company reported 29 percent growth in Europe, 7 percent growth in Asia Pacific, and 8 percent growth in the Americas, excluding the States.

"Clearly, we've taken our eye off the ball," Daley said. "There's enormous growth potential in the U.S. market and we're not tapping it effectively."

EDS took a $379.8 million pretax charge for the first quarter to cover the cost of firing about 4 percent of the workforce, asset write-downs, and the consolidation of operations. The firm also reported a gain of $63.5 million related to the sale of limited partnership investments. The charges and gain resulted in a net loss of $20.6 million, or 4 cents a share.

About 60 percent of the jobs eliminated will be in the United States, and the rest in Europe. These reductions are underway and are expected to be completed by June, Brown said. The company has moved to lay off the bottom 20 percent of its sales force over the past 60 days, he said.

Separately, some 7 top executives have left the company in the past month, Bloomberg reported.

Brown, the former Cable & Wireless head who has been on the job at EDS for four months, vowed to cut another $1 billion over an unspecified time period through "productivity gains and cost cutting." Brown also set a goal to improve operating profit margins as a percentage of revenue to better than 10 percent by the end of next year -- calling for more accountability within the company, better measurement of employee and contract performance, sharpened marketing and sales skills, and a higher corporate profile.

He said EDS is also "putting a spotlight" on every contract the firm signs to weed out "bad apples" that have hurt the firm. A contract dispute with Xerox contributed to a $200 million accounting write-down the company took last quarter after Xerox stopped payments for services. EDS filed a suit against Xerox, which is now pending.

Overall, Brown said EDS has had problems with fewer than 20 contracts overall within the past several years.

EDS chief operating officer Jeff Heller said contract disputes occurred mostly in 1995 and 1996 when the client's expectations weren't clarified at the time of the signing or were misinterpreted by the two parties during the contract's execution. In other cases, EDS got in over its head, he said.

"We got into situations where we thought we knew what we were getting into and we got in there and we didn't perform well," Heller said.

Meanwhile, business from former parent company General Motors is expected to continue to decline 3 to 7 percent this year. Business from GM has dropped over the past five years from 39 percent of overall revenues to about a quarter of revenues this year and is expected to fall to 10 percent within five years, the company said.

Nonetheless, Brown said EDS is working to increase revenues on its GM contracts and is winning bids from the automaker through aggressive bidding.

In other news, EDS announced E-Business Solutions, a new EDS division focused on providing customers Web-based services, including installing supply chain management systems, building Web commerce sites, and integrating online payment and billing systems.

E-Business Solutions, which will report directly to Brown, is starting up with $2 billion in revenues and will be staffed by 20,000 EDS employees. A leadership team is expected to be announced next week, Brown said.

Bloomberg contributed to this report.