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EDS profit falls on weak IT spending

Computer services giant Electronic Data Systems reports lower fourth-quarter revenue and earnings and offers a cautious outlook for the coming year.

Computer services giant Electronic Data Systems on Thursday reported lower fourth-quarter revenue and earnings and offered a cautious outlook for the coming year.

The Plano, Texas-based company reported a fourth-quarter net income of $360 million, or 75 cents per share, compared with a net income of $405 million, or 82 cents per share, during the same period of 2001. The results include a loss of six cents per share stemming from EDS' investment related to aircraft leases with United Airlines, as well as a gain of six cents from a reversal of provisions related to the company's business with WorldCom.

Fourth quarter total revenue decreased 5 percent to $5.507 billion versus $5.8 billion in the year-ago period. The revenue figure beat analysts' average expectation of $5.48 billion, according to a survey by First Call.

"Market conditions in the (information technology) services sector remained challenging in the fourth quarter as companies continued to limit discretionary spending," said Richard Brown, chief executive of EDS. "However, we continued to win business, improve our free cash flow, and build on our record of service excellence."

Citing "continued weakness in technology spending and the general economy," the company projected its rate of revenue growth--excluding acquisitions and divestitures and its General Motors business--to be in the low to midsingle digits in 2003. EDS said it expects its General Motors business to decline this year at a percentage rate in the midteens to low-twenties. EDS' General Motors business took in $662 million in the fourth quarter, about 12 percent of the company's overall revenue.

EDS also said its revenue for the first quarter, excluding acquisitions and divestitures and its General Motors business, would fall at a percentage rate in the low to midsingle digits.

EDS forecast earnings per share, excluding the impact of discontinued operations, of $1.80 to $2 for the full year and 30 cents to 35 cents for the first quarter. Analysts polled by First Call on average had been expecting earnings per share of $2.04 for the full year and 43 cents for the first quarter.

The company's results suggest it is losing ground to rival IBM. Fourth-quarter revenue at IBM's global services unit rose 17 percent year over year to $10.6 billion, thanks largely to Big Blue's acquisition of consulting and technology services company PwC Consulting last year. IBM's global services unit signed more than $18 billion in new business contracts in the fourth quarter. EDS said it signed $8.1 billion in contracts in the fourth quarter, down from $10.1 billion a year ago.

A recent report from research firm Gartner said that IBM is leading the fight to snag "megadeals"--IT services contracts worth $1 billion or more. IBM won seven of the 14 megadeals awarded in 2002, and shared an eighth deal with Keane, Gartner said. Computer Sciences landed one megadeal, and EDS won two deals.

Earlier Thursday, the battle between IBM and EDS took the form of dueling press releases about new contracts with Ford Motor. IBM said it and partner Dassault Systemes won a software and services contract for vehicle development at Ford--a win building on IBM's existing product development technology used at Ford divisions Land Rover and Volvo.

EDS in a separate release said it landed an expanded contract to provide Ford with collaboration and product development software. EDS said its "product lifecycle management" offerings will serve as the foundation for the integration of Ford's virtual product creation environment.

Ford spokesman Paul Wood said news reports about the IBM/Dassault contract had inaccurate information, including an estimate that the deal was worth "hundreds of millions." "The 's' on 'hundreds' is a stretch," Wood said. "The number is a whole lot closer to $50 (million) than it is to $500 (million)."

Wood said the new contracts with both IBM/Dassault and EDS concern a pilot project for Ford's next-generation product-development system. EDS' technology presently is used for the bulk of product-development work at Ford, Wood said.

Although IBM and Dassault trumpeted their win at Ford, EDS remains central to the automaker, said David Garrity, director of research for American Technology Research. "While today's IBM press release may have caught headlines due to good (public relations), EDS remains (Ford)'s No. 1 (product lifecycle management) software vendor and is setting the standard on which (Ford) is basing its current and future vehicle development efforts," Garrity said in a report.

For the full year, EDS posted earnings of $2.28 per share versus $2.81 per share a year ago. Net income was $1.12 billion compared with $1.36 billion in 2001. Revenue in 2002 increased 2 percent to $21.5 billion versus $21.1 billion a year ago, excluding the results of discontinued operations in both periods. The total value for contracts signed in 2002 was $24.4 billion compared with $31.4 billion a year ago.

It's been a tough several months for EDS, which provides services such as software development and support, technology consulting and information technology outsourcing. EDS' stock tanked in the fall after the company forecast third-quarter earnings well below expectations. In October, EDS said it was the subject of a Securities and Exchange Commission probe into its stock-hedging efforts and the events leading up to the company's reduced earnings forecast. On Jan. 17, EDS said the SEC's informal inquiry had become a formal investigation.