Troubled EDS struggles to find new customers

24 July 2003 Electronic Data Systems (EDS), the ailing IT services provider, suffered a sharp fall in profits in the second quarter as it struggled to attract new customers.

New contract signings fell by 45% during the quarter, from $6.2 billion to $3.4 billion, reflecting the “tepid” IT services market, said CEO Michael Jordan. “Market conditions continue to be challenging… and sales cycles are still pretty much stretched out,” he said.

Analysts say EDS is suffering from fierce competition from IBM and Hewlett-Packard, doubts over its accounting standards and fears among potential customers that apparent cash-flow problems could hit service levels.

But EDS executives said that liquidity fears have been overblown. A new restructuring and cost-cutting programme, which includes developing offshore application development and call centre facilities in far-flung places such as Egypt, India and New Zealand, would make the company more competitive going forward, they said.

And senior executives pointed to contracts with blue-chip clients, including Philip Morris and Barclays Bank, as proof of the Texan company’s ability to win big clients.

“The perceived, and I stress perceived, liquidity problem has impacted our competitiveness in the market. We believe the actions we took during the end of the quarter helped shore up our balance sheet and will mitigate these concerns going forward,” said the company’s CFO, Bob Swan.

Net income fell 56% in the quarter to $138 million, as the loss of 2,700 jobs contributed to a charge of $43 million.

Revenue grew 2% to $5.5 billion, helped by the slide in the US dollar. On a constant-dollar basis, revenue fell 3%, the company said. Sales figures included a 13% decline in sales at the company’s Solutions Consulting group and a 27% fall at its AT Kearney management consulting subsidiary. Growth in business process outsourcing revenue was “modest”, the company said.

EDS also warned that a charge of between $1.9 billion and $2.2 billion will be taken in the third quarter when it restates earnings for the first half of 2003 to conform with revenue-recognition rules.

EDS has suffered a series of body blows in the last 12 months. It shocked investors in September 2002 when it missed its earnings estimate by a wide margin after some troubled customers, including WorldCom (now MCI) and US Airways, cut back on their contracts.

Later, it had to draw on its cash reserves to settle obligations under a stock hedging strategy that went awry, setting off an investigation by the US stock-market regulator, the Securities and Exchange Commission.

The company then replaced its CEO and CFO with outsiders Jordan and Swann.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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