EDS to invest $1 b this year

Wei Gu

NEW YORK: EDS Corp. posted a higher-than-expected profit thanks to cost cutting, but it forecast 2005 earnings would fall short of analysts' estimates as it hopes to bring back growth by investing $ one billion in key areas this year.

The world's second-largest technology services provider posted a five percent decline in fourth-quarter revenue, and it expects 2005 revenue to fall as much as three percent after losing some large contracts. The news drove the stock down 4.5 percent in after-hours trade.

EDS Chief Executive Michael Jordan told investors that EDS has fixed its problems, extinguishing about six problematic contracts, and 2005 will be a growth year. New investment will go to areas such as human resources business processes.

EDS expects investment will peak in 2005 and start to pay back in 2006, but analysts had doubts.

"There is a question here as to how much of the investments here in '05 are truly one-time investments versus the cost to compete on an ongoing basis," Bernstein analyst Rod Bourgeois said.

EDS, based in Plano, Texas, has grappled with credit rating downgrades, money-losing contracts and pricing pressure. Its new business signings fell as customers worried about its ability to handle multibillion-dollar contracts.

Meanwhile, competitors like IBM and Computer Sciences Corp. have enjoyed new business growth.

"All the major competitors that don't have financial woes are just doing fine and experiencing growth," said Dean Davidson, an analyst with Meta Group.

During the quarter EDS laid off 800 employees by consolidating its global solution centers after only 1,500 people took an early retirement offer. The company had expected 2,300 to take the offer.

Net income was $53 million, or 10 cents a share, in the fourth quarter, compared with a loss of $337 million, or 70 cents a share, a year earlier. The previous year's results were hit by a large write-down for its money-losing U.S. Navy contract.

Earnings excluding items such as restructuring charges were 25 cents a share, higher than analysts' average forecast of 23 cents, according to Reuters Estimates.

Revenue fell 5 percent to $5.25 billion as EDS lost share in a difficult competitive environment. Excluding the impact of currency fluctuations, acquisitions and divestitures, revenue declined by eight percent.

New contract signings fell to $3.8 billion from $ four billion as a couple of deals EDS was counting on were lost. Several deals that had been expected to close in the fourth quarter were moved to the first quarter.

"What we are trying to do is to have more discipline and not to have a bias to sign a contract at the end of the year to report more bookings," Chief Financial Officer Bob Swan told reporters on a conference call. The company in the past had competed aggressively on prices to win new deals, which later turned into a dozen money-losing contracts.

Analyst Davidson agreed that lower booking is not entirely negative. "This is not doomsday notice at all," he said. "EDS could be severing off some of the unprofitable deals to shed unwanted pounds."

Without the $ one billion investment, 2005 earnings per share would show an increase, the company said. EDS now sees a profit of 50 cents to 60 cents a share on revenue of $20 billion to $21 billion in 2005, versus analysts' view of 73 cents a share on revenue of $20.16 billion.

For its first quarter, EDS expects results between break-even and a profit of five cents a share on revenue of $4.8 billion to $ five billion. That compares with analysts' average expectation of 11 cents a share on revenue of $4.98 billion.