NEW YORK: Electronic Data Systems Corp. said on Monday its 2002 operating
earnings could be hurt if WorldCom fails to pay its bills, sending shares of the
No. 2 computer services company tumbling to lows not seen since October 1998.
EDS shares closed down more than 18 per cent, or $6.70, at $30.45 on the New
York Stock Exchange, way off their year high of $72.
Earlier, Plano, Texas-based EDS, which competes in the market for computer
services against International Business Machines Corp. -- said it expects
WorldCom Group, one of its biggest customers, to account for $160 million to
$175 million of its revenue in 2002. That equates to about between 3 cents and 4
cents a share in the third and fourth quarters this year, EDS said in a
EDS said it believed "WorldCom would continue to require substantial
information technology services" but added that if WorldCom did not need
the services and subsequently did not pay EDS "these developments could be
material to results of operations in 2002."
The company also said it might have to write off about $90 million worth of
assets -- computer hardware and software dedicated to WorldCom -- if the
WorldCom contract falls through. But it added that based on prior experience, it
believed it would be able to redeploy the assets and adjust its costs,
"substantially mitigating the financial impact of any change" in
WorldCom's service requirements.
Analysts said investors were over-reacting to the news, however, and that
revenues and earnings from WorldCom only represented a very small proportion of
EDS' total for the full year 2002. "They give a worse case scenario that
they could be down 4 cents a quarter, which isn't a whole lot," Gary Helmig,
an analyst with SoundView Technology Group told Reuters.
Helmig pointed to average analyst forecasts, which call for EDS to post
earnings of 84 cents a share in the third quarter and 93 cents in the fourth
quarter, according to research firm Thomson First Call. The day's news hit
shares of rivals. IBM lost $4.40 or more than 6 per cent to close at $67.60,
while Computer Sciences Corp. fell more than 12 per cent or $6.12 to close at
Separately, EDS also said it called off talks with consumer giant Procter
& Gamble Co. about a services contract said to be worth $1 billion.
WorldCom, the No. 2 US long-distance telephone company, last week disclosed
that it hid more than $3.8 billion in costs and will have to restate results for
the last five quarter, erasing all profits from the beginning of 2001. WorldCom
said on Monday it could be delisted from Nasdaq as early as this Friday and that
bankers declared the company to be in default of loan agreements.
Under a complicated $6.4 billion, 11-year contract, which the two companies
struck in 1999, EDS provides IT services to WorldCom, such as running its
worldwide computer network and providing it with billing services.
In return, EDS said it would buy up to $6 billion worth of telecommunications
services from WorldCom over the same contract period. Under that deal, EDS
agreed to pay WorldCom $600 million a year for using its services, both
internally and as the network to help run the IT operations of some of its other
customers, EDS spokesperson Jeff Baum told Reuters.
Given WorldCom's troubles, and problems in the telecommunications sector at
large, however, EDS said it now believes there is a risk it may not be able to
continue making the payments to WorldCom.
"EDS' ability to meet these minimums is adversely impacted by the recent
events surrounding WorldCom," the company said in the statement. However,
EDS said it believed it would be "entitled to relief from some or all of
these obligations based on a variety of circumstances relating to WorldCom's
condition and that of the telecommunications industry generally."
As for 2002, it said it had already accounted for the $600 million it owes
WorldCom, "assuming it (EDS) obtains no such relief."
(C) Reuters Limited.