EDS says WorldCom's woes could impact 2002 target

CIOL Bureau
Updated On
New Update

Siobhan Kennedy


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.