EDS Earnings an Epitaph?

Every report out on Electronic Data Systems' (NYSE: EDS  ) first-quarter earnings talked about its troubles with several of its largest contracts. Its financial difficulties are making it hard for the second-largest information technology (IT) outsourcing firm to sign large contracts.

Organizations are leery of obligating themselves to long-term, high-dollar contracts with a firm that might soon see its debt downgraded to junk status. When potential customers can go with the far more financially stable IBM (NYSE: IBM  ) , Computer Sciences (NYSE: CSC  ) , or Hewlett-Packard (NYSE: HPQ  ) for roughly the same price, why go with EDS? Of course, EDS isn't having too much trouble getting smaller contracts with less commitment, given its reputation for bidding them at a loss.

IT outsourcing companies generally have the advantage of low overhead and flexibility, but as EDS has shown, they can get into trouble with large contracts and debt. And the company is so large that small contracts don't cut it anymore. It has to have the big ones to grow. However, there was nothing in yesterday's earnings release to indicate that the company will get back to growing any time soon.

New contracts did increase 33% to $4 billion, after falling 58% to $3 billion in last year's quarter, but there's a lot of ground to make up. And the firm did narrow net earnings to a loss of $12 million, or $0.02 a share, from a loss of $1.43 billion, or $3 per share, a year earlier. Excluding onetime charges, EDS lost $3 million, or a penny a share, compared with a profit of $33 million, or $0.07 a share, a year earlier. Revenue rose slightly to $5.20 billion from $5.02 billion.

But, it's not expecting much, if any, improvement in the second quarter, which it estimates will come in at somewhere between a loss of $0.06 and break-even, excluding onetime charges, with revenue to remain about the same.

Numbers aside, for EDS to get back to growing, it's going to depend on growth in international business and a very strong economy improving its financials enough to dispel concerns about its ability to generate profits and pay its debts. Even then, it's going to take some time for the company to rebuild trust and start signing big deals again. That could take well into 2005.

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Fool contributor Mark Mahorney doesn't own shares of any companies mentioned.


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