Loss of contract may hit EDS earnings

The loss of a major information technology outsourcing contract could shrink Electronic Data Systems' earnings next year by 2 cents to 3 cents a share.

Securities analysts reduced next year's earnings and revenue estimates for EDS following news that the Plano, Texas-based company lost a bid to renew its 10-year contract with the British government, which expires in June.

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What's new:
Cap Gemini Ernst & Young beat out EDS for a contract to manage the IT infrastructure of the United Kingdom's tax authority, Inland Revenue. The contract is valued at $5.2 billion over 10 years.

Bottom line:
The loss represents another setback for EDS, which some critics say has poor management, a lack of sales focus and a high cost structure.

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Cap Gemini Ernst & Young beat out EDS for the new contract, which involves managing the IT infrastructure of the United Kingdom's tax authority, Inland Revenue. The contract is valued at $5.2 billion over 10 years.

EDS will derive about 2 percent of its revenue, more than $400 million, from the soon-to-expire Inland Revenue contract this year, securities analysts said. Without the contract, EDS will fall 2 cents to 3 cents a share shy of previous earnings estimates for 2004 and will miss earnings estimates for 2005 by 4 cents to 7 cents, the analysts said.

A poll by First Call of 25 securities analysts pegged EDS earnings in 2004 at $1.04 a share.

In a November filing with the U.S. Securities and Exchange Commission, the company warned that the termination of the Inland Revenue deal "would materially adversely affect our revenue and earnings." The company said it could offset the impact by reducing costs associated with the contract related to equipment and software. An EDS representative declined to comment on the financial impact of the terminated deal.

The loss of the Inland Revenue deal comes at a difficult time for the company. Revenue has sagged this year as the company laid off staff, replaced its chief executive officer and dealt with an ongoing SEC probe.

Analysts offered a bleak scenario for EDS. "Unless bookings materially improve during the next few quarters, we believe the company will have insufficient new business to offset normal contract expirations and contracts which are not renewed with EDS, leading to sustained revenue decline in future years," Merrill Lynch said in a note it issued Thursday.

One analyst blamed the company's troubles on a poor management and sales focus as well as on an out-of-whack cost structure for its declining sales. "They have had difficulties for months from a competitive standpoint," said Cynthia Houlton, an analyst at RBC Capital Markets.

IBM, Computer Sciences and Cap Gemini are among EDS' primary competitors in the IT outsourcing services market.

EDS shares on Friday traded 2 cents above Thursday's close, at $22.83 a share.