05 Feb 04. The FT reported that Electronic Data Systems, the world’s second largest IT services company, reported a large fourth quarter loss on Thursday as it continued to struggle to service a multi-billion dollar Navy contract and fight increased competition from IBM. This led to Standard & Poor’s placing the company on credit watch with a possible downgrade of its debt, potentially bringing it within one level of junk status. S&P said it was concerned about adequate levels of free cash flow and it would closely monitor several factors, including the proceeds from the sale of UGS-PLM.
New contract bookings fell by nearly one half in the quarter to $4.3bn from $8.1bn a year ago, adding further pressure on senior management engaged in turning round the company. EDS is trying to recover from several strategic errors that left it saddled with huge contracts and low margins. A new management team was brought in early last year which included the replacement of former chief executive Richard Brown with Michael Jordan, widely respected for his success in turning round large companies. Mr Jordan said EDS was renegotiating the terms of the Navy Marine Corps Internet (NMCI) contract, originally valued at nearly $7bn, and the largest deal of its type. “We have changed our approach to the NMCI program and have developed a more efficient and predictable roll-out schedule,” he said.
The loss of $354m in the quarter included the write down of $559m in deferred revenues on the Navy contract. Excluding this and other one-time charges, EDS income was 12 cents per share, 1 cent above Wall Street estimates. Mr Jordan said this demonstrated EDS was putting its “house in order.” Revenues rose 8 per cent to $5.76bn largely due to favorable currency exchange rates.
The Navy contract was supposed to have been an important win for EDS, instead, high capital investments and delayed payments due to political wrangling created a massive burden for the company. This, and other problem deals, have made it more difficult for EDS to compete against better capitalized competitors, especially IBM. In addition, Hewlett-Packard, the US computer company, has managed to beat EDS to key contracts and expand its IT services group. In the UK, EDS recently lost a plum contract providing IT services to the UK government and on Thursday, it pulled out of the bidding for a new broadband link that will underpin the UK National Health Service’s drive to modernise its IT systems.
Mr Jordan is concentrating efforts to bring in smaller but more profitable contracts. Its former strategy focused on high profile multi-billion dollar contracts with slimmer profit margins. At the close of trading on Thursday EDS was up 1 per cent to $23.33 in New York.
The company also halted plans for an initial public offering of its UGS-PLM software group on February 8th, expected to have been one of the year’s biggest IPOs in the US, and is seeking a private sale in the hope of raising as much as $1.2bn in much-needed capital.
EDS said it had received “solid interest” in a private sale and expected to make a decision within a month. It would not say who had expressed the interest or what amount had been offered. A private sale could provide EDS with a better deal than an IPO because of the heavy expenses involved in an offering. However, a private buyer could seek to take advantage of EDS following its report last week of a large fourth-quarter loss. The subsidiary sells software to help large corporations manage product design processes. Michael Jordansaid the business should receive a valuation of about 1.5 times revenues, which were $866m in 2003.
“We were going to IPO PLM but we’re now looking at a private sale,” Mr Jordan told the Financial Times. “Once that is done we will have completed most of our divestitures.” EDS sold two smaller groups for about $541m in 2003 and late 2002.
EDS started preparing the