EDS chalks up record loss

By PETER GRIFFIN

More conservative accounting methods left a massive hole in EDS' books last year, pushing it to a record $78 million loss and indicating that cost-cutting may be needed.

EDS generated revenue of $307 million for 2002, down from more than $349 million in 2001. It will not explain the dip, but even on reduced revenue, at an operating level, it appeared to be comfortably covering its operating expenses of $290 million.

That was before an "unbilled revenue adjustment" subtracted $56.5 million from the equation, pushing EDS to the biggest single loss reported by an IT company in New Zealand.

The stricter accounting method, increasingly being adopted in the wake of the US accounting scandals, allows revenue from projects under way to be recognised according to their degree of completion.

In the case of EDS, revenue from IT services or licences is counted only as it is delivered to customers. No such adjustment was made in EDS' accounts for 2001. It appears that EDS has re-evaluated the revenue and costs across its contracts for 2002 on that basis and come up with a less favourable bottom-line figure.

The accounting method also snagged EDS Australia, whose profit fell from A$44.5 million in 2001 to A$3 million last year. It was hit by a A$70.6 million adjustment.

Telcos with long term contracts increasingly use percentage-of-completion accounting.

Equipment maker Lucent has paid particular attention to it.

It is particularly relevant to EDS, which tends to sign contracts spanning a number of years.

EDS' revenue may be more conservatively reported in coming financial periods, which will make it increasingly difficult for the company to turn a profit with its existing cost structure. That is, unless it succeeds in winning new work, significant portions of which can be accounted for in the short term.

While maintaining public silence on the loss, managing director Rick Ellis is understood to have emailed all 2300 staff to soothe worries about the loss, which comes just a couple of weeks after the official launch of Best Shores, an EDS programme which received $1.5 million in Government money and promises to generate 360 new jobs.

National's associate commerce spokesman, John Key, yesterday slammed the grant, saying it was "madness to believe bureaucrats in grey suits in Wellington can pick winners".

"[Jim] Anderton's job machine is proving to have a pretty chequered history; there are a number of companies where either second tranche funding hasn't been taken up or the company has completely failed."

The Government's other key funding initiative in the IT industry wound up when Ericsson Synergy failed to meet pre-determined targets for job creation. The company had won $1.6 million but received only $355,000.

Ellis said EDS' job creation plan would stay in place.

"The jobs we have committed to creating remain our objective over the next three years, as does creating $200 million of foreign exchange earnings for New Zealand over the next eight years."

The scheme had already created 37 jobs.

Spokeswoman Joanna Clarke said it was not yet clear how a plan to cut 2 per cent of EDS' workforce globally would affect staff locally. But most of the cuts were planned for the US and Europe.

Industry sources suggest EDS' staff levels may be too high and have questioned the efficiency of some of the company's contracts, such as the multi-year outsourcing deal with Telecom, where third party Infinity assists with desktop support.

Ellis has introduced a stronger sales focus in Auckland and shown a willingness to chase smaller contracts. He is seen as the man to turn the company around.

EDS will be a key contender when Fonterra chooses its IT partner this year, and that contract may finally enable it to stem the flow of red ink. EDS lost about $2 million in 2001, $4.1 million in 2000 and $15,000 in 1999.