Navy bid puts EDS under water

Electronic Data Systems Corp, the world's second-largest seller of computer services, posted a first-quarter net loss of $US12 million ($NZ19 million) on costs from a contract to build a data network for the US Navy.

That compared with a loss of $1.43 billion, a year earlier, when the company recorded a $1.4 billion expense to reflect changes in how it books revenue. Sales rose to US$5.2 billion from US$5.02 billion, Electronic Data said in a statement.

Electronic Data lost US$145 million on its US$6.9 billion Navy contract in the quarter, adding to more than US$1 billion in losses since 2000. The task of merging about 1000 computer systems has been beset by delays and software glitches, and the company will lose money on the contract for the rest of the year, CEO Michael Jordan said.

"The Navy contract has been the albatross," said Jimmy Chang, technology analyst at Rockefeller & Co., which manages $4 billion.

Shares of Electronic Data fell 66USc to US$18.74 in extended trading. They have dropped 22 per cent this year.

Electronic Data has spent US$2.4 billion on the Navy contract to build a network linking 350,000 desktop computers used by sailors and Marines at more than 300 bases.

Losses from the contract will be up to 38USc a share in the first half of 2004 and 21 cents in the second.

"We still see problems coming out of woodwork" because of the contract, Jordan said.

The company said it expects results this quarter of break-even to a loss of 6USc a share on sales of US$5.1 billion to US$5.2 billion. Analysts expected sales of US$5.16 billion.

Electronic Data cut its forecast for free cash flow for 2004 to US$300 million to US$500 million. It had expected US$500 million to US$600 million. The company had negative free cash flow of $166 million in the quarter, compared with positive cash flow of US$122 million a year earlier.

Free cash flow, or cash from operations minus property and equipment purchases, is important to computer services companies, which buy hardware and make investments in the early stages of a contract.

Excluding a gain of 8USc a share from the sale of its automotive group, and costs of 10USc a share associated with firing 5200 workers, Electronic Data had a loss of 1USc a share, in line with the average of 19 analysts' estimates.

Electronic Data said it signed US$4 billion of contracts in the quarter, up from US$3 billion a year earlier.

"For the first time we are seeing some wind at our back," Jordan said.

IBM and other rivals had been taking advantage of the company's problems to steal clients.

Clients worried by Electronic Data's declining finances are ordering services from rivals with better credit ratings including IBM, Accenture and Computer Sciences.

This month Electronic Data lost a contract held since 1977 to process claims for North Carolina's Medicaid system. Affiliated Computer Services won the contract.

Moody's Investors Service and Standard & Poor's have said they may cut the company's credit ratings to below investment grade as contract signings slow and sales to Electronic Data's largest customer and former parent General Motors decline.

Sales to General Motors fell to US$503 million in the quarter from US$566 million a year earlier.

The companies rate Electronic Data one step above junk.