Investors worry as EDS wobbles

By PETER GRIFFIN

The share price of IT services giant EDS has slumped 62 per cent in the past two weeks, wiping more than US$11 billion ($23.1 billion) off its market value.

Investors are worried that the company's core business is shrinking.

The worries extend to New Zealand, where EDS's local unit is chasing increasingly small contracts as the big deals dry up.

The share slide began when EDS revealed its revenue for the third quarter would be as much as US$600 million below its previous forecast.

It blamed the slump on a major slowdown in corporate IT spending.

The outlook for EDS worsened when the company was forced to pay US$225 million in cash last month to meet commitments to buy back share options from investors.

This created worries that the move could leave the company short of money to compete for big out-sourcing deals and wipe out positive cashflows.

The United States Securities and Exchange Commission this week started an inquiry into the company's earnings forecasts.

EDS's crisis has sparked a rethink in a business plan under which it has chased long-term multibillion-dollar deals. Analysts are now questioning whether those deals are profitable overall.

EDS New Zealand's newly appointed chief executive, Rick Ellis, has indicated that the Wellington-oriented company will make an assault on the Auckland market and lower its sights to consider smaller contracts.

EDS made a loss of $2 million on sharply reduced revenue of $349 million for the year to December 31.

An operating profit of $30 million was swallowed by $15.2 million in goodwill and royalty payments and $14.3 million in interest payments to its US parent.

IDC analyst Mark Cribbens said EDS was sheltered slightly from tumultuous market conditions rocking its parent company in the US by a major contract with Telecom.

EDS signed a 10-year $1.5 billion contract in 1999 to supply all Telecom's IT services.

It was extended to 2012 in August at a cost of around $290 million to Telecom.

Other sizeable deals have been won, mainly in government and banking, but new deals of that magnitude have dried up.

Cribbens said the lack of large outsourcing contracts and increasing competition in IT services made it hard to see where EDS's growth would come from.

He said IT outsourcers were going after the smaller deals.

"I'm surprised at the size of the contracts they're bidding for. We're talking $50,000 contracts.



IDC estimates the IT services market will be worth about $2.1 billion this year. Of that, IT outsourcing was valued at just under $600 million, expected to grow to $637 million next year.

Frank Stephenson, the managing director of IT outsourcer Datacom, said his company was yet to feel the heat from EDS in Auckland, but thought his competitor would have to significantly change its ways as it went "down market".

"EDS likes to do 10-year deals which I think are difficult to evaluate if you're a supplier. We do open contracts which let the customer walk out at any time if they wish."