UPDATE 2-EDS CFO sees risk will not meet FY 2003 target
(Reuters 02/25 15:31:05)
(Adds byline, analyst comments, closing stock price,
background)
By Jon Herskovitz and Siobhan Kennedy
NEW YORK, Feb 25 (Reuters) - Electronic Data Systems Corp.
<EDS.N> said on Tuesday it risks not meeting its earnings
target in 2003 because of a rash of problem contracts, exposure
to troubled customers and diminished access to debt markets.
Still, the No. 2 computer services company stood by its
forecast for 2003 profit in a range of $1.80 to $2.00 a share.
EDS first announced that guidance earlier this month.
"There are more risks than opportunities," the company's
newly appointed Chief Financial Officer Bob Swan told analysts
at an investors meeting in Dallas, referring to the company's
chances of meeting its full-year outlook.
The news came the same day that French heavy engineering
firm Alstom <ALSO.PA> said it ended talks to contract out its
technology operations to EDS, saying the two companies were
unable to agree on terms.
But EDS sought to temper that news by saying it received
clearance to expand work on its potentially lucrative contract
with the U.S. Navy.
Shares of EDS closed down 67 cents, or more than 4 percent,
at $15.75 on the New York Stock Exchange, having earlier fallen
as low as $15.41.
EDS, second only to International Business Machines Corp.
<IBM.N> in the market for technical services and consulting,
has been hit hard by the slowdown in corporate technology
spending.
NO MORE SAFE HAVEN
While services companies had long been considered safe
havens, EDS stunned Wall Street last year when it warned its
third-quarter profits would be 80 percent below its
expectations. It also warned it would generate far less cash
than originally anticipated.
That tipped off a domino effect of bad news including a
stock hedging strategy that went awry and the opening of a
formal Securities and Exchange Commission probe into the profit
warning.
But Swan said the company would continue to pay dividends
and it hoped to recover some of the losses from problem
contracts -- including those with bankrupt telecommunications
company WorldCom <WCOEQ.PK> and United Airlines <UAL.N> -- in
2003.
Those contracts hurt earnings by 84 cents per share in
total for 2002. Swan said the aim was to recover at least 64
cents of that during the course of the year.
But those gains would be offset by losses from additional
pension and health-care costs, slower technology spending,
increased price competition and other factors, such as currency
fluctuations, Swan said.
In addition, he said, a recent downgrade by debt ratings
agency Moody's Investors Service late last week would likely
cut EDS's access to the short-term commercial paper markets.
Moody's cut its rating on EDS for the second time in three
months on concern that cash flow might fall due to lowered
demand for its services as key customers scale back spending.
"We would contemplate we would be out of the commercial
paper market," he said.
RESTORING CREDIBILITY
For most analysts, the meeting offered the first chance to
meet Swan, the former CFO of defense company TRW, who replaced
Jim Daley as CFO of EDS in January.
"I don't think that there were any big surprises. I think
the big factor was Bob Swan and how he presented,' said Adam
Frisch, an analyst with UBS Warburg.
"Our impressions were positive, initially," he said.
In the past, investors have criticized EDS for being too
bullish on its financial outlook. Just weeks before it issued
its shock profit warning last September, for example,
executives had been on a roadshow bragging about the company's
ability to weather the downturn.
After hearing Swan speak on Tuesday, however, analysts in
general said they thought his arrival could herald a new era of
openness for EDS.
"I was encouraged with seeing him being honest with the
things he knows and the things he doesn't know," said Rod
Bourgeois, an analyst at Sanford C. Bernstein.
Frisch said investors would be waiting to see if Swan could
come to grips with the company's financial guidance, fully
evaluate the risks and potential problems and "come out with
something that is potentially more accurate."
(Additional reporting by Franklin Paul)
((Reporting by Siobhan Kennedy, editing by Mike Miller;
Reuters Messaging siobhan.kennedy.reuters.com@reuters.net; 646
223 6194))
REUTERS
S.RT EDS ALSO-PA IBM WCOEQ-PK UAL DPR.R ENT.R US.R BUS.R FR.R WEU.R GB.R AIR.R TEL.R RESF.R DBT.R USC.R IBM-T IBM-L IBMC-L IBM-R IBMC-T IBM-Z IBM-F
