TECHNOLOGY EDS struggles to regain reputation

Some investors are concerned about how the company structures contracts.
PLANO, Texas (AP) -- Electronic Data Systems Corp. executives love to talk about winning big contracts, and the biggest by far is a $6.9 billion deal to build a new communications network for the Navy and Marines.
But technical and other delays have pushed the project 18 months behind schedule and drained cash that EDS needs to compete for new contracts.
EDS and Navy officials say engineers have struggled, for one, to bring old hardware and software used in the communications system up to new security standards.
Also, Congress demanded additional testing requirements because of the project's size. It is the federal government's largest information-technology outsourcing deal, and one which could be a model for other agencies.
Resilience challenged
The stumbles on the Navy deal have left EDS struggling to recover its reputation as a technology company that thrived in hard times.
All last year, chairman and chief executive Richard H. Brown liked to boast that EDS was well-insulated from the sluggish economy because corporate customers saved money by turning over their technology needs to EDS specialists. The company reported a string of quarters with double-digit earnings growth and rising profit margins.
But last month, company officials stunned investors by announcing that EDS would miss third-quarter profit expectations by about 80 percent. The final numbers came out last week. The company said it earned $86 million, compared with $212 million in the same quarter last year.
EDS also announced last week it would eliminate as much as 4 percent of its work force -- about 5,500 jobs -- and shift other work overseas.
Earlier this year, EDS said the SEC had launched an inquiry into the stock deals and events leading up to the earnings warning. The company says it did nothing wrong, but its stock price has tumbled from $72 a share last November to under $15.
EDS says the Navy contract and a deal with the British government have cut cash flow by $1.8 billion in the past 18 months. A two-year extension of the Navy project is pending in Congress. Navy spokeswoman Lt. Elissa Smith said the extension would not affect the terms or payments of the original deal, signed in May 2000.
Varied outlooks
EDS officials say everything will work out fine.
Douglas L. Frederick, an executive vice president who oversees EDS's biggest business, technology outsourcing, said EDS will have enough cash to compete for new, capital-intensive contracts -- though analysts aren't sure.
Rod Bourgeois, an analyst with Sanford Bernstein & amp; Co., says there is no quick fix for EDS's predicament.
"They're sort of in the penalty box," Bourgeois said. He said EDS shares will remain depressed until the company shows it can reduce overhead and squeeze more cash from its work for corporate and government customers.
Company executives also face skepticism about their explanation for the third-quarter shortfall, which they attributed largely to a sudden drop in discretionary spending on technology.
Analysts worry that EDS's problems will hurt the company's ability to win new contracts against competitors such as IBM Corp.
The first indication of that may have surfaced recently, when a top executive at Procter & amp; Gamble Co. said talks with EDS over a rumored $8 billion deal were "on hold." Ironically, investors might cheer if the P & amp;G deal falls apart. That's because of concern over the way EDS structures deals.
Costs of a project
When EDS takes over a client's computer systems, it typically buys the company's equipment and often takes on some of its employees. Those upfront costs -- analysts said P & amp;G wanted EDS to invest $800 million -- drain cash before EDS earns a nickel.
On the Navy network project, for example, EDS burned through $640 million in the first six months of this year. The EDS official in charge of the contract says the company underestimated the number of old applications that needed to be updated for security reasons. EDS expects to begin generating cash from the deal sometime next year.
EDS also has been hit by the bankruptcy filings of two large customers, WorldCom Inc. and US Airways, which together pay EDS $800 million a year, and questions about its practice of booking some revenues before it bills clients, which is common in the outsourcing industry.