EDS has slashed its Q3 revenues and earnings estimates. Citing continuing softness in the IT services sector, the company now expects to report total revenue of approximately $5.3-$5.5 billion, down 2-5% from the $5.6 billion reported a year ago. EDS had expected total revenue to increase between 4-6% in the quarter.
As a result of lower revenues, increased new business pursuit costs and other factors, the company expects to report earnings per share of 12-15 cents for the quarter ending September 30, 2002. The company had previously estimated earnings per share of 74 cents a share for the third quarter.
The lower than expected contract revenue growth is due to reduced discretionary spending on existing contracts as well as fewer new sales. These factors, combined with a decision to increase investment in sales pursuits and processes to leverage an increased business pipeline, accounted for approximately 25-28 cents of the lowered earnings per share estimate.
Other factors accounting for the remainder of the lowered earnings estimate were:
Recognition of asset writedowns associated with the US Airways bankruptcy in August;
Financial performance of certain contracts primarily in Europe; and
Asset impairments resulting primarily from EDS’ decision to exit the subscription fulfillment business.
These additional factors are expected to result in further reductions to earnings per share of 14, 14 and 8 cents, respectively. On the positive side, 2 cents of expenses the company anticipated as a result of the WorldCom bankruptcy are now not expected to occur in the third quarter.
I am deeply disappointed with our results for the quarter. The unexpected severity of the global slowdown in corporate spending, especially in the past two months, far exceeded our expectations. This combined with the US Airways bankruptcy and the adverse financial performance of certain European contracts impacted our results, said Dick Brown, EDS Chairman and CEO. We remain confident in EDS’ and the sector’s long-term outlook. We continue to strengthen our organization and sign significant new business.
EDS said it anticipates market softness to continue through the remainder of 2002 and into next year. Fourth quarter 2002 total revenues are expected in the $5.5-$5.7 billion range, down 37 percent from the $5.9 billion reported a year ago. The company indicated it expects earnings per share of 57-59 cents in the fourth quarter versus the First Call consensus of 88 cents a share and full year earnings per share of $2.05-$2.10.
Free cash flow is now expected to be in the $200-$400 million range for the full year, down from previous guidance of $600-$800 million primarily as a result of lower third and fourth quarter earnings expectations and the US Airways pre-petition receivables provision.
EDS expects to announce its full third quarter 2002 results on October 30, 2002 following the close of trading on the New York Stock Exchange.