Long-Term Outlook Sparks EDS

But "all that said, it does say it is gaining some momentum," he acknowledged.

In fact, UBS analyst Adam Frisch noted on the conference call that free cash flow in 2005 will benefit from a couple of one-time events, including a $200 million real estate sale. That suggests the company is setting the bar for free cash flow growth in 2006 even higher than it might first appear, prompting him to join a chorus of analysts who asked the company why it's so confident.

On the call, EDS executives repeatedly attributed their confidence to improved productivity in the company's massive contract with the U.S. Navy, which they believe will more than offset any loss in business from GM.

That said, CEO Mike Jordan said he's also optimistic about EDS' chances of remaining a significant service provider to GM, which he expects to make final decisions at the end of the year and sign contracts at the beginning of 2006.

"Our progress in bolstering productivity and improving the performance of our large outsourcing contracts, including the U.S. Navy Marine Corps Intranet, drove substantial earnings, margin and free cash flow improvement," Jordan said in a statement.

"We expect this trend to continue, delivering significant EPS and free cash flow improvement in the second half of 2005 and for full-year 2006," he said.

EDS executives said productivity initiatives companywide also will more than offset pricing pressures and restructuring charges. EDS expects its operating margin to expand to 5% in 2006 from 2.7% this year. The company expects total contract value to increase to roughly $21 billion in 2006 from $20 billion in 2005.

For the second quarter, EDS is expecting earnings of 10 cents to 15 cents a share on sales of $4.8 billion to $5 billion. The midpoint of that guidance falls short of analyst expectations calling for earnings of 14 cents a share on $5.1 billion in sales.