IT Slowdown Rocks EDS

The company offers modest 2003 targets amid a pullback in business with GM.
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Profits continue to shrink -- and the outlook continues to darken -- at troubled

EDS

(EDS)

.

The Plano, Texas, computer services giant reported a dive in both fourth-quarter and full-year 2002 earnings on Thursday. The company also warned that future profits, hurt by a sharp drop-off in business from

General Motors

(GM) - Get Report

, will get worse instead of better in 2003.

EDS is now projecting 2003 earnings of $1.80 to $2 a share, 4 cents shy of the consensus estimate. The company described its guidance as conservative, even while noting some downside risk.

"While the potential for increasing geopolitical risk and the related subsequent impact on certain industry segments has not been factored into the ... guidance, the company has taken a cautious view of the marketplace," EDS stated Thursday.

After falling 53 cents during regular trading Thursday, EDS slipped an added 55 cents in postclose action, to $15.16.

For the fourth quarter, EDS reported earnings of 75 cents a share that were down 9% from a year earlier. Excluding special items, fourth-quarter earnings came in at 51 cents a share, hitting the high end of analysts' estimates but falling 41% short of last year's results. Full-year earnings of $2.06 a share also topped consensus expectations but represented a 29% dive from 2001.

EDS, which saw revenue and margins shrink across the board, continues to blame a falloff in corporate spending for much of its problems.

"Market conditions in the IT services sector remained challenging in the fourth quarter as companies continued to limit discretionary spending," CEO Dick Brown said in a prepared statement. "However, we continued to win business, improve our free cash flow and build on our record of service excellence."

EDS attributed its improvement in fourth-quarter cash flow, which nearly doubled from a year ago, to the company's more conservative capital management program. In the past, EDS has invested huge sums of capital in "megadeal" projects that sometimes don't turn a profit for years. The company has since revealed plans to become more selective about the projects it chooses.

For the fourth quarter, EDS reported a 20% slide in new contract signings from a year earlier. It also warned that GM, one of its biggest clients, would be spending considerably less with EDS next year. Specifically, EDS estimated a "mid-teens to low 20s percentage decline" in 2003 revenue from GM.

Overall, the company is forecasting organic revenue growth in the low to mid-single digits for next year.