Updated from April 26

EDS ( EDS) has run into more glitches.

To be fair, the computer services giant did manage to meet profit expectations -- and even top revenue estimates -- for the latest quarter. It also grew contract bookings by one-third from last year's dismal levels.

But it generated negative cash and trimmed its cash flow guidance for the year. It also issued new second-quarter and 2004 profit estimates that fall well below consensus estimates.

Still, the company adopted a decidedly upbeat tone when announcing its latest results.

"We are pleased with the progress we made in the quarter," CEO Mike Jordan stated. "We met our financial commitments, delivered excellent programs for our clients, finalized our leadership team and began to generate sales momentum. ... 2004 will be a year of execution where we continue to build EDS."

Apparently, the market wanted far more. Shares of EDS slid 3.8% to $18.50 in early Tuesday trading.

Aiming Low

For starters, EDS met profit expectations by actually losing $3 million -- or a penny a share -- in the first quarter. The company earned 7 cents a share when it was booking less revenue a year ago.

First-quarter revenue climbed 4% to hit $5.43 billion and beat the consensus estimate by $340 million. Contract bookings, lifted by small and renewing accounts, jumped 33% to $4 billion. But the company enjoyed weak year-ago comparisons.

Bob Djurdjevic, an industry analyst at Annex Research in Phoenix, pointed out that the year-ago first-quarter bookings were themselves 58% below 2002 levels. Since then, he said, EDS has replaced only $1 billion of that lost business at a time when its biggest competitors are reporting substantial growth. Moreover, he added, EDS is actually losing business in a North American market that's clearly on the rebound.

"The biggest challenge for EDS continues to be growing sales," said Djurdjevic, who has no position in the stock. "They have their work cut out for themselves. The latest results just confirm that."

Crash Landing

Wall Street was already bracing for another EDS crash.

Analysts warned that contract bookings could fall and forward guidance could suffer as a result. They feared that another major contract -- besides a troubled deal with the Navy -- could trigger a big write-off. They also fretted over a possible credit downgrade.

Granted, some of their predictions have yet to materialize. For example, EDS isn't writing off the second troubled contract right now. Nor have the credit ratings issued automatic downgrades.

But the company, hit by declining cash flow and earnings, remains vulnerable. It now expects to generate full-year cash flow of just $300 million to $500 million instead of the $500 million to $600 million it originally promised. And even though it expects to "achieve zero net debt" by year-end, buying back $1.6 worth of convertible bonds in the process, the ratings agencies could still pounce.

"A downgrade to junk credit status could occur in the next week as credit analysts get a chance to evaluate progress in the first quarter," Schwab Soundview analyst Cindy Shaw predicted just ahead of Monday's earnings release. "A junk credit rating would reduce EDS's financial flexibility, increase its borrowing costs and -- more importantly -- further pressure bookings."

But EDS insists that it's making progress. It says that it is strengthening its balance sheet, improving its cost structure and bolstering its win rate. It pointed to three first-quarter achievements as evidence of its success.

The company said it stabilized its troubled Navy contract. It moved closer to a settlement on its other troubled contract. And it revised its sales strategy to better attract and retain customers.

Still, Djordevic remains skeptical. He believes the company will have to be sold. But he says the company's price tag must drop -- dramatically -- before that can happen.

The buyer "will have to dump a lot of junk ... with the Navy deal and God only knows what other skeletons they have," he said. "The stock needs to be around $12 a share before someone really gets interested."

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