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Updated from 4:41 p.m. EST

Affiliated Computer Services


posted second-quarter earnings in line with Wall Street expectations Thursday on weaker-than-expected sales.

In a move unlikely to quell concerns about slowing growth, the company lowered guidance for fiscal 2005 and said third-quarter results also could fall short of expectations because customers are taking longer to sign deals and projects are taking longer to ramp up.

Tempering that news, the Dallas-based business process and information technology outsourcing firm reported what one executive called a "blowout quarter in terms of bookings" and strong cash flow during the quarter that ended Dec. 31.

Affiliated Computer Services reported net income of $96.1 million, or 73 cents a share, in the second quarter, which ended Dec. 31. That was down from net income of $253 million, or $1.80 a share, in the same period a year ago. Earnings a year ago totaled 64 cents a share when excluding $1.25 a share from ACS' federal business as well as a charge of 9 cents a share related to a settlement with the Georgia Department of Community Health.

Analysts were expecting the company to bring in earnings per share of 73 cents, according to Thomson First Call.

ACS' revenue rose about 3% to $1.03 billion from $997.9 million a year earlier. That was the low end of the company's guidance, and it fell short of the consensus estimate calling for $1.04 billion in sales.

Excluding the revenue associated with ACS' divestiture of its federal business, revenue grew 11% from a year earlier. Internal revenue growth for the quarter, excluding growth from acquisitions, fell to 4% from 11% in the first quarter. On a postclose conference call, company executives said the quarter should mark the bottom for internal revenue growth. They are expecting overall internal growth to range from 7% to 10% in fiscal 2005.

Looking forward, ACS expects third-quarter revenue to range from $1.1 billion to $1.125 billion and third-quarter earnings to range from 79 cents to 81 cents a share. Analyst estimates last called for ACS to post $1.161 billion in sales and 81 cents a share in earnings in the third quarter.

ACS lowered its guidance for fiscal year 2005, which ends June 30. The company said it now expects revenue to range from $4.375 billion to $4.45 billion, down from a previous range of $4.475 billion to $4.575 billion. It lowered the high end of its earnings guidance by two pennies, saying it expects EPS to range from $3.10 to $3.15 compared with a prior range of $3.10 to $3.17.

The latest consensus estimate calls for fiscal 2005 revenue of $4.48 billion and earnings of $3.13 a share.

The company said it reached only the low end of its sales range in the second quarter because of delays in new state deals, expected to be signed by next quarter. ACS executives said they lowered their full-year sales guidance because new business is taking longer to sign and after the new business has signed, projects then are taking longer to ramp up.

Executives said this doesn't appear to be a permanent trend but they will monitor it. Ultimately it means some revenue will slip into fiscal year 2006, they said.

On the bright side, ACS said annualized recurring new business signings reached a record $227 million in the second quarter and represented $1.1 billion of total contract value. The company targets signings of $175 million plus or minus $25 million per quarter.

The company said its pipeline remains "very healthy" with more than $1.2 billion in annual recurring revenue expected to be awarded within the next six months.

Cash flow from operations totaled $180 million during the second quarter, or 17.5% of revenue. That was the second-highest level of cash flow from operations ever posted by the company. Free cash flow was $120 million, or 11.6% of revenue.

Shares of ACS declined 29 cents, or 0.5%, to $55.14 in recent after-hours trading. Shares closed the regular session down 62 cents, or 1.1%, at $55.43.