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Profit Drops at Affiliated Computer

The IT services company beats Street second-quarter income expectations.

Updated from 4:44 p.m. EST

Affiliated Computer Services'


second-quarter profit fell year over year, but the company beat analysts' forecast for its bottom line by a penny late Tuesday.

The Dallas-based IT services company said it earned $72.1 million, or 72 cents a share, compared with $102.4 million, or 81 cents a share, in the same three-month period last year.

Excluding 9 cents a share in legal and other charges related to its ongoing stock options investigation and a 2-cents-a-share gain on hedging instruments, ACS earned 79 cents a share for the second quarter, better than the 78 cents a share predicted by analysts.

On the top line, ACS reported $1.43 billion, rising from $1.35 billion in the same quarter last year and slightly less than the $1.44 billion consensus estimate.

"I am very pleased with our results this quarter. We saw improvements in operating margins in both the commercial and government segments," ACS' CEO Lynn Blodgett said in a statement. "Our renewal rates were excellent at approximately 90% for the second quarter and approximately 95% for the first six months of the year."

On his first earnings call as chief executive after the departures of former CEO Mark King and CFO Warren Edwards in November due to

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stock options chicanery, Blodgett outlined the company's broad strategy, including a long-term goal to bring in $10 billion in annual revenue by 2010.

He also said the company would continue to acquire "well-run, profitable companies that are accretive to earnings" to make ACS more competitive. Recent buys include a $65 million spend on

Systech Integrators to bolster the company's SAP business, and the assets of Albion, which makes software for the health and human services market, for $30 million.

Blodgett said that acquisitions are regarded as a kind of "research and development" for ACS.

He sees more growth potential in the finance and accounting, healthcare, transportation, manufacturing and customer care markets, among others.

For the quarter, the government segment posted strong results, which was offset by slower growth and sub-par signings in the commercial segment, executives said.

The government division comprised 40% of the company's sales, growing 4% internally and 10% in total when excluding the divestiture of its WWS unit. Meanwhile, the commercial business grew 9% overall, with 3% internal growth, and accounted for 60% of sales.

Recently after hours, ACS shares lost 7 cents to $50.40.

The company did not provide an outlook for the third quarter.