Electronic Data Systems last week reported a quarterly
net loss of $126m, blaming "problem contracts" and a whopping $334m
pretax loss stemming from difficulties with the multibillion-dollar
US Navy/Marine Corps intranet program.
EDS chief financial officer Robert Swan said the two primary
causes of the loss associated with the N/MCI contract were lower
profit margins on N/MCI seats and deployment delays.
The average N/MCI seat price dropped by 4%, a significant hit
resulting from the Navy's decision to place more orders for cheaper
N/MCI seats and fewer for higher-priced seats that are configured
differently, said Jeffrey Baum, an EDS spokesman. The order
therefore fell short of EDS estimates on the number of high-margin
seats that the Navy would require.
That shortfall was offset somewhat by a recent improvement in
the number of seats deployed and concessions from EDS
subcontractors and suppliers. But Swan said the combination of
lower margins on N/MCI seats and deployment delays that reduced the
time EDS had to generate revenue per seat produced a loss that
could not match the increase in the number of deployed seats.
N/MCI is a $6.9bn IT outsourcing contract, often referred to as
seat management, that will give the Navy and Marine Corps secure,
universal access to integrated voice, video and data
communications. EDS won the contract in October 2000. However,
technical difficulties, deployment delays and user complaints have
hampered the program since its inception.
During the first quarter, EDS made what Swan called "reasonable
progress" in the number of N/MCI seat orders received, but he said
the company fell behind in the number of seats actually "cut over"
to N/MCI.
Swan added that EDS has "good visibility" into second-quarter
orders for seats but that "we need to accelerate the cut-over seats
to a rate of approximately 900 a day and hold this level throughout
the year."
EDS now expects to have $1.9bn in free cash flow, compared with
its previous estimate of $2.1bn.
Swan assured financial analysts that EDS has been taking steps
to improve the operating controls of the N/MCI account. So far, EDS
has made improvements to the cost estimation process, assigned
additional financial personnel to the contract and made staff
changes at the program management office.
EDS has also conducted a detailed review of at least a dozen
so-called problem contracts, said Swan. "While we continue to
pursue megadeals as a key element of our strategy, we are being
more selective in the deals we are looking at," he noted.
EDS chief executive officer Michael Jordan said that EDS has
backed away from contracts that would put the company in a position
of too much negative cash flow.
"This is, in fact, a cash-generating business," said Jordan. "We
have to re-establish the company's credibility with the financial
community."
Details on EDS's strategic transformation plan will be released
next month.
When a financial analyst asked if there was a chance that the
N/MCI contract would not be part of EDS's portfolio in the near
future, Jordan responded, "I wouldn't think so."