Dallas / Fort Worth Local News

PLANO (CBS 11 News) ― The sigh of relief was palpable last week at the headquarters of Electronic Data Systems Corp. when word arrived that the company's biggest customer was signing up for five more years.

Rival computer-services companies such as International Business Machines Corp. were trying to steal EDS' lunch. Analysts thought EDS would lose most of its business running the computer systems of General Motors Corp.

So when GM awarded EDS contracts worth $3.8 billion over the next five years, and the likelihood of even more to come, EDS executives were able to claim victory even though it's less than EDS has been getting from the auto maker.

"We did better on balance than we might have thought," Chairman and Chief Executive Michael H. Jordan confided shortly after GM's announcement.

Rushing to explain the significance of the moment, several analysts struck a similar note. They said the GM deal shows that a three-year turnaround campaign at EDS is finally taking hold.

"A lot of the obvious problems have been fixed, and management has instilled some discipline in the company," said Rod Bourgeois, an analyst with Sanford C. Bernstein & Co. who has followed EDS closely for several years.

Bourgeois said EDS has patched up some huge money-losing contracts and shored up its balance sheet. It is again competing for clients who steered clear of EDS not long ago, he said.

The company has bounced back from the depths of 2003, when it lost $1.7 billion. It has recorded four straight profitable quarters, but the earnings have been razor-thin for a $20 billion enterprise.

"The company is essentially turned around," Jordan said.

EDS is scheduled to report its final 2005 results on Wednesday. If analyst forecasts are correct, EDS earned nearly twice as much last year as it did in 2004.

Still, analysts say it's too soon for Jordan to run victory laps around the EDS campus -- which, fittingly, is shrinking after the company sold part of its real estate. Revenue has been slipping for three years, and net profit margins are around a meager 1 percent.

Under founder Ross Perot in the 1960s, EDS invented the business called information-technology outsourcing -- running other companies' computer systems. But the services arm of IBM overtook EDS in the 1990s and widened the lead after 2002, when a series of missteps led to shareholder lawsuits, a Securities and Exchange Commission investigation which remains unresolved), and the ouster of CEO Dick Brown.

Jordan, a retired CBS and Westinghouse CEO, was brought in to fix things in early 2003.

But progress was slow. EDS continued to hemorrhage money on big jobs. Contracts with financially troubled airlines fell in value. There wasn't much new work coming in. And Jordan came under fire for filling key jobs with old friends.

Ask how things are improving, and the first thing EDS executives point to is a mammoth contract that the company won in 2000 to build a communications network for the Navy and Marine Corps.

It remains one of the biggest information-technology contracts ever awarded by the federal government. Initially said to be worth $6.9 billion, it grew to $8.8 billion with add-ons.

But those are revenue figures, with no guarantee of profit. The job of transforming the Navy's hodgepodge of aging computer programs into a sleek and secure network proved more difficult and costly than EDS expected. The company pumped well over $2 billion cash into the deal before seeing a cent in profit.

The tide turned on the Navy deal in 2005, according to Chief Financial Officer Robert Swan, who said the contract generated $100 million in cash during the first nine months of the year.

The company is getting better scores in Navy customer-satisfaction surveys, which could trigger incentive payments. And now EDS and the Navy are negotiating a three-year extension that would let the company recoup some of its earlier losses.

Navy officials declined to comment, citing the negotiations.

EDS officials said they learned from mistakes on the Navy deal and now review new contracts more closely. Executives say about two-thirds of proposed deals are reworked before they are signed. They claim to have walked away from deals that didn't make sense for the company.

New business also picked up in 2005, led by a 10-year, $4 billion contract to build a Navy-like network for the United Kingdom's Ministry of Defense.

At home, EDS has won back contracts to operate Medicaid contracts for several states. In some cases, such as Florida, EDS beat lower-priced competitors.

EDS' biggest customer remains General Motors, which bought EDS from Perot in 1984 but spun it off in 1996. GM paid EDS about $1.8 billion last year, or 9 percent of EDS revenue. After last week's announcement, that work will shrink to between $1.2 billion and $1.4 billion per year through 2011.

Yet the company declared victory, and analysts agreed, because many had predicted EDS would do much worse. The company had warned it might get only $1 billion in GM work. But GM work will still shrink, and EDS is expected to say this week that total revenue fell in 2005 for the third straight year.

"This has been a story about fixing the business, and they've made great progress in the last 12 months," said Cindy Shaw, an analyst for Moors & Cabot Capital Markets. "Now they need to bring in new business and grow the company."

EDS' core business of running corporate computer systems is now more than 40 years old and growing very slowly. EDS is pinning much of its growth strategy on the newer service of taking over other companies' back-office functions, such as personnel and finance.

One such customer, the Canadian Imperial Bank of Commerce, has hired EDS to run its payroll, benefits and pension administration until 2011.

Bank Vice President Hugh MacDonald said the deal means the bank can focus on banking. "We've been very happy with what we've built together," he said.

Back-office work makes up about 12 percent of EDS revenue now, but company officials insist they can double that in a couple years.

The problem is several other companies are aggressively seeking the same hot areas of BPO as EDS, including Accenture Ltd., Mellon Financial, Hewitt Associates Inc., and many smaller players.

"It's a lot of competition in a relatively small market, and it's unclear how profitable it's going to be," said Bourgeois, the Bernstein analyst.
For several years, EDS has been selling off parts of the business to raise cash. Jordan said the company is now considering acquisitions in the back-office area.

"We have a very strong balance sheet," Jordan said. "We should be using it to supplement our growth."

(CBS 11 News)