EDS yesterday reported a decline in third-quarter earnings, blaming its continuing struggle with General Motors contracts as well as a hefty severance package of departing chairman and CEO Les Alberthal.
Net income for the quarter was $218.6 million, or 44 cents a share, excluding a one-time charge of $36.7 million related to the retirement of Alberthal. Diluted earnings were 39 cents a share. In the third quarter of 1997, net income was $246.8 million, excluding a $25.9 million charge, for diluted earnings of 47 cents a share.
Revenue for the quarter, which ended Sept. 30, was up to $4.4 billion, including the $69 million EDS received for the sale of some of its leasing portfolio. The company said it signed about $2.8 billion in new business during the quarter. This compares with revenue of $3.7 billion a year ago.
EDS's 10-year contractual commitment to service computer systems for GM , the integrator's former parent and now largest customer, continues to concern analysts. EDS pointed to its reduced profitability on contracts with GM to explain the decrease in its income for the quarter. Analysts say GM-related revenue accounts for about 25% of EDS's total revenue, down from 31% when the company was spun off in the summer of 1996.
The results were not much of a surprise to Wall Street analysts, who had expected about 39 cents a share. "The street is expecting the third quarter to be pretty negative at least on margin side," says Moshe Katri, a director for Warburg, Dillon, Reed LLC. "The company's results were negatively impacted by the GM strike and the severance pay for the retiring CEO."
But EDS's non-GM business continues to grow at a rapid rate. Non-GM-related revenue increased 24% in the third quarter, year over year. "The non-GM business will continue to grow very rapidly," says Moshe. That is necessary in order for the company to remain profitable. "Right now, EDS's GM-related business is [negatively] impacting the overall growth of the company," adds Moshe.