GM contracts take rap for EDS income slump

Electronic Data Systems' (EDS') low-profit service contracts with its former parent company General Motors (GM) have resulted in a 15 per cent drop of net income in its third quarter.

EDS, the world's second largest services and systems integration company, saw its net income drop to $195.1 million on 30 September from $230.2 million last year. Turnover was up to $4,352.7 million from $3,733.7 million.

The latest quarter's results include a charge of $36.7 million to cover the payout to retiring chairman and chief executive Lester Alberthal, who is stepping down.

The lower net income reflected an ongoing decline in profits earned from contracts with GM, which has put out contracts for competitive bidding.

Work won by EDS has returned substantially lower profit.

The contract work was the sole domain of Texas-based EDS until GM spun it off in 1996. GM remains an EDS customer, accounting for a quarter of revenues.

Alberthal said non-GM revenue grew by 24 per cent during the quarter against the third quarter of 1997. The company signed $2.8 billion of contracts in the quarter.

In an interview after the report, Gary Fernandes, vice chairman of EDS, said the company expected to book contracts worth about $14.9 billion for the full 1998 year, down from $16.2 billion reported in 1997. While contract bookings are expected to fall, the work was tipped to yield higher profit margins than the previous year.

Ahead of the report, EDS stock rose 94 cents on 29 October to close on $41.50 a share on the New York Stock Exchange. Following the report's release, it surged to $44.

One of the software industry's most popular rumours, that Oracle second-in-command Ray Lane is about to jump ship, has resurfaced. Speculation that Lane is planning to join EDS was fuelled last week when he was spotted at its headquarters. He claimed he was paying a customer call on the company's chief information officer. Oracle has given Lane substantial share options and other incentives to stay.