EDS Shares Fall 23% After Earnings Drop in Quarter

From Washington Post

Shares of Electronic Data Systems Corp. plunged 23% Friday after the giant computer firm reported a drop in first-quarter earnings that it attributed to the rising wages it has to pay technical employees.

The company said it will consider cutting as many as 9,000 jobs to reduce labor costs and shore up future profit.

The company’s announcement is the first time a major firm has said the current shortage of information-technology workers in the United States--estimated by one industry group to be as high as 190,000--has significantly affected profits. That shortage has been driving up the average annual compensation of such workers by 15% to 20%.


Although many computer companies have been passing along the increased costs to their customers, EDS, which designs and operates computer systems for large corporations and government agencies, traditionally has entered into long-term, fixed-price contracts. Unable to increase labor charges under those agreements, EDS said it has had to absorb much of the increased cost internally.

Some Wall Street analysts said that other factors, such as increased expenses in bidding for contracts that it lost, contributed to EDS’ sagging profit. But they said the wage issue is real.

“There’s a possibility other companies could see some of this problem,” said Jeffrey A. Newman, an analyst with Wheat First Butcher Singer Inc. in Richmond, Va.

Shares of an EDS competitor, Computer Sciences Corp., fell $4.75 to $60 Friday on what analysts said were such fears.

Founded in 1968 by Ross Perot, Plano, Texas-based EDS employs about 100,000 people.

The company said late Thursday that its net income in the first quarter fell 11%, to $194.1 million, or 40 cents a share, from $218.8 million, or 45 cents. That’s largely because as revenue increased to $3.59 billion from $3.37 billion, expenses in the period rose at a faster rate, to $3.26 billion from $3.01 billion.

The news caused the company’s shares to tumble $9.50 a share Friday to close at $32.50 in heavy trading on the New York Stock Exchange.


Salaries paid by the industry for many computer-related jobs jumped more than 15% from 1995 to ‘96, according to a survey released in February by the Information Technology Assn. of America, an industry group based in Arlington. For example, salaries for programming managers increased 17.2% to $92,200, according to the association.