EDS earnings to face increased scrutiny today

Thursday, July 27th 2000, 12:00 am
By: News On 6

Financial analyst Carol Levenson put it bluntly after Electronic Data Systems Corp. dribbled out some negative financial information over two days, which took the stock down as much as 32 percent.
"Loose lips sink ships," Ms. Levenson said at the time to clients of Gimme Credit, a Chicago-based bond research firm.

Ms. Levenson was miffed because only a few Wall Streeters got private telephone conversations with the company about details of a second-quarter revenue slowdown after the market closed June 8.

EDS didn't make an official disclosure until the next morning. But by then it was too late.

Coached by those analysts in the know, investors stampeded from the stock, leaving company officials to deal with a public and investor relations mess in a year that had otherwise gone swimmingly.

Now, all eyes will be on the Plano-based computer services company when its official results are reported Thursday afternoon. Earnings previews in the financial media over the last few weeks frequently emphasized the EDS revenue warning, in which the company said its revenue growth for the quarter would be closer to 4 percent than the 7 percent it once had anticipated.

EDS officials declined to comment on the disclosure issue Wednesday, citing the pending earnings release.

By most accounts, the company will meet expectations for earnings, but the stock has yet to recover. Price targets, once in the range of $70 a share, have since been downshifted to $50. Goldman, Sachs & Co. analyst Gregory Gould said he thinks that the stock will be pressured until earnings pick up. Shares traded down $1.31 to $40.69 Wednesday.

But there's more at stake, potentially.

"When you dribble out information that's material, there are real hazards," said Louis M. Thompson Jr., president and chief executive of the National Investor Relations Institute in Vienna, Va. "You could be opening yourself up to an SEC investigation."

There is no evidence of a Securities and Exchange Commission investigation in the EDS case, and the agency does not comment on such matters.

Ms. Levenson, who said she was not among "the chosen Street analysts" who heard the information first, suggested that the company opened itself up to shareholder lawsuits. Others say the situation is more like a lesson learned the hard way.

"I strongly suspect that if they had to do it over, they might have had a conference call for everyone," said Stephen McClellan of Merrill Lynch.

The longtime EDS follower had the best intelligence of the day on June 8 and got his clients out of EDS stock first, before the pile-on began.

A few days after the episode, EDS said Wall Street had overreacted by reading the caution as an earnings-related warning. Indeed, one national newspaper corrected a story that reported an earnings slowdown instead of a revenue slowdown.

As unfortunate as the incident was, the timing also was poor for EDS executives, who are in the middle of a much-anticipated turnaround.

Chief executive Richard H. "Dick" Brown, about 18 months on the job, is working to execute the second part of his strategy to return EDS to a leadership position in the industry. The company fell behind IBM Global Services several years ago.

Mr. Brown so far has shown a knack for cost-cutting and signing heavy hitters such as WorldCom Inc. and Rolls-Royce PLC to new contracts.

He's pared the corporate bureaucracy from more than 80 units to a few clear lines of business and is directing the sales force to sign up e-commerce clients as well as traditional "mega" outsourcing contracts with Fortune 500 companies.

The number of new contracts signed since the fourth quarter of last year has surged.

No one has questioned Mr. Brown's efforts so far, though Merrill Lynch's Mr. McClellan said the former Cable & Wireless CEO has a task that's "more challenging than we thought."

The larger lesson from the EDS disclosure snafu is deeper than once burned, twice shy, said Mr. Thompson.

"In the aftermath, all you've got is your credibility."