Electronic Data Systems has posted disappointing quarterly earnings, and analysts say the results highlight the outsourcing company's difficulties in its dealing with banks.
The Plano, Tex.-based company has a long history of providing computer services to the banking industry. In the early 1990s it won a string of big contracts with regional and superregional institutions.
But last year, EDS deemphasized such contracts in favor of smaller, more profitable ones with community banks.
As a result, in one larger deal, EDS lost out in May 1996 to competitor Computer Sciences Corp. for part of a $2 billion, seven-year outsourcing contract with J.P. Morgan & Co. Mark Wolfenberger, analyst at Deutsche Morgan Grenfell, said EDS could not match Computer Sciences' bid because of its higher cost structure.
Deals can take up to two years before they reach the break-even point, and over the longer term "could ultimately become unprofitable," said Wayne Segal, Mr. Wolfenberger's colleague at Deutsche Morgan Grenfell.
"EDS is caught in a tough situation," he said.
In 1996, EDS booked 147 outsourcing contracts for a total value of $8.4 billion, compared to the prior year's 83 deals, which totaled more than $10 billion, according to Lehman Brothers, New York.
"We see the profits shifting toward the smaller guys who have built their business models around selling value-added technology," Mr. Segal said.
But to effectively expand the $16 billion company, EDS' management has adopted a so-called "balanced portfolio" approach, which eventually will mix both large and small deals into the new business pipeline, Mr. Segal said.
In the most recent quarter, EDS reported first-quarter revenues of $194.1 million, or 40 cents per share, below First Call's consensus estimate of 48 cents.
EDS' stock price dropped more than 20% on the news.
"People were absolutely stunned by this quarter," said Patrick Burton, analyst with Lehman Brothers.
Mr. Segal said EDS' specific problems were due to a number of long-term, fixed-price contracts, and a dramatic increase in labor costs.
In other earnings news, National Processing Co.'s first quarter results also disappointed Wall Street. The Louisville, Ky.-based transaction processor recently reported revenues and earnings that reflected a weakness in its merchant services unit.
The company was spun off from National City Corp., Cleveland, in August. The bank said on Friday it would raise its stake in the processing company to 89% from 85%.
The bank also said it plans to buy two million shares of National Processing on the open market, a move to bolster the price.
National Processing's stock reached $21.875 in October, but has since been in decline, hitting a low of $6.75 before Friday's announcement.
