EDS sees NMCI prospects brightening

Electronic Data Systems Corp. is due to get the official thumbs up within the next week to take over another 100,000 seats under the-Navy Marine Corps Intranet project, but the move won't immediately benefit the company's bottom line.

John Stenbit, chief information officer at the Defense Department, said Dec. 16 that he is satisfied with the progress of NMCI testing. While 160,000 seats have been authorized for the program, there has been a 60,000-seat cap in place until EDS demonstrated that an acceptable testing process was in place, and that staff could identify and fix problems and implement improvements as the program evolves, he said.

EDS spokesman Kevin Clarke said Stenbit's comments validate EDS' position that NMCI is making progress, and that the Defense Department has confidence in the program.

While this latest block of seats won't immediately make NMCI cash flow positive for EDS, that status is getting closer, Clarke said. Once 20,000 of the 160,000 seats meet the contract's service level agreements, the Navy can release another 150,000. It is that next wave of seats that will significantly increase the revenue generated by the project, he said.

Clarke said EDS is "very close" to meeting requirements of the service level agreements on those 20,000 seats.

EDS won the eight-year, $6.9 billion NMCI contract in October 2000, but EDS is footing the cost of development, testing and installation and will only begin recouping its investment in the later years of the contract.

"I think it's a positive for EDS that [NMCI] is still moving forward, but it's still a negative cash outflow for the next year" said Bill Loomis, managing director of the technology research group at Legg Mason Wood Walker Inc. in Baltimore. "The company is focused on improving cash flow, selling off non-strategic assets [and] reducing capital expenses."

Those moves come at the expense of future growth, Loomis said. The long downturn in the economy has hurt the Plano, Texas company, both in its commercial business and financial markets.

"EDS is kind of in a turnaround mode now," Loomis said. "Over the next few years, we can see it losing ground to major competitors such as IBM and [Computer Sciences Corp.]"

Though the company can benefit from trends in defense information technology spending and homeland security, "I think they're going to have their hands full with NMCI," he said.

In fiscal 2001, EDS had revenue of more than $21.5 billion with 143,000 employees worldwide.

(Updated Dec. 19, 2002, 4:59 p.m.)