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By Alorie Gilbert, 15 December 2003 08:45

NEWS The loss of a major information technology outsourcing contract could shrink Electronic Data Systems' earnings next year by $0.02-3 cents a share.

Securities analysts reduced next year's earnings and revenue estimates for EDS following news that the company lost a bid to renew its 10-year contract with the British government, which expires in June.

Cap Gemini Ernst & Young beat out EDS for the new contract, which involves managing the IT infrastructure of the UK tax authority, Inland Revenue. The contract is valued at $5.2bn over 10 years.

EDS will derive about 2 per cent of its revenue, more than $400 million, from the soon-to-expire Inland Revenue contract this year, securities analysts said. Without the contract, EDS will fall $0.02-3 a share shy of previous earnings estimates for 2004 and will miss earnings estimates for 2005 by $0.04-7, the analysts said.

A poll by First Call of 25 securities analysts pegged EDS earnings in 2004 at $1.04 a share.

In a November filing with the US Securities and Exchange Commission, the company warned that the termination of the Inland Revenue deal "would materially adversely affect our revenue and earnings." The company said it could offset the impact by reducing costs associated with the contract related to equipment and software. An EDS representative declined to comment on the financial impact of the terminated deal.

The loss of the Inland Revenue deal comes at a difficult time for the company. Revenue has sagged this year as the company laid off staff, replaced its chief executive officer and dealt with an ongoing SEC probe.

Analysts offered a bleak scenario for EDS. "Unless bookings materially improve during the next few quarters, we believe the company will have insufficient new business to offset normal contract expirations and contracts which are not renewed with EDS, leading to sustained revenue decline in future years," Merrill Lynch said in a note it issued Thursday.

One analyst blamed the company's troubles on a poor management and sales focus as well as on an out-of-whack cost structure for its declining sales. "They have had difficulties for months from a competitive standpoint," said Cynthia Houlton, an analyst at RBC Capital Markets.

IBM, Computer Sciences and Cap Gemini are among EDS' primary competitors in the IT outsourcing services market.

EDS shares on Friday traded 2 cents above Thursday's close, at $22.83 a share.

Alorie Gilbert writes for CNET News.com