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UPDATE 3-EDS profit dives, to cut 5,500 jobs, shares rise

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By Siobhan Kennedy

NEW YORK, Oct 30 (Reuters) - Battered computer services provider Electronic Data Systems Corp. on Wednesday said quarterly earnings fell sharply amid a chronic slowdown in spending and said it would it cut its work force by up to 4 percent, or about 5,500 jobs.

But shares of the world's No. 2 services company jumped nearly 15 percent in after hours trading as investors breathed a sigh of relief that there were no negative surprises.

"It's really relief at no more downsides: the fact that the numbers were in line with their pre-announcement and that there were no other skeletons that fell out," said Prakash Parthasarathy, an analyst with Banc of America Securities.

News of the cost-cutting measures, which also included plans to divest certain non-core assets, would also make investors believe EDS "is headed in the right direction," Parthasarathy said.

EDS -- second only to International Business Machines Corp. in the market for computer services and consulting -- stunned investors last month when it warned that its earnings would be just a fraction of what it had expected previously because of the protracted softness in computer services sector.

Its profit is also being pinched by losses from a long-term contract it has with WorldCom Inc. , the bankrupt long-distance phone company, and US Airways .

NO MORE SURPRISES

The company's profit warning, and the revelation of a stock hedging strategy gone awry, is the subject of an informal Securities and Exchange Commission inquiry.

Still, EDS Chief Executive Richard Brown sounded what amounted to an upbeat note during a conference call with analysts, reiterating that full year 2002 earnings would fall no more than the previously-signaled 25 percent decline.

That's despite an expected 20 percent decline in sales of its services to auto maker General Motors Corp. , its former parent and largest customer, in the fourth quarter versus the quarter ended in December 2001.

Brown also stressed he believed EDS had completed the process of winnowing out contracts from troubled customers and said he had worked to reassure customers that the company expects no sudden surprises.

The stock of EDS, which has lost nearly two-thirds of the $18 billion market value it held just two months ago, rose to $15.75 in after-hours trading from a close of $13.75 on the New York Stock Exchange.

CUTS STAFF, ASSETS

In a bid to cut costs, EDS said it would reduce its work force by about 3 percent to 4 percent over the next several quarters, beginning with 800 to 1,000 positions by year-end.

It said it would cut other corporate overhead expenses by $75 million in 2003, as well as divest several non-core assets. It did not provide any further details about which assets.

EDS said it expects those actions would raise its cash position by more than $500 million over the next six to eight months.

In addition, EDS said it planned to shift a minimum of 1,500 of its software development and customer contact center employees to lower cost facilities in 2003.

EDS, which carries medium "investment-grade" ratings from top credit rating agencies that are several notches above "junk" status, also said it expects to preserve its investment grade status that is vital to ensuring its access to low-cost commercial bank credit.

PROFIT DIVES 60 PERCENT

For its third quarter, EDS said its profit fell to $86 million, or 18 cents a share, from $212 million, or 44 cents a share, a year earlier. Six weeks ago, analysts had expected earnings of 74 cents.

The company said revenue in the quarter fell 2.7 percent to $5.41 billion from $5.56 billion the year before.

EDS had previously expected revenue to increase between 4 percent and 6 percent in the quarter.

The Plano, Texas-based company, which was founded in 1962 by Texas billionaire and former U.S. presidential candidate Ross Perot, said it booked $3 billion worth of new contracts in the quarter, down from $6.2 billion in the June quarter and $6.8 billion in the year-earlier third quarter.

"There's no sugar-coating these results. They are the by-product of a very difficult market and our own decisions," Brown said. "The key question is, Where do we go from here?" he added.

(Additional reporting by Eric Auchard and Jonathan Stempel in New York)