But the world’s No. 2 IT services company lowered its 2005 earnings target in order to meet planned investments for its $3.85bn contract with the UK’s Ministry of Defense. And uncertainty surrounding its future with General Motors, its largest commercial customer, looms large.

For the first calendar quarter, EDS posted a $4m profit, or 1 cent a share, versus a $12m loss, or 2 cents a share, during the same period a year ago. The Plano, Texas-based company’s results included the effect of stock option expensing, which it adopted January 1. If EDS had expensed stock options in the first quarter last year, it would have had a loss of $44m, or 9 cents a share.

Revenue for the quarter was $4.94bn, down 5% from $5.2bn a year ago, but at the high end of guidance. Organic revenue, which excludes currency fluctuations, acquisitions and divestitures, fell 8%.

CEO Mike Jordan said the company posted its strongest signings quarter since 2002 and is on track to meet its long-term turnaround goals. Our win rates almost doubled this year, Jordan said in a conference call. The MoD contract boosted an overall 87% surge in contract signings to $7.1bn, compared to $3.8bn a year ago.

However, Joseph Vafi, analyst at Jefferies & Co, warns that one-off blue-bird contracts like the MoD, which are very large and very risky, make that a high-risk bookings number.

These large outsourcing contracts are sort of opaque, he said. Hiccups to a large contract like this can ripple through the entire [profit and loss statement.]

Bookings disappointed Wall Street analyst Cindy Shaw, at Moors & Cabot, who said she expected $8.2bn for the quarter. Shaw also said she is concerned with the company’s ability to generate cash from large contracts, such as the MoD, which has the potential to go awry much as the Navy contract did, she said.

An intranet contract with the Navy Marine Corps, won in December 2000, has been the cause of many of EDS’ financial problems during the past two years. The seven-year deal was the largest federal IT services contract ever. However, in October 2002, EDS alerted investors that the project was generating substantial costs up-front without creating cash flow. The problem has been closely tracked by investors ever since.

Vafi said the wound that is Navy contract is still in the forefront of investors’ minds but has, to some degree, healed, helped by its modest cash flow in the quarter.

So the worst is clearly behind us on Navy, he said. And maybe the best investment they made in Navy is learning a lot, which could maybe help them be successful in the MoD contract.

EDS is pulling out all the stops to meet a series of milestones involved in ramping up the MoD project, Jordan said. We’re developing a very detailed plan … this is considerably more detailed planning than we did in the early days of the Navy contract. We feel pretty good about it.

Real-estate sales will generate about $200m in cash flow, to help offset the $250m cash outflow on the MoD contract, EDS CFO Bob Swan said in a conference call.

Still, EDS warned of an unexpected loss in the second quarter and lowered its 2005 earnings range. For the current quarter, it forecasted a loss of between 2 cents a share and 7 cents a share, on revenue of between $5bn and $5.2bn. Wall Street analysts hoped for a 10-cent-per-share profit on revenue of $5.06bn.

For the full year, EDS expects to earn between 40 cents and 50 cents in profit on revenue in the $20bn to $21bn range. Analysts expected a 54-cent-a-share profit on revenue of $20.19bn. In February, the company had forecast a profit of 50 cents to 60 cents. The company’s lower guidance is, in part, due to EDS losing last year a $5bn contract with the UK’s Inland Revenue.

The guidance, however, did not seem to trouble Wall Street (Shaw said she had expected it to lower its forecast by 19 cents a share, greater than the 10-cent dip the company expects.)

Of greater concern are EDS’ contracts with General Motors, which are up for renewal next year, analyst Vafi said, who downgraded EDS’ stock to a hold rating on February 8. He and analyst Shaw agree that some large corporations, including GM, are moving away from a one-stop-shop approach for IT services toward a best-of-breed vendor approach. Vafi expects India-centric outsourcings companies, who sell some services at a cost lower than EDS, to grab some of its GM business next year.

GM contracts drive roughly 8% to 9% of EDS revenue, Vafi estimates. Shaw forecasts EDS will lose two-thirds of its GM business in 2006. Her worst-case scenario is a 35-cent-a-share loss in earnings, as a year-over-year change, next year due to GM contracts not being renewed, she said.

GM is looking to diversify its supplier contracts, she said. Other IT service suppliers, including IBM, Hewlett-Packard and Accenture, will likely compete for EDS’ GM contracts, she said.

Revenue from GM fell 8% to $465m during the recent quarter, compared to a year ago. Still, chief Jordan said EDS remains confident it is doing a good job for GM and is competitive.