Affiliated Computer Services, Inc. (ACS) announced an extension of a three-year information technology (IT) contract through 2015 with DCP Midstream, a Denver-based energy company. The contract is worth $72 million.

Based in Dallas, ACS delivers comprehensive business process outsourcing (BPO) and IT outsourcing solutions as well as system integration services globally to commercial and government clients.

ACS will provide DCP with customized IT solutions such as end user and desktop support, midrange and network services, messaging services, document management, security services and application services and disaster recovery services.

Additionally, ACS will help DCP with evaluating and implementing new technologies such as virtual desktop and provide additional IT services including, Telecommunication Expense Management Services (TEMS). ACS will also provide additional application support and security services. These services will help DCP achieve cost savings and streamline operations.

We remain encouraged by the company’s ramp of new business signings, which were a record for fiscal 2009 at $1 billion of annual recurring revenue (ARR), a substantial increase of 27% from fiscal 2008. Total contract value is estimated at $4.5 billion.

We expect that the renewal of IT contract would help the company grow bookings (particularly in the second half of fiscal 2010). The company expects double digit growth in signings in fiscal 2010, which will help accelerate revenues.

However, ACS faces increased risk in the highly competitive BPO services market from large companies, such as International Business Machines (IBM), Cognizant Technology (CTSH) and Computer Sciences Corp. (CSC).

Xerox Corp. (XRX) plans to acquire ACS in a cash-and-stock transaction for about $6.4 billion. The transaction is expected to close in the first quarter.

We maintain our Neutral rating on ACS.

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