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Unisys, SGI - canaries in the coal mines

Quarterly profits a mixed bag

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While tier one server makers IBM and Sun Microsystems have reported their financial results in recent weeks, and Hewlett-Packard is getting set to do so in two weeks, there are other players in the server space. In some ways, they're canaries in the server coal mines. Niche and boutique vendors sometimes feel the pinch first, even if they do offer advantages compared to the big boys.

Everybody likes to pick on Unisys these days, as they have done in rough patches in the economy in times gone by. A month ago, the company chose Ed Coleman, who sold off PC maker Gateway off to Acer, as its CEO and chairman. And in his first month on the job, Coleman had to face a company where technology sales fell by 8.7 per cent to $160.3m in the quarter and services sales dropped by 5.4 per cent to $1.15bn. That drop in sales pushed Unisys to report a loss of $34.7m, or 10 cents a share, a slight worsening of the $31m loss Unisys posted a year ago (which worked out to a loss of 9 cents per share).

While the technology business - which includes mainframe and x64 servers and a smattering of storage and other wares - is declining, it seems to be pretty profitable, with a cost of revenue that works out to 51.7 per cent of sales. Across all server brands (including the ES7000 family of x64 and Itanium machines), server sales grew by 6 per cent in the quarter, according to Janet Haugen, chief financial officer at Unisys. The decline in the technology business came about because Nihon Unisys Ltd, the company's Japanese partner, canceled a technology licensing agreement in March that generated $18.8m in quarterly sales for the tech biz.

If you take that Nihon Unisys deal out of the mix, the other parts of the technology business actually had a 2 per cent sales growth. Considering the state of the financial services and government sectors where Unisys does a lot of business, all things considered, this did not to seem all that bad. However, Haugen said she expected ClearPath mainframe sales to be "down significantly" in Q4 against a relatively strong quarter a year ago.

Unisys said that the economic meltdown caused a decline in spending among its customers, particularly in financial services and the government sectors. Half of the revenue decline in the quarter came from the financial sector, in fact. However, on a bright note, ClearPath mainframe sales grew outside of the government sector. On a global basis, and driven by the launch of new mainframes, the ClearPath machines showed a double-digit increase in sales in the quarter, and that boosted gross profits in the technology side of the Unisys business to 47.5 per cent of sales, up nearly 3 points.

Unisys had $494m in cash as the quarter ended, and as I have previously suggested, instead of selling off Unisys, Coleman might do better to just take the company private and get Wall Street off its back. As we go to press, thanks to the battering that Wall Street took in the days since the election, Unisys has a market capitalization of $478m. The company can afford to buy itself, which it could not when I suggested it think about it only a few weeks ago.

The story for supercomputing niche player Silicon Graphics is not much different. The company's stock has been battered since The Meltdown began, and it only has a market capitalization of $44.6m as we go to press. In SGI's first quarter of fiscal 2009 ended, the company held up better than you might have expected, with sales of $92.8m, up 1.1 per cent. Product revenues, which include Altix Itanium-Linux global memory machines, Altix ICE x64 clusters, and related storage arrays for supercomputing, came in at $44.5m, up 10.9 per cent. Services sales were up 4.5 per cent to $47.5m. SGI has embraced its own flavor of x64 clusters as a means of staying in business, but these products have lower prices and lower margins than the Altix Itanium machines that SGI used to have as its only product.

However, SGI is still not making enough money to pay all of its bills, and it reported a net loss of $33.7m in the first fiscal quarter, only slightly smaller than the $36.2m loss it had in the year-ago quarter. SGI had $36.4m in cash and equivalents on hand as the quarter ended. It cannot afford to go private - at least not until we have a few more weeks of The Meltdown. Besides, what the company's managers and shareholders want is for SGI to get revitalized and get more sales in an HPC market that is still pretty hot, despite the wobbly economy. ®

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