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Losses at Unisys run into Q1

Japan stalls mainframe deals

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Unisys have reported the latest in a very long line of losses after a number of big ClearPath mainframe deals were delayed to some undetermined time in the future.

The top brass at server and services company hosted a conference call before Wall Street woke up this morning, and said that its sales fell by 15.5 per cent in the first quarter to $1.1bn, and even after a costcutting drive that chopped $58.9m in SG&A costs from the books and reduced R&D spending by $5.3m, the company nevertheless reported at net loss of $24.4m, or 7 cents per share, a tiny bit higher than the $23.4m loss it reported in this quarter a year ago.

In the first quarter, Unisys said that its services revenues fell 13.5 per cent to $983.8m, while its technology business (comprised of hardware and software) plummeted by 29.3 per cent to $116.1m.

As has been the case for the past decade, and just like rival IBM, Unisys is predominantly a services company that uses its enterprise server platforms to drive services sales and anchor its sales reps into customer accounts. In a way, hardware has turned into a loss leader for both IBM and Unisys, and probably even for all but the largest systems at Sun Microsystems and Hewlett-Packard, once all of the discounting is done to sell an entry or midrange.

In the call with analysts, Janet Haugen, chief financial officer at Unisys, said that currency effects due to the strengthened U.S. dollar were responsible for two-thirds of the 15 per cent revenue decline, but that the currency effects also helped in the cost-cutting measures.

Ed Coleman, the chairman and chief executive officer who was brought in last fall to turn Unisys around, said that the company has ditched its "matrix management" organization, which had managers running different business lines, another set running geographies, yet another managing cross-company products and still others running specific industry sectors. Now, Unisys is organized by four business lines and whole ranks of upper and middle managers have been removed from the ranks, as well as the support people associated with them.

Coleman is the former CEO at PC maker and server wannabe Gateway, who was brought in to turn that company around and sold it off to Taiwanese PC maker Acer in the summer of 2007. His appointment at Unisys has obviously fuelled speculation that the company would be sold, but thus far Coleman seems intent on making Unisys profitable.

He said this morning that Unisys was going to reduce its costs by around $310m, up from the projected $225m in belt tightening that Coleman announced just before the Christmas holidays last December. Coleman believes that Unisys can get $275m of the $310m in costs off the books in 2009, and says that he is focusing on pushing the business toward higher-margin projects and products - security and legacy application modernization were singled out as key areas - while at the same time offshoring to lower labour costs.

Haugen said that the outsourcing business at Unisys accounted for $425m in sales in Q1, down 14 per cent, while systems integration and consulting fell by 1 per cent to $340m. Infrastructure sales - which means hardware and software not related to servers - came in at $142m in the quarter, down 30 per cent, and enterprise server sales cratered by 38 per cent to $79m. (The company did not provide any metrics for ClearPath mainframe or ES series x64-based server sales.)

Maintenance on servers and storage accounted for almost as much revenues as the servers themselves, at $77m, and the decline here was 21 per cent, which is a big drop for an installed base of enterprise servers. Specialized technology sales accounted for $37m in sales and actually rose by 3 per cent. Haugen added that sales to the U.S. federal government were up by "double digits" and that sales in Latin America had grown as well - at least when measured in their own currencies. Still, stalled spending among Unisys' commercial customers and declines in Europe and Asia pulled the company into the red.

Coleman laid the problem that Unisys faced in Q1 squarely on the shoulders of its Japanese customer base. "The biggest impact we have had - and this is typically a weak quarter - was in Japan," he said. "The business in Japan has been very soft." So when are those Japanese clients going to pony up some yen for ClearPath mainframes? "I am reluctant to predict when those customers will be comfortable enough to execute purchases," Coleman added.

In Q1, sales at Unisys in the Asia/Pacific region fell by 34 per cent (as reported) to $117m. Thanks to Uncle Sam kicking in the deals, sales in the United States were flat in the quarter at $539m, providing some ballast at least for Unisys. In Latin America, sales fell by 7 per cent to $120m, but in local currencies sales were actually up 14 per cent.

Unisys generated $39m in cash flow from operations and ended the quarter with $469m in cash. It has a services backlog of $5.7bn, down 6 percent from the backlog at the end of December. (That is a mere 4.5 per cent the size of Big Blue's $126bn services backlog, by comparison.) Unisys added that it has $300m in notes that mature in 2010 and that it is exploring alternatives to shore up its balance sheet, including offering new secured notes, a tender offer for existing notes, or exchanging new secured notes for the existing notes. Haugen said the company would be making announcements shortly regarding the plan of action it will take, and added that Unisys has more than enough cash on hand with which to run the company and that it was nonetheless looking for ways to cut costs to free up cash. ®

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