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Unisys pulls profit from 16% sales drop

Cost cuts thanked

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Thanks to cost cutting, server and services provider Unisys has pulled out some profits in the second quarter even as its sales continue to fall.

In the second quarter ended June 30, Unisys watched (probably with something akin to horror) as its technology sales fell by 31 per cent to $98.7m, undoubtedly impacted by a mainframe refresh in late May. Services revenues held up better in Q2, only declining by 14 per cent to $1.03bn in the quarter.

Total revenues in the quarter came to $1.13bn, falling 15.8 per cent compared to the year-ago period. While sales were down in both the technology and services areas, cost-cutting actions taken by Unisys at the end of 2008 paid off, with gross margins for services rising to 21 per cent (up 180 basis points) and technology gross margins at 40.4 per cent (up 120 basis points). This helped Unisys bring $38.1m to the bottom line, which is considerably better than the $14m loss it had a year ago.

In a conference call with Wall Street analysts, Janet Haugen, chief financial officer at Unisys, said that services orders were down compared to the earlier period, mainly to a drop in outsourcing that other services players have seen. But they were up sequentially compared to Q1. Services declines in the United States and Europe were partially offset by gains in Latin America and the Asia/Pacific region. The services backlog at the end of the quarter stood at $5.9bn, up 3 percent from the end of the March quarter.

Across both services and technology, Unisys had $542m in sales in the United States, down 5 percent, with $341m in sales in EMEA (down 28 per cent), $134m in Asia/Pacific (down 9 per cent), and $112m in Latin America (down 25 per cent). So a drop off in technology sales - mostly servers and storage - outside the United States seems to have been a big issue in the quarter.

By business segment, Unisys had $458m in outsourcing sales (down 12 per cent), $352m in systems integration and consulting revenues (down 10 per cent), $144m in infrastructure sales (down 25 per cent, not including servers), and $77m in enterprise server sales (down 33 per cent). On the server front, Unisys took lumps just like IBM's mainframe business did in the same quarter, with a 39 per cent drop in revenues and a 20 per cent drop in MIPS capacity shipped. Rounding out the quarter, Unisys booked $76m in maintenance fees, and $22m in specialized technology sales.

Unisys has been trying to exchange some of its debts and had a debt offering last month that petered out. Since then it, it has rejiggered the deal, and this one is being better accepted by investors. Unisys offered to exchange $300m in unsecured debt that comes due in March 2010 for secure notes that mature at a later date and for cash. About $230m of this offering has been tendered. And of a $400m exchange for notes due in 2012, about $290m has been tendered.

Haugen said that Unisys expects the third quarter to be soft thanks to the normal seasonality it sees and to the recession. And Ed Coleman, the company's chief executive officer, was cautiously optimistic that Unisys would reach his goal of cutting costs by $250m and improving gross margins by another $250m. So far, Unisys has cut about $200m of costs through layoffs and other actions since December.

"I would characterize the second quarter as an encouraging quarter, perhaps an indicative quarter that shows that we are on the right path," said Coleman. "I think we are better prepared to take advantage of the improving economy as it occurs." But Coleman did not guess when that improving economy might appear. ®

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