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Unisys hit by mainframe, services declines in Q3

Apple deal misunderstood and overblown

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The ClearPath mainframe upgrade cycle that Unisys has been enjoying for the past three quarters started to run out of steam in the third quarter, cooling off the company's revenue and profits. The top and bottom line at Unisys was also hit by declines in its various services business.

For the quarter ended 30 September, Unisys posted $960.6m in overall revenues, down 13.2 per cent, with technology sales (mostly ClearPath mainframes but also a smattering of ES7000 x64 servers, storage, and various systems software) plummeting 31.4 per cent. The services side of the Unisys house fared a little better, but also took its lumps, with revenues of $855.2m, down 10.2 per cent. Unisys stomached a 53.7 pummeling in net income, which fell to $21.8m, in the third quarter, lower than Wall Street had expected.

The ClearPath mainframes were refreshed at the end of 2008 and again in early 2009, and have enjoyed three quarters of pretty decent growth. The midrange of the ClearPath lineup was just revamped last week with faster Xeon 7500 processors and supporting emulated versions of the MCP and OS 2200 operating systems and their COBOL and Java applications. It will take a while for these machines to see uptake, picking up some of the slack. The mainframe business at Unisys is one of choppiness and long rises and declines based on product launches.

The important thing for Unisys, explained Ed Coleman, the company's president and chief executive officer - in a call with Wall Street analysts going over the Q3 numbers - is that the mainframe maker has not "embraced secular decline" and given up on the mainframe. Instead, over the past two years the company continued to make investments in the ClearPath products.

Coupled with Unisys cleaning up its balance sheet - Unisys had too much debt two years ago when Coleman took over, and has reduced its net debt to $138m, down from $555m a year ago - the upgrades and enhancements in the ClearPath line have made the 1,800 government, financial services, and other corporate customers who have relied on Unisys gear for decades to feel comfortable enough to keep buying MIPS.

While the ClearPath mainframe business is still up for the year so far in 2010, it will be a tough finish because the fourth quarter of 2009 was gangbusters by mainframe standards. The technology business at Unisys was up 18.7 percent in Q4 2009, to $192.4m, with Enterprise Servers up 29 per cent to $169m. The annual compare could be easier, since the first half of 2009 was not all that great for the ClearPaths. For the first three quarters of 2010, technology sales are up 2 per cent, according to Coleman, and operating margins are up 14 points, despite the big hit in Q3.

In the third quarter of 2010, the Unisys Enterprise Server business certainly took it on the chin, with sales down 45 per cent to $77m. While the hodge-podge of other technology products that Unisys peddles saw 92 per cent growth to $28.4m, it was not enough to fill in the gap.

On the services front, Coleman said that Unisys continues to hire more workers overseas (offshore employees now represent 27 per cent of the company's head count, up from 20 per cent at the beginning of the year) to cut services costs and is being picky about the deals it has done. While Unisys saw declines in all of its services businesses excepting information technology outsourcing, the company nonetheless was able to get the operating profit of the services business up to 8 per cent in the quarter, hitting the baseline of its long-term goal announced two years ago of between 8 and 10 per cent.

Outsourcing revenues for Unisys in Q3 came to $328.1m, up 1 per cent, while core maintenance on Unisys hardware and software fell by 32 per cent to $54.9m. Infrastructure services fell by 13 per cent to $116.4m, and systems integration declined by 11 per cent to $291.5m. Business process outsourcing was hit hardest, dropping 25 per cent to $64.3m. Coleman said that Unisys was being particularly careful in this area to avoid becoming stuck in money-losing deals; the company also had a very large BPO deal in the United Kingdom last year this time, which made the compare difficult. Services orders were down year-on-year, but were up 3 per cent compared to Q3. Unisys closed the quarter with a backlog of $5.8bn in services bookings.

Unisys finished the quarter with $689m in cash and equivalents and said that business had improved enough that it would be reactivating the matching on its 401(k) retirement plan for employees beginning in January 2011; this matching was cut in January 2009 in the depths of the Great Recession.

Everyone was a bit curious about a relationship between Apple and Unisys that came to light late yesterday in a report by Bloomberg. And by everyone, I mean even Coleman, who was a bit perplexed by the story himself. The Bloomberg bit said that Apple had enlisted Unisys to help it crack deals with government agencies and corporations, but as it turns out, Coleman said that Unisys has inked a systems integration deal with Apple that has no dollar value associated with the contract. "The article suggests there is more there than there is," explained Coleman.

That said, as El Reg has previously reported, Unisys has created extensions to its ePortal middleware for mainframes to link iPhone and iPad apps back to COBOL applications and let mainframe shops declare that they have an app for that. ®

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