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Fed budget cuts, lower mainframe sales hit Unisys

Swinging to a loss in Q2

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Lower overall spending by Uncle Sam and a slowdown in ClearPath mainframe purchases combined to push Unisys to a loss in the second quarter. Sales were off 9.6 per cent in Q2 to $937.2m, and the company posted a net loss of $11.6m compared to a gain of $120.2m in the year-ago period.

For the first six months of 2011, revenues at Unisys are off 8.2 per cent to $1.85bn and it has booked a loss of $52.4m compared to net earnings of $108.6m. Profits at Unisys have been choppy in the past several years owing largely to the company's dependence on state and Federal governments for a large portion of its services contracts, and of course governments in the United States and Europe have been trying to trim their budgets like mad since the Great Recession started in December 2007 in the US.

While some industrial sectors have started to recover – and some of them, like banking and insurance, are areas where Unisys still makes a respectable amount of money – the public sector is still in recession and will likely stay there for a number of years. Unisys in particular has been hurt by losing a $489m contract with the US Transportation Security Administration to rival CSC.

In the quarter, Unisys posted technology sales of only $94.5m, down 34.8 per cent. The company was no doubt hurt on the server front by the impending delivery of upgraded ClearPath mainframes, which were announced on May 10, a little less than halfway through the quarter. Three of the four machines (the ones running Sperry's OS 2200 operating system) were available that day, but a third (running the Burroughs MCP operating system) was not available until June 17.

Unisys CFO Janet Haugen said in a conference call with Wall Street analysts that the decline in its technology division was due mostly to a drop in ClearPath mainframe sales, and reiterated the company's contention that it is best to evaluate ClearPath on an annual, not a quarterly basis, because deals can be choppy quarter to quarter. Enterprise server sales, which includes ClearPath mainframes as well as ES series x64 machinery, accounted for $80m in revenues, off 39 per cent, while other technology sales (mostly OEM disk array sales) accounted for $15m in sales and rose 11 per cent. Technology gross margins took a 12.2 point hit, falling to 49 per cent and following down the ClearPath revenue dive in Q2 but obviously not anywhere as steeply.

On the services front, where Unisys gets most of its revenues (like IBM but not like Hewlett-Packard, Dell, or Fujitsu), sales were off only 5.5 per cent, to $842.7m. Gross margins and operating margins were up despite the revenue hit, and Ed Coleman, president and CEO at Unisys, said in the call that services revenues were flat year-on-year if you ignore the US government. (Something most Americans and perhaps the whole world would like to do these days as Washington can't seem to figure out how to help Earth's largest economy.)

In the second quarter of last year, the TSA contract represented 10 per cent of total IT outsourcing revenue at Unisys, so for IT outsourcing sales to be down only 3 per cent this quarter to $307m shows that the Unisys sales force has been scrambling and doing pretty well. Systems integration and consulting sales were off 15 per cent in the quarter, to $286m, and core maintenance on Unisys hardware and software fell by 3 per cent to $57m. Business process outsourcing took a 5 per cent hit in Q2, falling to $63m, while infrastructure services was up 13 per cent, to $130m. Unisys has a private label maintenance business and this is what is growing. (Unisys did not say which IT vendors it has added to its support business, but it is growing through additional customers.)

Uncle Sam accounted for $152m in revenues across products and services in the second quarter at Unisys, down 29 per cent from the year-ago period when the TSA contract accounted for $22m. In a typical quarter in 2010, the TSA deal brought in somewhere between $30m and $33m dollars. Even without taking into account the TSA business, Unisys revenues from the Feds were off 17 per cent in Q2 and have been falling since the Great Recession got rolling. In Q2, about 22 per cent of the money the Feds give Unisys came from the Department of Homeland Security, 28 per cent was through the Department of Defense, and the remaining half from other civilian agencies.

Unisys has a services backlog of $5.7bn, up 3 per cent from a year ago.

During the second quarter, Unisys retired $179m of high coupon long-term debt, and took a $46m charge relating to this debt retirement, which pushed the company into a loss if you want to give Unisys a break. The company now has $178m in net cash, compared to $340m in debt net of cash a year ago; Unisys has retired $390m in debts in 2011 alone, and is hell bent on cleaning up its balance sheet. For which Wall Street should probably be happy, but wasn't. As El Reg goes to press, Unisys stock is off nearly 18 per cent this week in anticipation of and in the wake of the Q2 earnings report, leaving Unisys with a $1.1bn market capitalization.

It is a wonder that Dell doesn't buy Unisys for its services and Federal government contacts and sell off the ClearPath mainframe business to IBM. That said, having Unisys be a free-standing, alternative mainframe supplier is a good thing for companies that still like their COBOL card wallopers. ®

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