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Unisys swings to profit on ClearPath mainframe spike

Pays off debts ahead of schedule

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Mainframe maker and services provider Unisys raked in more dough than it might have expected in its second quarter, thanks to a jump in sales of its ClearPath mainframes – and it used the occasion and the cash to prepay some if its debts to get its balance sheet in order.

Knocking the balance sheet into shape and stabilizing mainframe sales are two things that CEO Ed Coleman was hired to do in October 2008 when he came on board, which was when the Great Recession was just getting rolling and when the debt load at Unisys was making Wall Street very nervous.

In early 2009, Unisys had nearly $750m in debts net of cash, and since that time the company has sold off businesses and cut costs while weathering the loss of a big contract with the US Transportation Security Administration and the general overall business bumpiness, generating enough cash to pay off all but $291.8m of its debts and have a net cash position of $367.9m as the quarter ended.

Thanks to the boisterous sales of ClearPath mainframes in Q2, Unisys announced while going over its numbers that it would be able to pay off another $84.5m in debts – considerably ahead of the plan that Unisys hatched in early 2011 to have about $1bn in debt paid off by the end of 2013.

Unisys CFO Janet Haugen said on a conference call with reporters and analysts that the company was exploring options to pay down even more of the debt in future quarters, but made no commitments.

In the quarter, Unisys had $921.3m in overall sales, down 1.7 per cent, but it swung to a profit of $46.6m from a loss of $11.6m in the year-ago quarter.

Unisys saw services revenues slide by 3.2 per cent to $815.7m. When measured in local currencies, services revenues actually rose by 1 per cent, and Haugen said that if you take out the US federal government, services sales were flat as booked and up 5 points at constant currency.

Systems integration drove $262m in revenues in Q2, down 8 per cent, but IT outsourcing saw an 8 per cent rise to $330m. Infrastructure services plummeted 17 per cent to $108m (this is one area where Uncle Sam is making big cuts), and core maintenance on Unisys hardware and software also fell by 16 per cent to $48m.

Business process outsourcing rounded out the services picture for Unisys in the quarter, up 5 per cent to $66m. Despite the sales drop, gross margins and operating margins were both up nine-tenths of a point, which shows that Unisys is making the best of a bad situation.

The services backlog at Unisys was down 8 per cent from the level at the end of 2011, to $5.1bn – but some of this is due to currency effects as well as decreased contracts. Haugen said Unisys expected that about $670m of that services backlog would convert to revenues in the third quarter, so it is already about two-thirds of the way home.

Unisys' Technology segment had $105m in sales in the quarter, up 12 per cent despite plummeting sales of third-party wares such as external EMC disk arrays and other gear the Unisys sales force used to peddle more aggressively. This third-party hardware only accounted for $5m in the period, down 68 per cent. But enterprise servers and software bearing the Unisys brand rose by 27 per cent to $100m, more than compensating for the decline and pushing overall technology sales up.

Coleman said that ClearPath mainframe sales had double-digit growth – "a good quarter for ClearPath across many enterprises," and not just a couple of big deals. Thanks to the mainframe bump, gross margins for the Technology segment rose by 14.4 points to 63.4 per cent, and operating margins rose from nearly zero a year ago to 28.6 per cent.

The Unisys CEO also warned Wall Street to not put too much stock in the sales – whether up or down – in any given quarter, and to continue to look at it on an annual basis.

Coleman concluded that when he took the helm at the venerable mainframe maker nearly four years ago, the best Unisys could do was keep ClearPath mainframe sales flat and profitable on an annual basis. And that's precisely what Unisys has done for the past three years and is on track to do again this year, according to Coleman.

Sales to the US government dropped by 20 per cent in Q2, to $121m across both services and technology products. A little more than half of the US Federal sales came from the civilian agencies, with a little more than a quarter coming from the defense and intelligence agencies and a little less than a quarter coming from the Department of Homeland Security.

The Feds comprised 13 percent of sales, and North American companies and governments accounted for 41 per cent of revenues rising 1 per cent and up 15 per cent excluding the Feds.

The EMEA region accounted for 32 per cent of the Unisys pie, and fell 5 per cent year-on-year, while the Asia/Pacific region was a 17 per cent slice of the pie but shot up by 19 per cent. Something bad happened in Latin America, with sales down 25 per cent, representing only 10 per cent of revenues.

Around the globe, governments of one kind or another drove 40 per cent of revenues at Unisys, falling 10 per cent, while financial services companies accounted for 23 per cent of the revenue pie and grew by 3 per cent. Other commercial entities drove 37 per cent of sales and rose 6 per cent. ®

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