Unisys still battling on multiple fronts
31/01/2008
Operating profit (non-GAAP and excluding restructuring and retirement costs) was $273m (almost double that of 2006), representing a margin of 4.8%.

Kate Hanaghan

Unisys announced its fourth quarter and full-year results. For the year, revenue declined 2% to $5.65bn (foreign currency exchange rates had an approximately 4 percentage point positive impact on revenue for the full year). The company reported $247m in fourth-quarter operating cash flow.

Comment:

The picture we see here is a complex one, comments Kate Hanaghan. Unisys is battling on multiple fronts, including profits, revenue growth and share price performance. There is no doubt that over the past two years we have seen some significant strategic improvements, all geared towards improving the platform for sustained future growth and profits (for example, the shift away from low margin, low-growth areas).

At the same time, Unisys has made a huge effort to restructure the make-up of its work force. Over the past two years, it has reduced the workforce by 6,700 and shifted roles to India, China and Eastern Europe. At the end of 2007, 4,200 staff (including staff in partner organisations) were based in these locations. By the end of 2008, Unisys expects this number to hit 6,000. The trouble is that the company's competitors were typically ahead in making these changes. The company is playing catch-up with its peers - and in the mean time is still having to pay expensive contractors as it goes through the process of replacing staff in more expensive locations with staff in lower-cost locations.

The above changes have nevertheless filtered down to the bottom line. The non-GAAP operating profit margin (excluding cost reduction charges and retirement-related expense) has improved significantly from 0.7% in 2005 to 4.8% in 2007. Furthermore, the company is confident it can improve this further still. We look forward to seeing just how far it can push it in 2008, especially if overall revenue growth continues to be a challenge.

Looking at the topline, again there is a complex picture as Unisys continues to transition towards revenue streams that hold better prospects in the longer term. The good news is that strategically-important areas (e.g. outsourcing and enterprise security) are growing relatively well. The not-so-good news is that improvements are being hampered by poorer performances elsewhere. The question is: when will this dynamic change in order to bring an improved performance to the overall topline? That is a difficult question to answer, but it is safe to say it will not be in the immediate term. We think that while the outsourcing business is managing reasonable growth, Unisys must put increased effort into improving the growth in its SI & Consulting business. This business declined in 2007, in the context of a buoyant market.

Despite the progress behind the scenes, CEO Joe McGrath and his team must be disappointed that the hard work they have put in over the past two years has not had a positive impact on the firm's share price. Around two years ago, the company was trading at approximately $6. Yesterday it closed at just under $4. We suspect the market will want to see an improved overall topline and an end to restructuring costs (and therefore an improved bottom line) before it will reward Unisys with a better share price performance.