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Also, check out "Amdahl Boosts Its Millenniums," and "UNISYS Returns to Profitable Growth."


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HIGH-END

Analysis of UNISYS Third Quarter and 1997 Results

UNISYS Returns to Profitable Growth

Debt Reduction Pledge Fulfilled One Year Ahead of Schedule

PHOENIX, Oct. 22 - UNISYS is on the mend (once again). At least that's what its latest financial results indicate. The third quarter revenues were up 9%. More importantly, the company has returned to profitable growth (once again).

The reason we keep underlining "once again," however, is because we've seen a similar recovery under the leadership of Jim Unruh, a former CEO, in the 1992-1993 time frame. But this return to profitability was short-lived. It was followed by four years of bottom line losses, culminating in nearly $1 billion of "red ink" which dropped to the bottom line in 1997. Such a massive loss was as a result of $1.1 billion in various charges which the new UNISYS CEO, Lawrence Weinbach, implemented soon after taking office in September of last year.

But the stockmarket applauded the cuts and boosted the value of the UNISYS stock by almost three-fold since Weinbach's arrival. Guess investors also liked his message, which can be summed up as - it's the services and solutions, stupid!

In his 1997 letter to the shareholders, Weinbach said, "I stress the term 'solutions' because our business is helping clients become more successful by using technology to help them solve their business problems."

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Yet, we've heard this before, too. Back in early 1994, we noted that UNISYS' new goal was to be "a services-led solutions provider... UNISYS is a company which, like IBM, has been trying to reinvent itself in the new world of software and services. And it has progressed the furthest of all high-end vendors in this direction" (see Annex Bulletin 94-08, 2/15/94).

So what's different about Weinbach's "services and solutions"-message from that of his predecessors?

Well, one thing different is the messenger. Prior to joining UNISYS, Weinbach had been the head of Andersen Worldwide, an audit and consulting firm, for eight years. Having joined Andersen Worldwide in 1961 right after college, Weinbach became in 1970 one of its youngest partners ever.

In other words, "services and solutions" is what Weinbach has been living and breathing all his life. After 36 years in the consulting business, it seems safe to assume that they are in his blood. Which has not been the case in the past with UNISYS leaders. And which was one reason we sounded somewhat skeptical about UNISYS prospects back in early 1994.

UNISYS Versus IBM

"UNISYS has done many of the things which IBM's new management is trying to do, only sooner," we wrote in the Annex Bulletin 94-08. "To students of history this should come as no surprise. Forty-five years ago, IBM was also trying to catch up to UNIVAC. It did. And it overtook it by an eight-fold margin.

(The allusion here was to the way IBM overtook UNIVAC's early lead in the computer industry. For more on that, check out the Appendix A which contains some background information on UNISYS).

"Will the outcome be the same this time?," we wondered. "Stand by for the answer as we go 'back to the future' in the 1990s..."

Well, that future is now. And what we have seen in the last three years is a slowdown in IT services growth both for IBM and UNISYS. But the term "slowdown" for IBM still meant a 26% compound annual increase since 1994, while UNISYS' growth was more than five times slower (5%).

As a result, by the end of 1997, IBM towered over all of its major IT services competitors with worldwide revenues of $19.3 billion versus UNISYS $2.1 billion.

So Weinbach has got his work cut out for himself. Yet he sounded very upbeat about his ability to turn UNISYS around. "I joined Unisys last September because I believed this was a company poised to capture opportunities in vital markets," he said in his letter to the shareholders. And the early returns seem to bear out his optimism.

The third quarter IT services revenues surged by 25% over the previous year's level. Just as importantly, UNISYS' gross margins improved by two points, rising to 23%. These results compare to IBM's smaller increase (23%) in service revenues during the same period, and with a lower (21%) gross margin.

Of course, one swallow doesn't make a spring; especially not in the fall, but the preceding figures do suggest that UNISYS is on the right track with its IT services strategy.

Hardware/Maintenance. Furthermore, both IBM and UNISYS face some of the same challenges: How to slow down the erosion of their hardware and maintenance businesses?

In UNISYS' case, the third quarter hardware revenues declined by 5%. But excluding the revenues from its PC manufacturing operations which UNISYS has outsourced, the remaining hardware business was up 1% over the third quarter of 1997.

Just as importantly, however, UNISYS' hardware gross margins at 47% were slightly higher than last year's. Meanwhile, IBM's third quarter hardware gross margins were only 32%, down two points since a year ago.

But while UNISYS' hardware seems to be more profitable than IBM's, its maintenance gross margins are lagging quite a bit behind IBM's. In 1997, for example, UNISYS' maintenance gross margins were 27%, down from 30% the year before, while IBM's were at 47%, down only slightly from the 1996 levels.

Geographic Performance. The U.S. operations showed the most robust growth in 1997, rising 15% over the year before. European business declined by 3%, while the Americas/Pacific unit's revenues dropped off by 2%.

In 1998 to-date, the strength of the U.S. market continued to boost UNISYS' results. Furthermore, gains in Europe and Latin America more than offset the declines in the Asia/Pacific market, leading to, what the company called, a "modest growth" of its international revenues.

Pruning the Balance Sheet. But perhaps the greatest tangible early achievement which Weinbach has chalked up is his pruning of UNISYS' balance sheet. The lion's share of the $1.1 billion write-off, recorded in the fourth quarter of 1997, was the nearly $900 million-worth of goodwill stemming from Burroughs-Sperry merger in 1986.

Furthermore, shortly after taking the UNISYS rudder in 1997, Weinbach committed that he would eliminate $1 billion of debt by the year 2000. As of the end of the third quarter, the company has virtually completed its debt reduction program, one year ahead of schedule.

As a result, UNISYS now has a positive cashflow. During the first nine months of 1998, the company's operations generated $440 million in cash, versus a negative cashflow in the corresponding period of last year.

Happy bargain hunting!

Bob Djurdjevic

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Additional Charts:

  • UNISYS 1997 Business Segments
  • UNISYS 1997 International Segments
  • UNISYS 1997 Sales Productivity
  • UNISYS Business Trends (1990-1998)
  • UNISYS Gross Profit (1990-1998)

Tables:

  • UNISYS Income Statement (1995-1997)
  • UNISYS International Business (1995-1997)

Can you afford not to know things such as the data presented above?

Also, check out "Amdahl Boosts Its Millenniums," and "UNISYS Returns to Profitable Growth."








Volume XIV, No. 98-37
October 22, 1998

Editor: Bob Djurdjevic
Published by Annex Research
e-mail: annex@djurdjevic.com

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