Fixing the Problems at Unisys

Unisys has been receiving a lot of attention lately, including accolades from IDC and Frost & Sullivan and a spot in the most recent edition of the book CRM at the Speed of Light.

But there’s been bad news as well. The company posted lower-than-expected third-quarter profits. Nearly a week ago, the company announced earnings down more than 50 percent from a year ago, even after a net benefit from resolved tax issues — and the company recently announced it will shed 1,400 employees.

The market’s short memory explains how a company can win kudos while losing cents per share, said Patrick Sayers, analyst with Technology Business Research in Hampton, New Hampshire. Only hard work can turn the company around.

Don’t Blame the Industry

“In general, the missed earnings pointed to the second-quarter missed earnings, which pointed to a bunch of delays right at the end of that quarter,” Sayers said. “One might expect those revenues to show up in the third quarter, but that didn’t happen. Earnings were flat.” And the market took the bad break without even raising an eyebrow, he said.

Missing the profit projections, Sayers continued, “was, in fact, not a good sign.” While Unisys, in its quarterly earnings announcement, blamed declining technology orders, Sayers said the role of victim doesn’t fit. “I don’t want to say it’s happening only at Unisys, but it’s not something we’re seeing across the board,” he said.

“There’s been a lot of language about the sales force not getting the complete message out,” agreed Rod Bare, an equity analyst at Morningstar. “That doesn’t sound like a firm that’s on top of its game, and that’s a little bothersome.”

Unisys faces daunting challenges, and two of them go by the names IBM and Accenture. As the company fights to secure market share in the services space, it will continue to slide backward in the 20 percent of its business — and revenue — still coming from its hardware, said Bare.

But he said even as the firm swaps out the old-school hardware it installed, implementing other hardware or outsourcing its function entirely, it will continue to sell services.

A Quiet Transition

“The out for Unisys is that they have to find a way to profitably sell services,” he said. Other players in services have the same problem Unisys has: It’s tough to bid big multi-year contracts, not knowing what the market will see in the latter years of the agreements. Unisys, however, has to prove even more flexible than its competitors to win the bids and keep the business.

The cure for Unisys, it seems, will be through a renewed commitment to the transformation it began years ago, from a legacy mainframe hardware technology company to a services firm.

It can pull itself up by its bootstraps if it takes a pragmatic view of the market, admits that its footprint has never widened enough to compete bid after bid with the big guys, and chooses to make its name in consulting and outsourced infrastructure, primarily in the United States and Europe, where 45 percent and 32 percent, respectively, of its revenues already originate.

“That’s something we’ve been saying for years,” Sayers said of himself and his colleagues at TBR. “Eighty percent of its revenue now comes from services. That’s enough to pull them up, but they have to go after it.”

One of the necessities of such a pursuit likely will be the addition of offshore employees for cost-effective, competitive service delivery, he said.

“One of the problems that they’ve struggled with is they’ve gone though this whole transformation,” said Sayers, that “most of the market is unaware of.” Sales isn’t delivering the marketing message, and margins on outsourcing through Unisys are lower because the firm has yet to send much of its work offshore.

Opportunities in Security

But the silver lining for Unisys might be colored red, white and blue. The company has some significant contracts with the U.S. Department of Defense and the federal Transportation Security Administration. Bare sees Unisys developing a core competency for government IT services out of these projects.

“Security is going to be hot, and I think Unisys has something to offer there,” he said.

“They really need to do the best job they can for our U.S. government agencies, and that will blossom to other governments around the globe.”