Here is yet another take
By Eric Auchard
NEW YORK, Oct 14 (Reuters) - Computer services comeback story Unisys Corp. (NYSE:UIS -
news) lost more than a third of its market value on Thursday after it posted sluggish revenue
growth, and warned of slackness into next year, erasing nearly a year's worth of share price
gains.
Despite reporting better-than-expected third quarter profits, the stock of the Bell, Pa.-based
company fell 15-11/16, or 37 percent, to close at 26-9/16 on the New York Stock Exchange,
where it was the second most active issue.
Unisys said in a statement announcing the mixed results that it expected to meet Wall Street's
fourth quarter earnings targets, but revenue growth would continue to be sluggish.
Third-quarter revenue grew 4 percent to $1.87 billion from the year-ago quarter due to weakness
in some computer services businesses. Without the negative effect of translating foreign
currencies into U.S. dollars, revenue grew 7 percent. By contrast, second-quarter revenue grew
12 percent, or 9 percent, including the effect of currency translation.
Net earnings on common shares, after payment of preferred dividends, grew to $137 million, or
43 cents per diluted share, compared with $67 million, or 25 cents per diluted share in the year
ago-quarter. The latest quarter included a tax benefit of $22 million, or 7 cents a share, as well
as an extraordinary charge of $12 million, or 4 cents per share, for buying back high-interest
debt.
Excluding these one-time items, third-quarter earnings per share rose 60 percent percent to 40
cents per common share. Analysts had forecast a third-quarter earnings consensus of 36 cents per
share ahead of the Unisys report, according to brokers surveyed by First Call/Thomson
Financial.
``We delivered a sharp increase in earnings in the third quarter,' said Chairman and CEO
Lawrence Weinbach, who had led a turnaround in the company's financial underpinnings since
joining Unisys two years ago, reviving profit growth.
``A better-than-expected performance in our technology business, combined with margin
improvement in our services business and continued tight expense control, helped us,' he said.
But Weinbach said Unisys must stoke revenue growth: ``While we are making excellent progress
in reducing costs, improving margins, and transforming our balance sheet, we clearly have work
to do in accelerating growth at the top line,' he said.
Unisys reported good revenue growth in international markets in the third quarter, driven by very
substantial gains in Japan and good gains in Europe, it said. But U.S. revenue was flat as strong
gains in commercial business were offset by declines in the company's Federal government
business.
Goldman Sachs analyst Greg Gould said Unisys beat profit expectations but that third-quarter
revenues grew at half the 8 percent rate he had expected. He credited the company with doing a
good job of stabilizing its business in recent years, but does not see revenue growth accelerating
until next year.
``(This stock) is going to trade in a range until the broader uncertainties about Y2K and revenue
growth subside, industrywide,' he said of uncertainties moving into year 2000.
Brokerage PaineWebber responded by downgrading its rating on the stock, advising investors to
take to the sidelines.
The company said that its networking services business, particularly in its work for the U.S.
government sector, is being hurt by intense competitive pricing pressures and unexpected delays
in the start-up of certain contracts.
The company's NT services work that helps companies run key business operations is
developing more slowly than Unisys anticipated as clients continue to evaluate and test new
Microsoft Corp. (NasdaqNM:MSFT - news) Windows NT-based systems.
Its traditionally slower growing mainframe-class computer business chugged along in the third
quarter with 4 percent revenue growth. Unisys cautioned that some customers have delayed
fourth-quarter purchases in order to focus on fixing potential Year 2000 glitches in their existing
equipment.
Unisys said it planned to realign its services business, which accounts for two-thirds of
revenues, to better position the company in the electronic business market to become more
selective about the services contracts it signs. Its hardware business generates the remaining
third of total revenues.
As part of its moves to integrate its high-end corporate computer services and low-end customer
desktop technical support businesses, the company announced the departure of Lawrence Russell
and Gerald Gagliardi, the executive vice presidents in charge of the company's two services
divisions. The company said it will be announcing more details of its revamped services
strategy within the next month.
Unisys warned fourth-quarter revenue growth would remain in the 4 percent range, after taking
account of currency effects, as the company restructured its services businesses and contended
with customer Year 2000 concerns. These changes would hurt revenue growth into early next
year, it said.
The company said it was comfortable with Wall Street analysts' fourth-quarter earnings
consensus, which stood at 46 cents per share compared with 42 cents in the year-ago fourth
quarter, according to First Call's survey.
The slowing pace of revenue growth is an echo of the average 2 percent growth that Unisys
reported in the five years before Weinbach arrived in 1997, which the company had appeared to
put behind it over the past year, analysts said. |
