Unisys watches ClearPath mainframe sales climb

The latest line of ClearPath mainframes from Unisys, launched in October and based on Intel's latest Xeon E5 processors, sold a bit better than expected in the final quarter of last year.

A mainframe selling better than expected is news by definition, and good news for Unisys in particular since the company's top brass has turned the company around in the past four years – and managed to do so during the Great Recession.

However, ongoing issues in the services business weighed Unisys down in the quarter ended in December, much as they had done through 2012. Some challenges were related to the company's dependence on Uncle Sam, some to larger macroeconomic issues, and some to Unisys' own execution in peddling outsourcing, systems integration, and other services.

As he has many times, CEO Ed Coleman explained when reviewing the quarterly report on a call with Wall Street analysts that the ClearPath mainframe business is best judged on an annual basis, not quarterly, given the ups and downs of the mainframe biz, which has its swings much like IBM's System z mainframes and other high-performance supercomputer items with big price tags.

Coleman said that during the quarter there was a big bump in ClearPath sales that closed earlier than expected, and that Unisys mainframes had sold better than it expected in the past three years.

The goal when Coleman took the helm was to just keep ClearPath sales steady year-on-year, but instead the company has been able to actually grow sales. This may not seem like a big deal, but the combination of increased mainframe sales and cost-cutting is a big reason why Unisys has largely climbed out of its pit of debt.

In the December quarter, the company's Technology division posted sales of $173.6m, up 15.7 per cent, while services revenues tallied up to $805.7m, down 3.5 per cent. Total revenues were $979.3m, down six-tenths of a point.

The revenue decline would not have been a big deal at all – other IT suppliers are having similar problems in services, IBM in particular – but unlike its larger mainframe rival, Unisys is not able to squeeze more blood from its stones. And thus profits fell 13.2 per cent to $81.8m. Some of that hit has to do with higher running costs, but the increased costs of getting those new ClearPath mainframes out the door also impacted profits.

Enterprise software and services accounted for $160m in revenues in the fourth quarter, up 13 per cent, and other technology (including resale of disk arrays, among other things) rose by 52 per cent to $14m. Gross margins were up 6.2 points in the quarter to 68.1 per cent, which helped the bottom line considerably. For the full year, the Technology division had sales of $514m, up 3 per cent, with enterprise software and services accounting for $480m of that and rising 8 per cent, and other technology making up the remaining $34m and falling 34 per cent.

Within the Services division, gross margins were essentially flat across all services, which is a bit of an accomplishment considering the issues that Unisys is managing after not getting renewals on some big government contracts and chasing new business outside of the District of Columbia.

The systems integration business was down 4 per cent in the fourth quarter to $278m, and IT outsourcing fell by the same amount to $298m. CFO Janet Haugen said on the call that the company had a goal of growing these two businesses at "market rates" in the coming years, and is working to make that happen.

According to the latest numbers from Gartner, the global IT services business rose by 1.8 per cent in 2012 to $881bn and was projected to grow by 5.2 per cent this year to hit $927bn. Data center systems sales (including servers, switching, storage, and operating systems) rose by only 2.9 per cent last year to $627bn, so Unisys is already beating the market here.

That said, the systems racket is expected to grow by 6.3 per cent in 2013 to $666bn, so Unisys has some iron to push to keep pace.

Core maintenance services (covering Unisys hardware and software) were $51m in the quarter, up 3 per cent, and business process outsourcing sales were $67m, up 6 per cent. Infrastructure services, however, fell 9 per cent to $112m.

For all of 2012, Unisys' services business was down 5 per cent to $3.19bn, and operating margins were off a half-point. The declines in the core systems integration and IT outsourcing businesses are slowing, and the question is whether or not Unisys can reverse the declines entirely and get on with the growing.

There's good reason to believe that it can, with services revenues up 2 per cent in North America – if you take the effect of the US Federal government out of the numbers. Uncle Sam accounted for 14 per cent of all revenues, including technology and services, in 2012. It is a tough situation when your largest customer has huge budget issues.

For the full year in 2012, Unisys had $3.71bn in sales, down 3.8 per cent, and net income was up 7.4 per cent to $129.4m.

To help pump up future sales, Unisys plans to build a channel for its products. Coleman said that Unisys set up a channel for peddling its Stealth system security and virtualization technologies last year, and is now planning to expand its channel to cover other products. He did not elaborate further, but it is possible that Unisys could try to peddle low-end ClearPath mainframe through the channel, provided the numbers work out and channel partners can put more feet on the street than can Unisys itself.

Unisys will also emphasize the fact that its Xeon-based ClearPath mainframes can run Windows or Linux, and boost sales of these operating systems and related software stacks on top of them. Unlike IBM, which has a mix of mainframe, Power, and x86 processors across its system lineup and seems content to keep it that way, the Unisys "ClearPath Forward" plan calls for the company to move all of its mainframes to Xeon E5 iron.

This effort should be done in a matter of years, at which time ClearPath mainframes should get considerably less expensive to build. It is hard to say if profits will expand or if the difference will just be eaten up in improvements in bang-for-the-buck that mainframe shops expect.

We'll know when we see the company's 2015 or 2016 financials. ®