Unisys Corporation (UIS) reported revenues of $1.34 billion in Q2:FY08, down 2.6% year-over-year [y/y] but up 3.0% quarter-over-quarter [q/q]. The year-over-year decline in revenues was due to weakness from financial services clients owing to uncertain economic environment.
EPS of ($0.04) was below consensus estimate of $0.03. F/X [foreign exchange rates] contributed 4% to the revenue growth in the quarter. Service revenues were up 0.9% y/y and 9.0% q/q. Technology sales decreased 14.4% y/y and 12.9% q/q. Gross margin improved to 22.7% from 21.8% in Q2:FY07 and 22.5% in Q1:FY08. Operating margin of 1.7% was up from 0.2% recorded a year ago but down from 2.2% registered in the previous quarter.
The management is still engaged in a multi-step strategy of reducing the cost structure of the company and focusing its resources on high growth areas of the IT market. It appears that UIS is now expected to demonstrate tangible results from its ongoing restructuring, after several execution missteps in the past. The management continues to target an operating margin goal of 8%-10% by the end of 2008. We maintain our Hold rating on Unisys.
Although management is making progress in expanding margins, we remain cautiously optimistic of the pace of IT spending recovery and the maturing of higher-margin legacy product sales and services. Accordingly, our target price stands at $4.25. This is derived by applying a P/S [price-to-sales] multiple of roughly 0.3x to our 2008 revenue estimate, which is below the industry median.
Read the full analyst report on UIS
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