Speaking at a JPMorgan conference in San Francisco last week, McGrath laid out the company’s future services strategy and offered some more details into the restructuring it announced last October, including some 3,600 job cuts, or roughly 10% of the total workforce.
Currently services make up 83% of Unisys’ business, with its technology line pitching in the remaining 17%. For the first quarter for this year, in which the company whittled down its net loss to $27.9m, services revenue grew 6% to $1.18bn.
This increase was offset by an 18% sales drop in Unisys’ profitable server business. One bright spot was that Q1 marked the second straight quarter of double-digit gains in bookings, McGrath said.
Overall, McGrath said the company is looking for revenue growth in the mid-to-high single-digit range by 2008, as well as operating margins between 8% and 10%. These targets are rather bold coming from last quarter, when revenue inched up only 2% and operating margins sunk to negative 12%. McGrath’s strategy includes targeting services markets that are growing at least 10% and present a minimum of $500m in annual revenue for the company.
The first of these is outsourcing and includes BPO and IT work. It is obviously a large market, but one in which Unisys has had trouble running some of its larger contracts at a profit. It is also a highly competitive space with India’s low-cost suppliers having an increasing impact on the market.
Asked about the tough competitive landscape, McGrath said Unisys had several tricks up its sleeve in each of these target markets. In outsourcing, for example, certain capabilities in real-time infrastructure give it better price performance and a lower cost of ownership for clients.
The second target market is in enterprise security networks. One example of this work is running the largest RFID network for the Pentagon, which supports military and intelligence operations in more than 20 countries, McGrath said.
He added that Unisys has a strong, differentiating competency in areas such as identity management, biometrics, physical tracking, and cyber security.
The third area is open-source services, particularly for high-performance, high-end Linux applications. McGrath added that its capacity for very high-volume applications work in this area gives it a clear leg up. Finally, the company sees promise in Microsoft services, again in the high-volume applications area for the upcoming Vista operating system.
On the cost side, the plan continues to be a combination of headcount reductions, offshore relocation, divestitures, and outsourcing of non-core operations.
McGrath said the services business would save $125m this year through steps such as reducing consulting overcapacity. Partnerships in its technology business for hardware design and manufacturing will add another $50m in savings, and the company is targeting another $75m in G&A savings.
Although Unisys already took a $146m Q1 charge for the planned workforce reductions, few cuts were made during the quarter, as the company first needed the cash from the March sale of its stake in Japanese distributor, Unisys Nihon Ltd, for $378m. McGrath said about 80% of the cuts will come this quarter and in the third quarter.
McGrath admitted we weren’t as aggresive as we could have been or should have been in growing an earlier offshore presence, but said the company is finally getting serious about its ramping up its headcount in low-cost regions.
He said Unisys was finally in position to boost offshore numbers, with facilities ready in Bangalore and Shanghai, and 20% of its entire workforce should be located offshore by 2008. Offshoring has also become more of a strategic contract feature for Unisys, with offshore delivery being initially locked into newer deals.
McGrath emphasized a suitable offshore mix of contract hires and Unisys workers. He said that the split will, at a minimum, be 50/50, but will hopefully move more toward the contract side. He cited the benchmark popularized by GE of a 70/30 ratio in favor of contract hires.
We want to avoid a fixed population asset but have the ability to move cyclically with the market, McGrath explained.
Another key feature of Unisys’s strategy is to focus more on its top clients and national markets. Currently 85% of revenue comes from 500 of Unisys’ 4000 accounts, and McGrath wants to concentrate more on these top clients for additional revenue opportunities, including cross-selling services such as consulting and systems integration.
Finally, when asked about some of its problematic big contracts, the company’s investor relations officer, Jack McHale, said that the iPSL check-processing deal with UK banks, which had been dragging down performance, is expected to break even this year.
Another undisclosed, similarly large utility-type deal that the company had previously acknowledged as a disappointment seems to be progressing more slowly, but the company expects continued improvement on it, McHale said.
