Unisys Corp, which followed the likes of NCR Corp in outsourcing its PC and low-end server manufacturing (CI No 3,320) in order to boost its services business and high-end NT server sales, should see healthier times ahead despite taking massive charges, according to analyst Steven Milunovich at Merrill Lynch & Co. Milunovich sees the company’s actions in line with his focus mantra and expects solid Q4 earnings and an improved 1998. There should be synergy between the two focus areas, as high-end servers feed services and consulting contracts, and vice versa. Unisys has warned that pulling out of PCs will cost the company an estimated $125m and is seizing the opportunity to write off $900m of capitalized goodwill created in the original 1986 merger between Sperry Corp and Burroughs which formed Unisys. Along with a $42m charge for early redemption of debt and the fourth quarter will see one-time charges totaling a whopping $1.1bn. For 1998, the company expects the reduced goodwill to have a $35m impact, or $0.13 per share, effectively reducing the tax rate to 36%. Interest savings should add another $0.02 per share. The move away from PCs was announced alongside preliminary estimates of the group’s year end results, which came in much as expected at $0.43 to $0.45 per share before charges. Accordingly, Merrill is reducing its Q4 EPS estimate to $0.26, net of the charges. But, more importantly, professional services should finally reach profitability when earnings are announced on January 15th. Merrill is increasing its 1998 estimate to $0.93. Milunovich says Merrill is impressed with the new management’s aggressive moves and thinks improved focus and additional resources should help the company expand the top line as well. Unisys also announced the early retirement of a further $198m of debts. Interest payments have been scuttling the company’s growth aspirations and new chief executive Lawrence Weinbach’s crusade to reduce debt at Unisys has wiped $800m of liabilities from the balance sheet in the last four months, quickly approaching the goal of a $1bn reduction by 2000. Analysts at Merrill expect the company to stand pat with that goal, using future excess cash to grow its businesses. Unisys shares have reacted positively to the latest developments, gaining more than 10% in two days to close at $15.0625 Wednesday, approaching the 52-week high of $16.50, no small feat as the low for the same period was just $5.75.
