Unisys loses $2.7 b. in market cap on profit warning

Ilaina Jonas

NEW YORK: Shares of Unisys Corp. fell nearly 40 per cent Thursday after the

computer services supplier said its second-quarter earnings could be less than

half of Wall Street expectations.

Unisys blamed delayed contracts, weak sales in the government and financial

sectors and currency fluctuations for its performance.

The shares fell 8-7/8 to 14-3/4, making Unisys the top percentage loser on

the New York Stock Exchange and hitting its lowest price since January 1998. The

drop chopped $2.7 billion off the company's market value.

Blue Bell, Pa.-based Unisys forecast second-quarter earnings of 18 to 20

cents a share, before a previously announced one-time charge of $20 million for

debt retirement. Analysts had expected 37 cents a share, flat with the results

of the 1999 second quarter, according to First Call/Thomson Financial. The

charge is expected to erode an additional six cents a share.

The company will report earnings on July 18.

Unisys Chairman Lawrence Weinbach last month said he expected second-quarter

revenues to fall slightly compared with a year earlier and said double-digit

revenue growth would return in the second half of the year.

"We expected our business to show a recovery in the second quarter, but

this has not yet happened to the extent that we had expected," Weinbach

said in a conference call Thursday.

Unisys forecast second-quarter revenues of $1.62 billion to $1.65 billion,

down 13 to 15 per cent from a year earlier.

Weinbach said several key contracts in its technology sector had been

expected to close late in the quarter. When this did not materialize by Tuesday,

the company decided to issue a warning.

"These contracts were for Clearpath hardware and related software, which

on a combined basis have very good gross margins," he said, referring to

the company's servers for e-commerce. "The deferral of these contracts is

the main reason why we missed our earnings estimate."

Unisys now expects second-half revenue to show a percentage rise only in the

single digits from a year ago. Revenue for 2000 is expected to decline by

mid-single digits and earnings per share for 2000 are expected to fall by a

mid-single-digit percentage compared with last year's operating earnings of

$1.56 per share.

Weinbach said the company would take key steps in its services division,

including a freeze on hiring, tight controls on discretionary spending and

training all sales personnel in e-business.

It also said it would join with other technology providers whose products

help companies reach out to business partners and customers, while Unisys

focuses on the behind-the-scenes, later-transaction stage of electronic business

activity.

The company said it would review low-growth service areas and would consider

all alternatives, including divesting some under performing units.

"I would put anything and everything on the table, but there's been no

decisions made specifically on that," Weinbach said.

Brokerages responded by trimming estimates and lowering their ratings on the

stock.

Merrill Lynch analyst Steve Milunovich cut his earnings estimate for Unisys'

second quarter to 20 cents a share on $1.64 billion of revenue. He projected

earnings of $1.42 on revenues of $7.24 billion for the year 2000. He cut his

rating on the stock to intermediate neutral from accumulate.

Salomon Smith Barney analyst John Jones Jr. also cut his second-quarter

earnings estimate for Unisys to 18 cents from 37 cents, his 2000 earnings

estimate to $1.30 from $1.75, the firm's rating to outperform from buy and his

18-month price target to $22 from $45.

"From our perspective, it is unclear if UIS has the e-business formula

to progress with its services business or if in fact time will show them as an

e-business wannabe," he said.

The Unisys warning added to the concern about International Business Machines

Corp.'s services business, which also relies heavily on sales to the government

and financial sectors. IBM shares slid to 110-1/16 before recovering to 114, up

5/16.

"It's clearly an issue for IBM's services side, but there are lots of

movable parts at IBM that can offset that," said Andrew Neff analyst Bear

Stearns.

This is the third quarter in the past year that Unisys has warned of slack

revenue growth.

While in the first quarter, the company cited sales force reorganization and

"Y2K" concerns for lower-than-expected sales, it blamed a fundamental

shift of focus in the marketplace toward electronic business for its current

troubles.

"There's a fundamental transition going on in the market, that is

affecting Unisys and many other providers of services and solutions,"

Weinbach said. "The transition of course is to e-business. That transition

is happening faster than we thought."

(C) Reuters Limited 2000.