January 19, 2000

Unisys sales hit by Y2K fallout The firm's earnings rose 76% in 1999, but sales grew just 4%. A second-quarter turnaround is forecast.

By Leslie J. Nicholson

INQUIRER STAFF WRITER Although the Year 2000 computer problem failed to shake up the world, Unisys Corp. is feeling the aftershocks - in the form of stagnant sales.

The Blue Bell company, which provides computer hardware, software and services, said yesterday it ended 1999 with a 76 percent increase in earnings, but Y2K-related spending slowdowns and unfavorable foreign-exchange rates held sales growth to just 4 percent for the year.

For the fourth quarter, sales dropped 4.8 percent. Hardware sales alone fell nearly 15 percent, while services revenue was flat.

The sales drop had been expected, and the company forecasts a turnaround beginning in the second quarter.

Unisys said customers reversed their normal spending patterns last year. They bought a higher-than-normal proportion of their hardware early in 1999 in anticipation of the Y2K problem. In the latter part of the year, hardware sales fell as customers froze spending and waited out the date change.

Chairman and chief executive officer Lawrence A. Weinbach said the Y2K spending freeze should be over by mid-February, though not in time to help the company's first-quarter sales, which are expected to be flat.

Unfavorable exchange rates also hit Unisys hard in the fourth quarter, reducing revenues by 5 percentage points, and the effect is expected to continue to a lesser extent in the first quarter.

Weinbach said sales of both hardware and software should accelerate as the year progresses and Unisys should end 2000 with a sales gain of between 8 percent and 10 percent. Earnings per share, he said, should grow at twice that rate.

When Unisys announced flat third-quarter sales last October and predicted a fourth-quarter drop, its stock plummeted 37 percent in one day. Three months later, the stock has not recovered, even though earnings are up.

Part of the problem, Weinbach said, is that Unisys was among the first companies to publicly predict a Y2K-related slowdown. By the time IBM and others followed suit, the damage to Unisys had been done. "As others came out, people got used to it," Weinbach said. "It was one of those times when being first was not the best thing to do."

He told analysts yesterday that he believes the stock is undervalued, given Wall Street's consensus estimate of $1.80-per-share earnings for 2000. "We're a hell of a deal," he said. The stock closed at $29.44 on the New York Stock Exchange yesterday, down $1.31.

Unisys is counting on the Internet to spark growth. It is focusing on providing transaction-processing systems, hardware, software, systems integration, and networking services to companies that want to conduct business electronically.

Despite the slowdown in sales, "overall 1999 was a year of significant accomplishment for Unisys, and we're proud of it," Weinbach said. During the year, the company shifted to a flatter business structure. It also launched a campaign to increase electronic business, retired its preferred shares, and continued to cut debt.

More than $1.3 billion in debt has been cut since 1997, and the company plans to target an additional $400 million this year. Paying that debt will cause a $24 million extraordinary charge against second-quarter earnings, most of which would be offset by reduced interest costs by the end of the year, Weinbach said.

http://www.phillynews.com/inquirer/2000/Jan/19/business/UIS19.htm

-- Martin Thompson (mthom1927@aol.com), January 19, 2000