The sound of silence can't drown out Unisys' painful transition to a cloud-enabled world
- Summary:
- Were Unisys' results bad enough to render Wall Street dumb? Hardly - but they do point to the ongoing pain of transition to a cloud-enabled world order for the enterprise establishment.
Was it a technical problem? I do tend towards to cock-up over conspiracy on most occasions. Certainly there wasn’t a great deal of good news in the update, which sent the share price down 7%, but it was hardly apocalyptic enought to render Wall Street’s finest into stunned silence surely?
What Unisys essentially reminded us of yesterday is that the transition from the old IT order to the new cloud-enabled regime isn’t just painful for legacy enterprise software firms. It hurts at the hardware and the services levels as well, both of which were reflected in Unisys second quarter numbers.
The firm turned in a net loss of $12 million in the quarter versus net income of $20 million in the year ago quarter, while revenues for the quarter decreased 6% year on year percent to $806.4 million from $858.6 million, comfortably (uncomfortably?) missing Wall Street’s consensus estimate of $851.65 million.
It was left to Coleman to spin the ‘we’re on a journey’ line that’s increasingly common among the enterprise IT establishment today:
The IT industry is going through major transitions, driven by the disruptive trends of cloud mobility, big data, social computing and increasing cyber security threats.
These transitions include the shift from labor-based services to software-based and enabled services. From on-premise computing to the hybrid cloud, from heterogeneous technology platform to standardizing on common platforms like Intel Xeon, from human to machine interaction, the sensor-based machine-to-machine interactions and support critical infrastructure and other mission-critical applications.
As a leader in providing mission-critical products, services and solution, Unisys too is making important changes to its business. We’re creating innovative new products and services to incorporate these disruptive trends and support these necessary transitions to deliver what we refer to as modern mission-critical IT.
Yada, yada, yada. That’s a refrain we’ve heard from a lot of places now. It may not invalidate the argument underpinning it, but maybe familiarity is breeding a bit of contempt among the investment community?
Whatever the case, breaking down the numbers isn’t pretty:
- Technology revenue makes up 12% of total revenues and fell 21% year on year.
- Services revenue, 8% of total, was down 4% year on year - and that may have been ameliorated by a massive contract win in Pennsylvania.
- Systems integration and infrastructure services revenues were down 8% and 16% respectively.
Coleman concedes there are big issues to be addressed in relation to the firm's services operation:
Our biggest challenge in services from a revenue perspective is in our project-based systems integration business. Like others in the industry, we are seeing a shift in client buying patterns away from traditional large multi-year customized systems integration projects, towards shorter-term package projects that can be implemented quickly with less risk and with the rapid return on investment.
Organizations are also looking to reduce their capital investments and operating expenses by moving to cloud-based solutions delivered on demand via as a service delivery models. This shift is also a change in the requirements for resources and people skills.
Today’s IT consultants and service specialists must be adept in applying disruptive technologies such as mobility, the cloud, social computing and Big Data within subscription-based software as a service delivery models, where clients are increasingly interested in purchasing computing power on an as needed basis.
Again it’s a familiar story. But with a thesis this widely rehearsed across the industry, what is Unisys doing to address the problem? Coleman points to that Pennsylvania deal to argue that Unisys is fact making the necessary transitions:
The Commonwealth of Pennsylvania recently chose Unisys for groundbreaking solution to create and operate, was expected to be one of largest secure, cloud-based IT implementations by US state government.
Building on our previous datacenter transformation work with the Commonwealth, Unisys will consolidate seven separate datacenters into a secure hybrid cloud environment that rollout state agencies to procure computing services on demand.
The contract is valued at about $681 million over its initial seven-year term and has three additional one-year options. By enabling agencies to access and use IT services on an as needed basis, the Commonwealth will be able to reduce operating costs while enhancing the flexibility and service delivery.
Buying into the pitch
Well it's certainly a good win to be able to point to, but one swallow doesn’t make a spring etc. Coleman picks out what he calls new models in Unisys managed services business to make the case that change is underway:
We continue to grow client base for our cloud-based EDGE, IT-service management solution, which uses advanced automation and predictive analytics to deliver cost-efficient, personalized IT support services, to an organization and users.
Because it is cloud and standards-based, EDGE can be implemented and has few as 45 days compared to six months or more than other ITSM deployment typically require. We’re excited to see Unisys recently named as the leader in the 2014 Forrester Research Wave report for North American ITSM implementation providers. For our solution was the only one to receive a perfect score in the category at value proposition.
And customers are buying into the pitch, he insists:
EDGE is now being used by more than 160 clients globally including in emerging markets. In Africa, IT services provider, Bytes Technology Group, recently chose our EDGE ITSM solution to provide IT services to 41 business units. Bytes will also use EDGE to provide standardized IT support services to new customers across the region. This follows the selection of EDGE by 21 Vianet as its standardized ITSM platform for delivering IT support services to its customers in China.
But overall, despite his best efforts, the big picture is at present downbeat. Coleman concedes:
While we’ve made good progress in transitioning our managed services business to new delivery model, we have more work to do on a project basis systems integration business where we’ve been experiencing revenue declines. This impacts our ability to reach our 2014 goal of flat services revenue.
But playing to a longer game may pay off yet for Unisys, reckons Elitsa Bakalova, analysts with Technology Business Research, who argues:
Unisys faces significant challenges going forward in its transition to a cloud-focused software and services provider due to the firm’s lack of progress adding talent with cloud skills and its dearth of proprietary software offerings. Despite the obstacles ahead Unisys has a clear strategy to reignite revenue growth including investing in IP to bolster its cloud portfolio, expand its channel partner network and boost investment in marketing to raise market awareness around its’ marquee solutions such as Stealth.
Unisys is also implementing a strategy to achieve sustainable margins in the 8% to 10% range by consolidating its non-US Federal services businesses into one organization, rationalizing its’ services portfolio, continuing the shift towards cloud-based delivery models and moving its headcount to low-cost locations.
TBR believes Unisys’ position as a leading public sector cloud services provider and strong services offerings for the air transportation and mortgage segments will carry the company through this difficult period allowing it time to transition the company to become a next generation IT services provider. We believe it will take at least two years for Unisys to see demonstrable results from its restructuring efforts.
It’s a sentiment that Coleman and his colleagues might take comfort from, even if it wasn’t enough to get Wall Street talking yesterday.
My take
Silence is golden.