Unisys Corporation (UIS) is currently restructuring its business to improve profitability. This restructuring strategy includes cutting of jobs to reduce costs, selling non-core businesses, revamping its sales strategy and focusing investments on a few higher-growth areas outsourcing, open source and Linux products, Microsoft (MSFT) offerings and security.

UIS is expected to report fiscal Q2:08 results on July 23. Earlier, revenues for Q1:FY08 came in at $1.3 billion, down 3.5% year-over-year [y/y] and 15% quarter-over-quarter [q/q], mainly due to softness in the U.S. business. EPS of ($0.07) was well below consensus estimate of ($0.02). F/X had roughly 5-percentage point positive impact in the quarter. Service revenues were down 1.4% y/y while Technology sales decreased 15.8% y/y and were down 38.7% q/q.

The most significant decline was in the U.S. federal business which was impacted by contracting delays at certain agencies. The technology business was also impacted as some clients tightened spending on IT projects in an uncertain economic environment. Gross margin improved to 22.5% from 19.1% in Q1:FY07 but was down from 27.4% recorded in Q4:FY07.  Nevertheless, management continues to target an operating margin goal of 8-10% by the end of 2008. We maintain our Hold rating on Unisys.

Although management is making progress in expanding margins, we remain cautiously optimistic of the pace of IT spending recovery and the maturing of higher-margin legacy product sales and services. Accordingly, our target price stands at $4.50. This is derived by applying a P/S multiple of roughly .3x to our 2008 revenue estimate, which is below the industry median.