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We recently downgraded our recommendation to Underperform from Neutral on Unisys Corporation (UIS - Analyst Report).

Unisys recently reported weak results for the second quarter of 2011. The second quarter results were impacted by the continued weakness in the U.S. Federal business and lower ClearPath sales. In particular, revenues continue to decline primarily due to the end of a Transportation Security Administration (TSA) contract effective November 30 and the impact of the U.S. federal government budget situation.

Unisys Corporation reported revenues of $937 million in the second quarter, down 10% from a year ago. Services revenues declined 6% year over year primarily due to lower revenue in the company’s U.S. Federal business.

Outside the U.S. Federal business, IT Outsourcing revenue grew 7%. ITO revenue from the U.S. Federal Government was down for the quarter principally due to the loss of revenue resulting from the closure of the TSA contract, effective November 30, 2010.

The TSA contract represented 10% of the total ITO revenue in the second quarter of 2010.  Infrastructure services revenue increased 13% year over year due to deal-specific third-party sales and new business wins in private label maintenance business. Core maintenance revenue inched down 3% year over year, business process outsourcing revenue declined 5% year over year.

Technology revenues declined 35% from the year-ago quarter. The decline was attributable to lower sales of ClearPath systems following growth in the prior quarter and in 2010. 

Net loss came in at $11.6 million or $0.27 per share in the quarter compared with a net income of $120.2 million or $2.82 per share in the year-ago quarter.  Excluding one-time charges, net income came in at $0.93, much better than the Zacks Consensus Estimate of a loss of $0.08.

Although Unisys has recently been restructuring its business to improve profitability, we do not see any catalyst driving the stock higher in the near-term. Earnings estimates for 2011 stand at $1.31, down by $0.30 in the last thirty days.

Based on a bleak outlook in the coming quarters, we downgrade our recommendation to Underperform from Neutral. Our recommendation is supported by a Zacks #5 Rank, which translates into a short-term rating of Strong Sell.

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