Legacy IT Will Constrain Margins But Cloud Will Uplift

Key Takeaways

• Exposure to cyclical sectors and legacy mainframe reliance may limit margin growth and erode earnings if next-generation services do not scale quickly enough.
  
• Operational efficiency gains face headwinds from labor cost pressures and complex client dynamics, resulting in potential delays in revenue realization and margin improvement.
  
• Unisys faces revenue and margin pressures due to legacy dependence, demand volatility, slow contract cycles, and difficulty pivoting to cloud and next-generation services.

Catalysts

Operates as an information technology solutions company in the United States, the United Kingdom, and internationally.

• Although Unisys stands to benefit from accelerated enterprise digital transformation and growing demand for AI-enabled data infrastructure, persistent macro uncertainty in public sector budgets and elongated client decision cycles risk delaying actual revenue conversion from its growing contract pipeline, potentially weighing on topline growth over the next several quarters.
  
• While ongoing operational efficiency initiatives-including workforce optimization, automation and advanced AI adoption-are improving gross and operating margins, the company remains exposed to rising global labor costs and potential shortages of high-skilled talent, which could undermine margin expansion and limit sustainable improvements in earnings quality.
  
• Despite increasing opportunities in cybersecurity and hybrid cloud management, Unisys's heavy exposure to government and regulated industries heightens renewal and pricing risk, as these counterparties increasingly demand outcome-based contracts that could drive margin compression even as recurring revenue grows.
  
• Although pivoting toward high-value, recurring cloud and managed services contracts should enhance revenue visibility and reduce cyclicality, Unisys's legacy reliance on mainframe and traditional IT services continues to create a drag on overall gross margin, and the secular decline in these areas may structurally erode future earnings unless next-generation offerings scale rapidly enough.
  
• While Unisys's robust pipeline of large-scale digital workplace and cloud transformation projects positions it for topline expansion, near-term revenue recognition remains uneven due to project timing, complexity in contract negotiations, and potential delays in client ramp-up, placing pressure on reported revenue and potentially constraining cash flow in the intermediate term.

Unisys Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Unisys compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Unisys's revenue will grow by 2.5% annually over the next 3 years.
• The bearish analysts are not forecasting that Unisys will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Unisys's profit margin will increase from -4.2% to the average GB IT industry of 6.4% in 3 years.
• If Unisys's profit margin were to converge on the industry average, you could expect earnings to reach $134.4 million (and earnings per share of $1.75) by about September 2028, up from $-81.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 4.9x on those 2028 earnings, up from -3.4x today. This future PE is lower than the current PE for the GB IT industry at 29.3x.
• Analysts expect the number of shares outstanding to grow by 2.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Unisys Future Earnings Per Share Growth

Risks

• The company's revised revenue guidance reflects a tempering of growth expectations due to persistent macroeconomic and geopolitical uncertainty, particularly impacting the public sector and higher education clients, which could continue to suppress revenue growth if government and enterprise tech spending remains subdued over the long term.
  
• Flat year-over-year revenue in key Ex-License and Support (Ex-L&S) solutions and a sequential decline attributed largely to revenue acceleration from future quarters suggest potential ongoing demand volatility in the company's core businesses, which may limit sustained topline growth.
  
• Heavy dependence on large, long-term contracts with government and global enterprises exposes Unisys to contract renewal delays, elongated decision-making cycles, and unpredictable backlog conversion rates, raising risks for revenue visibility and net margin stability as clients seek flexible, outcome-based engagements.
  
• Unisys's legacy product mix, including continued reliance on mainframe and infrastructure management services, faces industry-wide pressures from ongoing migration to public cloud and SaaS solutions; the company's ability to offset secular declines in these legacy offerings with sufficient, sustainable growth in next-generation services remains uncertain and threatens long-term earnings.
  
• Gross margin compression in Ex-L&S solutions, driven by restructuring and only partially offset by operational efficiencies, highlights vulnerability to rising costs and competitive pressures; without consistent improvement in high-margin offerings and a robust pipeline conversion, future net margins and profitability could remain at risk.

Valuation

• The assumed bearish price target for Unisys is $6.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Unisys's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $9.0, and the most bearish reporting a price target of just $6.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $134.4 million, and it would be trading on a PE ratio of 4.9x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $3.88, the bearish analyst price target of $6.0 is 35.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.