Unisys CEO Peter Altabef: “There’s An Increase In Demand For IT Services Labor”

‘We’re ... not just increasing compensation, although we are doing that, but also increasing entry-level recruiting, increasing the amount of people we get as a company from referrals, and also keeping our overall turnover below where we think the IT services market is in general,’ says Unisys CEO Peter Altabef.

The IT talent shortage is still very real, but Unisys has managed to navigate any headwinds, according to Unisys Chairman and CEO Peter Altabef.

Altabef, speaking to financial analysts Tuesday during the Blue Bell, Pa.-based solution provider’s fiscal year 2021 quarterly conference call, also said that Unisys is back in the M&A game after a long time during which the company stayed away from potential acquisitions.

With respect to workforce management, the market for talent is highly competitive, Altabef said during his prepared remarks

[Related: Unisys CEO Altabef: COVID-19 Impact Is Making The Company Stronger]

In response, Unisys during the year adopted targeted talent attraction and retention initiatives that resulted in voluntary attrition during 2021 of 17.1 percent, which Altabef said was lower than the pre-pandemic level of 17.9 percent for 2019.

This included Initiatives such as internal mobility and upskilling programs, which Altabef said increased opportunities for the company’s employees, resulting in a 33 percent internal fulfillment rate for 2021, up from 30 percent in 2020 and 24 percent in 2019.

“With respect to wage inflation, we are actively reviewing our workforce and also focusing our compensation adjustments on the capabilities and roles that have been identified as critical to achieving our short- and long-term strategic goals,” he said. “We are also leveraging referral-based hiring. ... These overall efforts allowed us to avoid any material disruption of service to our clients and kept us on track to drive growth while improving margins. They also position us to continue executing against our operational and financial goals in 2022.”

When asked during the question-and-answer period about potential headwinds to growth, including supply chain and other issues, Altabef said supply chain issues are in the broad sense not having a material effect.

“None of the headwinds that you listed are really having a material effect on us at this point,” he said. “I think all of that has been eliminated. The exception to that rule is really related to the cost of labor. So you are still seeing and we all know it, there’s an increase in demand for IT services labor, which is a good thing for our industry, but that’s coming with an increase in labor cost.”

Unisys, ranked No. 29 on CRN’s 2021 Solution Provider 500, is managing that labor cost, Altabef said.

“We are managing that through a variety of factors, not just increasing compensation, although we are doing that, but also increasing entry-level recruiting, increasing the amount of people we get as a company from referrals, and also keeping our overall turnover below where we think the IT services market is in general,” he said. “So we think we are being effective in that. So if I wanted to say there was one headwind remaining for us, it really is we have to manage the cost of labor very carefully.”

Altabef, in response to another analyst question, said Unisys has been actively focused on decreasing the cost of labor as a percentage of revenue. In fiscal year 2020, the cost of labor as a percentage of revenue was about 55.6 percent and fell to 54.2 in fiscal 2021.

“That’s really one of the ways we are measuring, if you will, the tide,” he said. “And it is our goal to continue to drive that down, and we think we will continue to drive that down in 2022.”

Labor cost varies according to the business segment, Altabef said.

In Unisys’ Digital Workplace Solutions (DWS) and Cloud and Infrastructure Solutions (C&I) business segments, the company has been able to mitigate labor costs via automation and AI, he said.

“And then in ECS [Enterprise Computing Solutions], it’s a little trickier because although we are getting more efficiency in our software development efforts, because services is becoming a larger percentage of that, and services is more dependent on labor as just kind of a general principle than software is, there’s going to be a little bit of a countercyclical effect in ECS just by the nature of that work,” he said.

Altabef, when asked about Unisys’ merger and acquisition strategy, said the company closed three acquisitions in calendar 2021.

The company in December acquired CompuGain, a cloud services provider, for $87.3 million. In November it acquired Mobinergy, which specializes in unified endpoint management, for an undisclosed amount. Unisys in June also purchased Unify Square to boost its enterprise collaboration prowess.

“[These] were the first acquisitions we had done in over a decade, and that was largely because we had made the balance sheet changes we did in 2020,” he said. “That acquisition program remains active, and we are continuing to look for good opportunities. Those opportunities tend to be in the DWS and in the C&I space, and we are focusing on those two areas with respect to acquisitions.”

When asked by another analyst how the valuations of potential acquisitions are changing, Altabef said that the closer to the cloud a potential acquisition gets, the more expensive the acquisition, while the closer to Unisys’ DWS business, the valuations are growing more slowly.

“From our standpoint that works great for us because DWS is an area where we believe that we have now a really powerful solution set, especially with the acquisitions we made last year, and we could look forward to more scale acquisitions as we go forward if we find that opportunity at the right price, and we do think that price is again lower than a comparable cloud company,” he said. “With respect to cloud acquisitions, we have to be careful because historically in the last 18 months, they have been expensive. And although the price is down a little bit, they are still expensive in terms of our analysis.”

For fiscal fourth quarter 2021, which ended Dec. 31, Unisys reported revenue of $539.3 million, down 6.5 percent from the $576.9 million the company reported for its fourth fiscal quarter 2020. Unisys attributed the drop to a change in its ECS license renewal schedule.

That included DWS revenue of $138.1 million, down from last year’s $146.3 million; C&I revenue of $129.9 million, down slightly from last year’s $131.1 million; and ECS revenue of $191.2 million, down from last year’s $220.5 million.

For the quarter, Unisys reported a GAAP loss of $131.2 million, or $1.95 per share, which was an improvement from last year’s loss of $174.7 million, or $2.77 per share. On a non-GAAP basis, Unisys reported net income of $34.8 million, or 51 cents per share, down from last year’s $49.2 million, or 73 cents per share.

For all of fiscal 2021, Unisys reported revenue of $2.054 billion, up 1.4 percent over fiscal 2020 revenue of $2.026 billion.

Unisys’GAAP loss for the year was $448.5 million, or $6.75 per share, up from last year’s loss of $317.7 million, or $5.05 per share. On a non-GAAP basis, Unisys reported net income of $117.5 million, or $1.75 per share, up from last year’s $75.4 million, or $1.13 per share.

Unisys reported free cash flow of $44.3 million for its fourth fiscal quarter 2021, a significant improvement over the free cash loss of $355.4 million it experienced in the year-ago quarter. For the full year, Unisys reported free cash flow of $32.3 million compared with a fiscal 2020 loss of $811.3 million. That made fiscal 2021 the first year Unisys experienced positive free cash flow since 2016.

Looking ahead, Unisys is expecting revenue growth for fiscal 2022 of 5 percent to 7 percent versus fiscal 2021, said Unisys CFO Mike Thomson during his prepared remarks.

Thomson also reported total company backlog for fiscal 2021 was flat sequentially at $3 billion, but that is growing.

“As a reminder, the ramp-up of our go-to-market strategy and the hiring of additional direct sellers, as well as the emphasis on channel sales and the addition of advisory capabilities, was all happening in the back half of 2021,” he said. “We are expecting backlog to increase throughout 2022 and into 2023. We are also expecting a 5 percent to 10 percent increase in backlog for the full year 2022.”