Unisys, a company with a legacy stretching back to 1873 (yes, older than the telephone!), has always been a bit of an enigma. They've weathered technological storms, shifted from typewriters to mainframes to digital solutions, and yet, they often fly under the radar of Wall Street's hottest picks. But within their recent Q1 2024 earnings transcript, there's a hidden gem, a trend almost no one is talking about: the power of their **tax assets** combined with the strategic shift towards higher-margin solutions.

Now, tax assets might sound as exciting as watching paint dry, but hear me out. Unisys has accumulated a significant amount of net operating loss (NOL) carryforwards, particularly in the US and EMEA, their two largest revenue-generating regions. This means that as their profitability in these regions increases, their cash tax burden is expected to remain relatively low, thanks to these NOLs offsetting their tax liability. Essentially, they get to keep more of their hard-earned profits.

But here's where it gets really interesting. Unisys isn't simply relying on tax benefits. They're simultaneously executing a masterful strategy of pushing towards higher-margin solutions within their Ex-L&S (excluding License & Support) portfolio. We see this playing out in both their Digital Workplace Solutions (DWS) and Cloud Applications & Infrastructure (CA&I) segments.

In DWS, they're experiencing strong client interest in intelligent solutions like their Smart PC refresh offering, bundled with higher-margin modern workplace services. It's not just about selling hardware; it's about wrapping it in a package of valuable managed services, driving up profitability.

Their CA&I segment is equally impressive. They're capitalizing on the hybrid infrastructure trend, where clients are seeking a mix of private cloud, colocations, and public clouds for tailored flexibility and security. Unisys is perfectly positioned to capitalize on this, leveraging their deep expertise in mission-critical services and partnerships with hyperscalers like AWS and Azure. This is high-value work, translating to a more profitable business.

And let's not forget their "secret weapon" in the making: Unisys Logistics Optimization. This quantum and AI-infused industry solution is poised to disrupt the cargo industry, offering unparalleled capacity, inventory, and routing optimization. The company is aggressively building out its go-to-market channels and assembling a team of industry veterans to scale this innovative offering, potentially unlocking a massive new revenue stream.

The evidence for this potent combination of tax advantages and a shift towards higher-margin solutions is already visible in their Q1 results. Ex-L&S gross margin expanded by a whopping 420 basis points year-over-year. While a one-time benefit of 140 basis points contributed, the remaining 280 basis points directly reflect their strategic initiatives.

This isn't just a short-term blip. Unisys is projecting an Ex-L&S gross margin expansion of 150 to 200 basis points for the full year 2024, with further improvements anticipated in 2025 and 2026.

Ex-L&S Gross Margin Expansion Projection

Now, let's talk numbers. If Unisys manages to achieve their projected 5% growth in Ex-L&S revenue for 2024, reaching approximately $1.67 billion, and maintains their current L&S revenue of $375 million, they would reach a total revenue of $2.045 billion. Assuming they hit the high end of their projected Ex-L&S gross margin expansion, reaching 17.1% (a 200 basis point increase from their 2023 full-year margin), and maintaining their current L&S gross margin of 65%, their total gross profit would be $584 million, a 5.6% increase from 2023.

The impact on cash flow could be even more dramatic. If their cash taxes remain low due to their tax assets, they would retain a significant portion of this incremental gross profit.

This, combined with their ongoing efforts to streamline SG&A expenses, declining environmental and legal payments, and the potential for a $30 million reimbursement in 2026 for environmental cleanup costs, suggests that their free cash flow could significantly exceed their current projection of $10 million for 2024 and accelerate further in 2025 and 2026.

Of course, these are projections, not guarantees. But the combination of tax advantages, strategic shift towards higher-margin solutions, and promising new offerings like Unisys Logistics Optimization suggests that Unisys is building a powerful engine for profit growth that has the potential to surprise even the most seasoned Wall Street analysts. This isn't just a company riding the waves of technological change; it's a company proactively shaping its future, and investors would be wise to take notice.

"Fun Facts about Unisys"

Older than the Telephone: Founded in 1873, Unisys predates the invention of the telephone! From Typewriters to Tech: Unisys has a rich history, evolving from producing typewriters to pioneering mainframe computers and now offering cutting-edge digital solutions. Quantum Computing Powerhouse: Unisys is a leader in quantum computing, leveraging this technology for groundbreaking solutions like Unisys Logistics Optimization.