Unisys Corporation (UIS) Earnings Call Transcript & Summary

Welcome to the Unisys Corporation Annual Meeting. My name is Peggy, and I will be your operator. [Operator Instructions] I will now turn the call over to Peter Altabef. You may begin.

Thank you, operator, and good morning, everyone. I am Peter Altabef, Chairman and Chief Executive Officer of Unisys Corporation. It is my pleasure to welcome you to this year's annual meeting of stockholders. Due to the COVID-19 pandemic, we are conducting this year's meeting over the Internet as a virtual meeting rather than in person. A recording of the meeting will be available on the Unisys website 24 hours after the meeting has concluded. You'll be able to access this recording through the Investor Relations page. I would like to introduce Gerry Kenney, Senior Vice President, General Counsel and Secretary, who will serve as secretary and walk us through the formalities of the meeting.

Thank you, Peter, and good morning. First, I'd like to introduce the members of our senior leadership who are with us today: Eric Hutto, President and Chief Operating Officer; Katie Ebrahimi, Senior Vice President and Chief Human Resource Officer; Vishal Gupta, Senior Vice President, President, Products and Platforms and Chief Technology Officer; Jeff Renzi, Senior Vice President and President, Global Sales; and Mike Thomson, Senior Vice President and Chief Financial Officer. Also with us today, in addition to Peter, are the following members of our Board of Directors: Dr. Jared Cohon, Nate Davis, Matt Desch, Denise Fletcher, Philippe Germond, Lisa Hook, Deborah Lee James, Paul Martin and Regina Paolillo. Also in attendance today are Richard Greenwood and Wilson Matheson, partners at PricewaterhouseCoopers LLP, our independent registered public accounting firm. They will be available to respond to questions following the meeting. A copy of the meeting agenda is available on the website through which you have accessed this meeting. There will be time following the adjournment of the meeting during which Mr. Altabef will provide comments regarding the state of our company and for questions or comments from stockholders. If you are a registered stockholder, you may use the control number provided in your proxy materials to submit a question at any time during the meeting, and Mr. Altabef will respond to questions relevant to the meetings following his comments, time permitting. The record date for this meeting is March 9, 2020, and each stockholder as of the record date has been given proper notice of the meeting. A quorum is present. Affidavits relating to the mailing of the meeting notice, the proxy materials and the annual report will be filed with the records of this meeting. A complete list of stockholders as of the record date is available on the meeting website. The list has been open to stockholders of record for at least 10 days. The Board of Directors has appointed Peder Hagberg as the inspector of election for this meeting. In keeping with our policy of confidential voting, the inspector is an independent inspector. He has been duly sworn and is present. Let's move now to the next order of business, the presentation of the proposals. The first item to be voted upon is the election of directors. The proxy statement includes a listing of the nominees. I hereby declare them duly nominated. This year, the deadline for stockholders to submit director nominations was February 7, 2020. Since no such nomination was received, under our bylaw procedure, I declare the nominations closed. The next order of business is the proposal to ratify the selection of PricewaterhouseCoopers LLP as the independent registered public accounting firm to audit the corporation's financial statements for 2020. The Board of Directors has recommended a vote for this proposal. The last order of business is the approval on an advisory basis of executive compensation. The Board of Directors has recommended a vote for this proposal. There being no further items to be voted upon today, the polls are now open for voting. Any stockholder or proxyholder present who have not voted or who wishes to vote at this time may do so by submitting their vote on the website to which you have accessed this meeting. Only stockholders of record or proxyholders may vote at this time. Stockholders in the Unisys Savings Plan may not vote at this time since they must vote through the plan trustee. I will pause now to allow for votes. [Voting]

Now that stockholders have had an opportunity to vote, the polls are now closed. The final report of the inspector of election will not be available before the end of the meeting. However, I'm advised by the inspector of election that he has counted the votes and certifies that proxies representing at least 91.2% of the common stock had been received. The preliminary results are as follows: no material changes in the outcomes are accepted. Each of the directors received at least 44,422,023 votes for his or her election which represents more than 80% of the shares voted. Accordingly, each of them has been duly elected as a director. The proposal to ratify the selection of PricewaterhouseCoopers LLP as the corporation's independent registered public accounting firm for 2020 received approximately 56,848,761 votes for, representing 99.5% of the shares present and entitled to vote. Accordingly, this proposal has been adopted. The proposal to approve executive compensation on an advisory basis received approximately 51,142,078 votes for, representing 97.7% of the shares present and entitled to a vote. Accordingly, this proposal has been approved. Since there is no further business to come before the meeting, I now declare the meeting adjourned. Peter Altabef, our Chairman and CEO, will now comment on the state of our company. Following Peter's comments, we will address any relevant stockholder questions that have been submitted through the website. Peter?

Thank you, Gerry, and once again, I want to thank everyone for attending. As many of you know, if you have attended our annual meetings in the past, we have, for a number of years, in addition to having in-person attendance, had people attend over the web. So this is not entirely different. In fact, in many ways, it's very similar. But in one particular aspect, it is different. So in the past, we've all been in a physical room together. And then we get to this part of the annual meeting, I can glance over to John Armbruster or to Gerry Kenney, whoever is handling the slides and ask them to move the slides. Well, we can't do that right now. So the one area where this might be a little glitchy is in moving forward on the slides. So if that gets a little glitchy, I ask for your patience. With that, Gerry, if you could move to Slide 3, which is our 2019 financial highlights. When we think about annual meetings to shareholders, this is technically the annual meeting to wrap up 2019 or the immediately prior year. So most of the time, I spend most of my comments talking about performance in the last full year. I'll talk about our performance in 2019 now. But unlike years past, I'll spend a little more time on what's happened in this calendar year, and that's really for 2 reasons: one, we had a very significant transaction in March with the sale of our U.S. Federal business that has evolved the company; and secondly, obviously, we have COVID-19. So I also want to give our shareholders a little insight into how we are handling the COVID-19 situation. Before we do, however, let's take a look at our 2019 financial highlights. As you can see from this slide, 2019 was a very strong year for Unisys. And as you see from the first column, we achieved all of our guided metrics. We started providing guided metrics in what I would call the modern era. We took about 12 years off as a company, where we provided no guidance to Wall Street or to our investors, for that matter. In 2016, we provided guidance on an annual basis for the first time. And 2016, '17, '18 and '19, in all 4 of those years, we were able to meet our guided metrics on each metric, and last year was no exception. With respect to how we did in an absolute basis, as you could see on the second column, we grew revenue for the second consecutive year. Prior to 2018, where we grew revenue for the first time, this company had not grown revenues since 2003. So this was actually a significant accomplishment for us. By the time we got to 2019, we had taken the revenue growth in 2018 and substantially accelerated it. And you can see we had the highest revenue growth since 1998 and the highest non-GAAP services revenue growth since 2003. Looking at the third column, one of the difficult things for a company, the majority of whose revenue is in IT services, is not only to grow revenue but to grow profit margin percentage at the same time. That's because typically, at our contracts, they tend to be long-term contracts. And for at least the first year or 2, the profitability of those contracts is depressed because you are providing savings to your customers and reengineering the way those customers operate from an IT perspective. Nonetheless, in 2019, we expanded our profit margin. We did that, as you will see on the next slide, for a number of years. And then when we turn to the fourth column, you'll see that we also increased our cash flow from the prior year. So Gerry, if you would now move to the next slide, which is entitled Historical Financial Performance. On this slide, you see a view from 2015, and it fleshes out a little bit of what I said on the slide before. So you can see the quite methodical approach we have had as a leadership team since 2015, first, to decrease the rate of revenue loss by about half each year; and then to turn that into a revenue increase for 2018 and accelerate that in 2019. Similarly, you see increases on the right side of the page around our profit margin going up each year. Gerry, if you could move to the next slide, which is diversified recurring revenue base. And here, I want to take a minute and talk about the line above the bar charts, 2019 adjusted revenue pro forma for the U.S. Federal sale. So we had a division as part of Unisys. That was our U.S. Federal division. It represented between 20% and 25% of our revenue on any given year. And that division was sold on March 13 of this year for $1.2 billion, effectively on a tax-free basis. So we were able to take effectively the entirety of that to pay down debt, to pay pension obligations and to increase our cash reserves. The timing of that was fortuitous, occurring just before the most significant COVID-19 news broke. And it put the company in a much stronger cash position going into COVID-19. So it was a very significant transaction for us, a very good one from a timing standpoint. That U.S. Federal team was sold to a company called SAIC. It had remarkable people at it, and we wish it the best. And we continue to work with that team because SAIC, including that team, is now a client of Unisys. With respect to the columns below, all of these columns had been restated to show our revenue for last year outside of the Federal team. And there are a couple of key takeaways there. One is you just see diversity across the page. So in terms of the green chart, which is the kinds of services we provide or the what, you see very significant diversity inside cloud and infrastructure services, that's 58%. About 33 points of the 58% or a majority of the 58% is what we call our global workspace business, which includes our work from home capabilities and includes things like InteliServe, which we'll talk about later. If you look at the yellow column, the second column, that is the revenue origin of our revenue from the standpoint of where the services are provided. So for instance, a company that has a U.S.-based headquarters but is a global company, we will be providing that company services in as many as 100 countries around the world. And so when we come up with the revenue number, we will look at where we're providing those services from the client perspective, and you could see a very significant diversity. Similarly, when we think about sectors, our public sector there represents United States' state and local business, the business that we get in the Federal marketplace by having SAIC as a client and governments around the world, and that represents about 30% of our revenue, as does our work for financial services clients around the world, and the remainder at 40% is our commercial work which we define really as everything other than governments and financial services. And then, finally, the fourth column, the red column, is what we call the how. And that is the types of contracts or that we enter into. And recurring services for us really means long-term contracts. Nonrecurring services would be project work, largely work that is less than a year in duration. And then technology is really mostly our proprietary software. And although that can be sold either on a license or SaaS basis, behind those sales are very long-term relationships. And so while they technically are not listed as either recurring or nonrecurring, they behave much like recurring services revenues. So when you add that up, you can see about 81% of our revenues is actually -- has the behavior of recurring services, very important when you get to a COVID-19 situation and you have a lot of pressure, particularly on discretionary or project work. So with that, I'll move to the next slide. And this slide is entitled Caring for our Associates During COVID-19. And this will be the first of 2 slides that we go over. They really talk about how we're responding to the COVID-19 situation, the first about our people, the second about how we're serving our clients. On this slide, and again, these slides are all available to you or will be within 24 hours on the -- on our associate -- Investor Relations website. You can see we haven't taken a one-size-fits-all approach with respect to the COVID-19 process. We are really trying to work across as many vectors as possible to help associates. There are associates, as you can see on the bottom right side, who need assistance in this period of time, working from home, working in isolation, particularly individuals who live alone, can be challenging. And so we have employee assistance programs to help associates which are available throughout the world to make sure that they're comfortable and we do everything we can to help them. Similarly, you'll see other items here such as our COVID-19 response survey. We went out to our associates less than a month ago, and we said, "How are we doing? Are we helping you? Are we meeting your needs?" And it was a very reassuring response. Over 85% of the respondents said that they thought we were doing a good job, 10% were neutral and about 5% thought we could do better. We had about 2,000 comments of our 20,000 people in the company, or 19,000, and we are working through all of those comments to see how we can respond better. If we turn to the next slide, that's titled Supporting our Clients During COVID-19. And this is a very important slide. Eric Hutto, our President and Chief Operating Officer, is on the line if you have specific questions about our operations and how we're dealing with our clients during this period of time. I can tell you, we have a very, very clear philosophy with that. And that is, first of all, we will serve our clients best by keeping our associates safe. While many of our associates work from home, some of our associates, by virtue of their position and role, are in the field working with our clients. So the safety of our associates means they're much less likely to spread any injure -- virus to our clients. So we think that, that is really still job one, both from our associate standpoint and from a client standpoint. Beyond that, we have been fortunate in we've been able to serve our clients in the manner in which we believe is Unisys quality. And in part, that's because we moved very quickly to be able to take care of our own ability to serve them. Within less than a week, we had 95% of our people working in a work for home capability. And secondly, the services we provide are quite attuned to a COVID-19 world. I mentioned our global workspace business, which is about 1/3 of our revenue, and that has deep capabilities in assisting companies to help their people work from home. Our security solutions are absolutely critical, as people move from a cloistered environment inside their own networks and now have to rely on connectivity to people's home networks. And then, finally, what people are learning throughout this process is that cloud providers have stepped up in a pretty significant way. You haven't heard of major issues running data centers through any of the major public cloud providers. And that means there's been an acceleration of how do we make sure as -- not only as we get through this process, but looking to the future, that we can continue to accelerate work in the cloud because in some respects, it's easier for companies because they don't have to deal with their own data centers. And our CloudForte solution is particularly well suited to that. So as you can see on this slide, we really believe that we have treated our clients the way we would hope they would treat us, and we think we have been successful. We have gotten some really remarkable testimonials from our clients without any request for them, and they're the kind of things you would expect to see when groups of people are working together hand-in-hand in very challenged circumstances. And we hope that, that work garners us goodwill that will carry us forward beyond the COVID-19 process. If you turn, Gerry to the last slide in my deck, which is entitled Unisys Priority Solutions. There, you'll see some of the solutions I've already made reference to. And these really are our 5 sets of core solutions in the company as the company has evolved: so Unisys Stealth, that industry-leading security suite of solutions; CloudForte to assist not only in clients getting into the cloud, but on an ongoing basis, managing cloud resources, optimizing applications that are on the cloud, making sure they're getting the best utilization of services from different cloud providers; InteliServe, I've already spoken to, which is our global workspace solution; ClearPath Forward is the most secure operating system in the world, period, and that has been confirmed by independent third parties. It is very important to run the backbone of some of the largest financial institutions and governments in the world, and being secure right now is of critical importance. And then, finally, we have several industry applications that are particular to each individual industry, and they provide us not only insight into the workings of that industry, but also provide deep specific capabilities to our clients in those industries. All 5 of these have some commonality, and that is they use leading-edge technology, whether that's artificial intelligence, whether that's automation, as well as being relevant today in the COVID-19 pandemic and will be relevant as we get out of that. And of course, being Unisys, they're all using leading security. So with that, I want to thank you again for attending our annual meeting of shareholders. We will now move to a Q&A session. But in case that ends without me getting an opportunity to make sure I express my appreciation, our shareholders have, in large part, been with us for a very long time in many years. I want to thank those of you who have been with us and following us for many years. Subsequent to the sale of the U.S. Federal, when our capital structure became what I would consider more normal, we were able to attract a large number of new shareholders, some of whom who perhaps thought that our story was a bit too complicated before, but was now a little easier to understand as our capital structure strengthened. And to all of you who are on this call who are new shareholders or prospective shareholders, I want to thank you as well for joining the Unisys community. So with that, Gerry, over to you, please.

Thank you, Peter. We will now address relevant questions from our stockholders. In order to assure that all stockholders have an opportunity to speak, our procedures limit those who may ask questions only to those stockholders of record on the March 9 record date or their proxies. John Armbruster, please let us know if there are any relevant questions or comments from the stockholders.

Thank you, Gerry. We do have a question from a stockholder. Mr. Altabef, I'll address this question to you. Mr. Chairman, the Carpenters Union pension funds have a collective ownership position of 151,800 shares of the company's common stock. As long-term investors, we appreciate the efforts of the company to address the difficulties being experienced by employees, customers and other important corporate stakeholders related to the COVID-19 pandemic. With regards to the long-term compensation components of the executive compensation plan, a 3-year pro rata vesting schedule is used for both performance-based and time-based equity grants. Could you discuss the rationale for these relatively short vesting schedules for long-term compensation? Thank you, Mr. Chairman.

Well, thank you. I'd like to thank the Carpenters Union for asking the question. The Carpenters Union has been a long-standing holder of Unisys shares, and we thank you for your confidence in the company. We do have -- as the union pointed out, we do have a long-term incentive program. And that long-term incentive program looks really at 3 elements. One is duration of employment with the company. The second is our specific performance in terms of our profitability. So each year, as we grant new shares as part of that program, we look out over a 3-year period and look at what we think the profitability of the company should be to assist our shareholders and to motivate our executives and others who participate in the program. We have many people in the company participating in this program, not just executives. And then, finally, the third element of that program is around what we call total shareholder return. So we look at how the Unisys stock is performing against a large index, and whether that stock is doing better or worse than that index and by how much. So we think that in terms of the elements of that program, those 3 elements, we think we have the elements right. Our Compensation Committee led by our Chairman, Lee Roberts, is a very thorough job with that, with our independent outside consultants which is Meridian. With respect to the duration that those grants are made over 3 years, we think that's actually fairly typical in a corporate context. And the reality is it's very hard for companies to have good visibility beyond 3 years. So if we were saying what should be our projected profit beyond 3 years, at some point, it becomes, frankly, guesswork. And that doesn't motivate our associates, and it doesn't really provide a lot of surety to our investors that we would be rewarding the kind of performance that we expect because we don't know what expectations are more than 3 years out. I would submit, with the COVID-19 upon us, it's not clear what expectations are even this year. And I should say that while we have provided guidance for the last 4 years, as many companies have, we've had to withdraw that guidance for this year because of the uncertainty around this year's activities. So -- but again, I thank the Carpenters Union for the question.

Gerry, there are no further questions or comments at this time.

Thank you, John, and thank you, everybody, for your time and your support of our company, and enjoy your day. Thank you.

Thanks very much.

Thank you all. This does conclude today's conference, and thank you for participating. You may now disconnect, and have a great day.