Unisys Corporation (UIS) Earnings Call Transcript & Summary

Great. Thanks, everyone, for joining. My name is Ajay Shah. I run TMT Investment Banking at Deutsche Bank, and we've got Unisys presenting today. We've got CFO, Deb on the stage here. She'll go through some slides, and then we'll open it up for Q&A. Deb?

All right. Great. Thank you so much. Good morning, everyone, and thank you for taking the time to join today and for having interest in Unisys. We're very excited to be here today. We'd like to thank Deutsche Bank for hosting us and allowing us the opportunity to meet with you. My name is Dave McCann, I'm Chief Financial Officer. And I also have with me Michaela Pewarski, Vice President of Investor Relations, up here in the front row. I'd like to start by discussing the market opportunity that we believe we have here at Unisys. So what you see on the slide is what our research shows that the IT -- Global IT services market is about $1.1 trillion today at an 11% 3-year CAGR moving to about $1.5 trillion. I think a key -- on the right-hand side are some markets within that market that we're working in today that are even higher than that 11% growth rate. So smart workplace, mobility, unified communications that around 12%, with about a $60 billion market by 2025. And then on the far-right infrastructure consulting, application modernization, Infrastructure-as-a-Service at about 19%, almost $400 billion by 2025. I won't read through all of them, but I think a key point of this slide is that just a few years ago, Unisys was not operating in these areas of the -- in all of these areas off to the far right. And so that was limiting our revenue growth opportunity as well as really the margin growth opportunity that we had as well. And so this is something that, through our build, buy and partner strategy. We really significantly transformed the business, building our partnership ecosystem, organically building out solutions. And now we feel like our portfolio today has all the capabilities we believe we need to provide our clients with innovative solutions to grow our NextGen capabilities and really be operating more on this right side of the market. So I think that's a key point to this page here. So Unisys today, who are we? We at Unisys, we drive breakthroughs. And this slide will give you a sense of who we are, 16,000 associates and more than 800 clients in about -- and we operate in 50-plus countries. I think this is a really key point because we're small enough, nimble enough to customize, to work with our clients on a real intimate basis, but we are global. We operate in 50-plus countries. $2 billion of revenue, 80% of that is recurring. And we have a more than 90% renewal rate. So we have -- if you look on the left, the top bullet of our top 50 clients on average have been with us for more than 20 years. And we believe that doesn't happen by accident. That happens with building those relationships and building that strong client base that we believe really gives us an opportunity to grow in the important areas. So what is it that we do to serve our clients. So as the top kind of key takeaway, talk about our clients rely on us to solve many of their most complex business and technology challenges to unlock faster growth and operational efficiency for them. And so these are kind of our 4 main areas of business, Digital Workplace Solutions, which is where we deliver device, endpoint, communication, collaboration, service desk and field service operations. Then our second business unit is Cloud Applications & Infrastructure Solutions, where we design, build and manage cloud data or on-premise infrastructure, applications, security and AI workloads. Third is our Enterprise Computing Solutions, where we enable high-intensity computing through our proprietary operating system and industry software applications and provide specialized managed services around our technology. Those three, as you can see on the right, I think a key point is that our revenue is very diversified. So those three business units that I just mentioned are each about 30% of our revenue. And so they're all extremely important areas for us, and I'll get into more detail on kind of the strategy within each. But this is an important point to show the makeup of what we do. I'm going to spend a few minutes on our License & Support business. So if we go back here within the third one, the ECS, we have this proprietary operating system called ClearPath Forward. And what we've started doing is breaking that out. So if you look at our results, our press releases and our reporting, you'll see that we talk about License & Support total company, and then you talk about Ex-L&S. So I think it's important to spend a few minutes here. The overwhelming majority of the sites to support is our ClearPath licenses and then the corresponding support to go along with that. This is a solid book of business. We have an extremely loyal and sticky customer base and our operating system is extremely reliable and incredibly secure. Our L&S customers are primarily financial services and transportation companies as well as many public sector clients. And they use our operating system to process mortgages, financial transactions, travel reservations, tax returns, cargo shipments and really rely on it for the core of what their businesses do. So because for this reason, we have -- they really 95% retention of our top clients, decade-long relationships very sticky in that they have managed services, applications, a lot that they've been building over the years. We invest a lot to ensure we keep the operating system modern. It's cloud compatible. It's got a lot of security. So we spend a lot of time and investment ensuring that we maintain the value for our clients. And what's important is because they've built so many things on this over years, we have very good visibility into this revenue over time. So we say about this year, we've set about $350 million of revenue, about $360 million on average over the next 3 years and 5 years. And we say on average because when we sell -- you could sell a 4- or 5-year deal for $50 million, $100 million, the revenue profit is recognized right as the deal is signed. And so it can create some lumpiness year-to-year. We can expect the client to renew this year, but really, they renew next year instead. Are they -- it's really more that they accelerate because their renewal period, they have to renew by, but in some cases, in 2022, for example, about $60 million of revenue we expected in '23 and '24 accelerated in '22, which created '23 to be lower than we had initially thought. So this is the reason that over time, we have very good visibility into this revenue but can't always predict the exact year or quarter. And so this is one of the reasons we've broken it out for our reporting because if you looked at our numbers in the past, if you just look at total company, 1 quarter, we grow 10% to the next quarter, the next quarter we're down 10%. So for investors looking at our business, it makes it really hard to understand what we're doing. So we've started reporting total company and then Ex-L&S so that people can see what's really happening in the business. But again, an important point here is these businesses rely on our -- on this operating system. When it is time for them to renew, they wouldn't come and say, we're not renewing at all because it takes many years for them to move off of this, which at a 95% retention rate doesn't happen often, but it wouldn't be something they just don't renew. They typically -- there's a multiyear transition period. So this is a really important business for us. Within all of those business units I showed before, we have solutions within those that we call our NextGen Solutions. And these are areas such as modern workplace within DWS, our digital platform application within CA&I, and specialized services within ECS. And then within our Business Process Solutions, micro market solutions. So these NextGen Solutions, you'll see talking about -- we talk about in our reporting as well. It's kind of all of these combined and what percentage of that is of total revenue. Right now, it's about 35%. And I'll talk a little bit in a minute about our plans to grow that mix going forward. But these are the areas that we're really focused on, that are higher growth, higher margin and are a key part of our strategy. So moving into our strategy. These are the core elements. So first is addressable market growth. We touched on that a little bit, land and expand. And I'll just -- you can see these on the page and then I'll get into each one as we go through the slides. So where are we going? We talked about this, a key element is this mix shift. And so right now, our NextGen Solutions are about 35% of total Ex-L&S revenue. And we see that -- those growing about 10% to 15%. And so that eventually by 2026, they'll be close to half of our mix. So these are higher margin. As you saw in the industry slide, these are, in some cases, growing 19%, even higher than what we're building into our model so that we don't -- this isn't saying we have to blow out the market, take share, be above market averages, but just kind of going within or lower than market, we believe we can get to this 45% mix. And these are really what's good about these is higher margin to ultimately drive higher cash -- free cash flow. Another area we're shifting our attention to is the mid-market. So we typically, in the past, have targeted more large commercial, financial and public sector clients and have actually spent a little time specifically targeting the mid-market. But as we reviewed the strategy, we've seen that this is an area we think there's a lot of opportunity. We define this as about $2 billion to $5 billion of revenue, where we see about 900 potential U.S. clients that we can go to with our services. And we really feel that as you look on the right, kind of the reasons why there's skill gaps, right? It's hard for smaller, more mid-market companies to get the skills to work on this technology. They require less customization. They really value that trust and reliability, which is something we pride ourselves on, as you could see with all of the long-term relationships we have. And we can really prioritize our industry and domain expertise to provide to them what's unique for their businesses. And so we feel that for all these reasons and what I talked about a little bit before is we're small enough to be kind of that close partner where they're not going to get -- be the small fish in the big pond. But yet, we are global. We have the resources, the partners and the technology to provide them what they need. So next is our kind of go-to-market strategy. How are we going to land these customers. And there's really 4 keyways we're focused on. So first is, of course, our direct sales force. And a big focus here is aligning around point of spear. So seeing a client, seeing a new logo, something that's more immediate need that they have, going in with that and then building upon that kind of expanding to that typical kind of land and expand, getting in there, bringing in the new clients with the potential to deliver more of our NextGen Solutions. Second is our partner ecosystem. We have built a big focus of ours, building channels, alliances and innovation partnerships where we can leverage off of them and their client base to really get into -- in front of more clients to let them know what we can do. Third is industry analysts and advisers. So folks like Gartner and ISG that it's really important for a lot of -- for CA&I and DWS as they're looking to do more with cloud or do more with digital workplace, they really lean on their industry advisers and analysts to understand who's in the top quadrant, who are the best at this. And it really gets us a seat at the table in deals we hadn't been able to get invited to before. So this is a big push for our marketing group. We're doing a lot more conferences with industry analysts. And if you look at our press releases on our website, you'll see over this past year, just a number of recognitions that we're getting from these advisers as being top in those areas of digital workspace and cloud application infrastructure. So that's a really important part of our strategy for go-to-market. And then lastly, brand awareness and marketing. So last November, we did a big rebrand. [ Unisys is the brand that ] used to be this kind of red -- Unisys. We really thought it was important to modernize, get people to -- we've gotten feedback from customers that said they saw our sign in an airport, and they just -- they saw, oh, Unisys, they've been around 150 years, but there's something new about this and what are they doing now? So it's really just made people go to the website. We've had so many more hits on the website where then we collect information, reach out to them, and that's created some leads as well. So it's not just the brand and the advertising but actually leading to funneling lead generation. Okay. So our key -- our Unisys partner. So this is -- as I've talked about, we've put significant effort these past 24 months in building a broad and deep ecosystem of technology partners, including many of the leading hyperscalers, hardware and enterprise software providers such as AWS, Dell, Google, Microsoft and ServiceNow. And this is a really important point as I get into a little bit more about solution development, so not just from a solution development perspective, but also in getting more of those leads for new sales, these key Unisys partners are -- have become really important and a key priority for us and our strategy. I've mentioned it before, but our quality client base is really critical. It's something that across many verticals. So it's not -- we have a very broad, diverse quality client base that I'll illustrate in a minute, gives us really a lot of opportunity to expand in cross-selling into this great base of long-standing happy clients. So we did an analysis of taking all of our existing clients looking at untapped addressable wallet that they're spending on IT services elsewhere. And this is just for DWS and CA&I alone. And you can see on the right, by solution, most of it being in traditional infrastructure and saying, these are our existing clients. We've put our best salespeople on the clients that have the most opportunity and are really going after these existing clients. We have NPS scores above industry average. These clients have been with us a long time and really going to them and trying to sell additional products. So at this point, about 44% of our clients spending $1 million or more with us, are buying solutions for multiple Unisys business units, which is which is good, but you could see it leaves a lot of room for opportunity as well. So next, I want to spend a few minutes on our variable solution development platform. So we've -- over time, been looking for kind of the ideal model for solution development, right? And so it's spending a lot more capital spending build versus buy a lot of those decisions. And I think we feel like we're at a point where we really have a great balance of industry expertise, targeted innovation and integration, and managed and purposeful orchestration to deliver what we think is the optimal value for our clients. And so we have innovation partners who -- we can -- they can kind of support us while we provide some in-house development as well, but then really use our expertise in integration and orchestration of helping bring these to our customers and the industry expertise. So it's -- it provides us flexibility and variability in our solutions, we can leverage innovation and standardize it across our customers and share that cost with our partners. So all of this, we feel is the ideal model that allows us to bring what the clients need and bring it to them faster and when they need it. So I want to just touch a minute on data and AI, and there's been lots of references to this, I'm sure you've heard a lot about that the past few days and year really. But for us, these are not buzzwords. These are -- we have practical applications of these in pretty much everything we do today, and we're really focused on doing even more going forward. So data telemetry and orchestration of data is the basis for our use of AI and generative AI. And we believe that's what required to really provide our customers a deeper insights. The other important part of this is I think a lot of clients are getting increased budgets to spend in some of these areas, which is just good for us because it's a lot of things we're already doing. And again, that mid-market in particular, will really allow us to -- they're looking for someone and a partner in navigating this. And I think it's something we've been doing for years and are improving every day. So I think this creates a big opportunity for us. So as far as gross margin, part of our strategy is to generate more free cash flow, and that's through several ways, which I'll get into more in a few minutes, but a key part is expanding gross margins. The left side is more what I've already talked about, shifting into those NextGen Solutions, which are naturally higher margin. But then we're also looking at our traditional solutions and very focused on the lower cost of delivery through increased automation, through labor optimization, that's looking at our labor pyramids throughout our business. Do we have the right level? Do we have the right onshore versus offshore. We have a lot of offshore now, but still looking for how we can optimize that even further. And also with our labor, ensuring that we have these business units, but are we optimizing labor across the business units and having a pool of resources that if one deal maybe is coming to an end, ensuring we're utilizing those resources on deals that are coming up. So built a lot of time and effort around ensuring we're managing our resources as optimally as possible. Also global contract management teams to ensure we have the proper standards built into contracts to ensure we have the right measurements and rigor around contracts throughout their life cycle. And so this is a very big focus of ours to ensure we're improving the margins on our delivery. And then on top of that, we're really taking a harder look at SG&A as a percent of revenue, which right now is not aligned with our peers, and we feel there's a lot that can be done here. A big part of this is streamlining our core G&A functions. We specifically say G&A because we're trying to -- we're not really touching the S part of SG&A as much. So sales, marketing are still important to us and require a lot of investment to succeed with our growth strategy. But -- and not just growth but margin, right, in order to get those NextGen Solutions improve that margin, that's an important part of it. But the rest of our G&A functions as well as our real estate footprint also looking at within the SG&A functions, balancing labor locations and then information technology. So our goal is by 2026, to have about $50 million of SG&A savings versus where our '23 plan was. So this is something, there's someone on my team dedicated solely to managing this project, tracking time line by month, what savings are coming, ensuring those are getting executed and that we're taking this cost out, which is really critical in order to meet our free cash flow goals. So speaking of free cash flow, again, we've talked about the margin expansion on the bottom left. So the mix shift, the cost of delivery, increase in L&S renewal, '23% was a lower L&S year that moves up a little bit as well as SG&A reduction. But then on the top left, also looking at working capital, our payment terms with our vendors, our receivables terms with our clients and really ensuring we can do everything we can to control the cash coming in and out. Our CapEx-light strategy, we continue -- we've been transitioning to a less capital-intensive service offerings. Part of that was that the solution partnerships we talked about before and just really keeping a very tight focus on CapEx. So it now -- I pretty much approved almost every CapEx dollar that we spend. So that's in addition to just having the plan upfront, even as the year is going on, there's a lot of really tight controls there. And then pension management, that pension volatility, we have a lot of opportunity to reduce some of that and hopefully reduce some of those payments going forward as much as -- is within our control. So to talk about that a little bit, the pension, we really have, during the past several years, proactively reduced the overall side of our pension plans as well as reduce the volatility. First, by removing $1.7 billion of global liabilities to third parties. So on the top row, we purchased three annuity contracts totaling almost $800 million. Two of these happened in 2021, one just happened in March of this year. And what we do is we transfer those pensioners to a third-party insurance company and reduce the number of participants by about 27,000. We offered a lump sum window in late 2020 that resulted in almost $300 million of liabilities being removed. And then finally, we removed Dutch plans and a significant portion of our Swiss plans which totaled about $700 million of liabilities going down. So we're actively constantly looking at ways to improve this. It's resulted in -- in addition to removing those liabilities to third parties, just through interest rates and regular benefit payments, we've reduced the global liability by about $3.5 billion or 45%. And the GAAP deficit due to an $800 million contribution we made in 2020 after selling the federal business as well as a mix of interest rates and other factors, we've reduced the GAAP deficit by about 70%. So as you can see on the right, definitely an improvement in both the liabilities and GAAP deficits over time. And we'll continue -- we're continuously looking at ways to reduce those liabilities, which reduces the volatility. It won't necessarily -- the contributions are still there, and they'll fluctuate potentially based on interest rates and asset returns. But we're doing what we can to control the liability. A quick view, this is the last results that we announced was Q2. And as you can see, this is a good example of why we started reporting Ex-L&S. So total company net down 6.3% year-over-year because Q2 of this year was a lower renewal year of those licenses than last year. So it looks as if the company is declining. But yet if you look at excluding that L&S business, the remainder of the business grew 6.5% year-over-year. So this is an important reporting change we've made, and we've gotten a lot of people are pleased with that. On the right, again, total company gross profit down due to the license renewals, but 560-point improvement in the Ex-L&S business landing us at about 16% gross margin. Another key point is the pipeline grew 15% but the NextGen pipeline grew 25% quarter-over-quarter and 55% year-over-year. So again, I think these are some good leading indicators that the strategy we're implementing is we're making a lot of traction. So in closing, I hope that I've been able to give you a sense of the qualities that we feel make for a compelling opportunity for our investors. The large market opportunity operating within a $1 trillion IT solutions market, our innovative NextGen Solutions, or highly recurring revenue, but then also that sticky, highly profitable license and support solution revenue and profit. Our strong and large base of high-quality clients again, the top 50 being with us for more than 20 years on average and then our strong financial management. So the track record of managing the pension liabilities as best we can and really executing on a strategy to improve margins and free cash flow. So with that, I think we'll open it up for questions.

[indiscernible] if you look at the other [indiscernible] But across all of those, is it separate?

Yes. So it's separate. So within enterprise computing solutions, it's the biggest portion of its within that. So it's not across all of them. So it's a very distinct operating system. Licenses that we sell to customers who use that to run their businesses. So it's within ECS. And then the other part...

[indiscernible].

Yes. So they're using it for large, very transaction processing. So for instance, it is cloud. It's compatible on the cloud, but it depends on who's using it. So in some, they're using it on a mainframe, but it is also cloud compatible. I'm not sure about that. But it's, for instance, banks doing all of their processing of mortgages or really just large -- it's governments using it to process tax returns. It's...

Are you selling the [indiscernible].

But mostly there, we're doing managed services to help them build the applications, but there are some instances where we also help build the applications.

And are there [indiscernible]?

No, not necessarily.

[indiscernible].

Yes. So I don't want to call it legacy, meaning that we're continuing to invest and ensuring that it stays modern and up to date, but it is really just clients who've been with us for decades.

We're not actively adding new?

We're not actively adding new. We are actively adding -- many of those clients are increasing the volumes. And so we -- there -- it's growing in some cases, but...