Unisys Corporation New

Welcome to the Unisys Corporation third quarter 2022 earnings conference call. All participants will be in a listen-only mode today. Should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note that this event is being recorded today. I would now like to turn the conference over to Ed Ewen, Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. Thank you for joining us. Yesterday afternoon, Unisys released its third quarter 2022 financial results. I'm joined this morning to discuss those results by Peter Alteneff, our chair and CEO, Dan McCann, our CFO, and Mike Thompson, our COO, who will participate in the Q&A session. Before we begin, I'd like to cover a few details. First, today's conference call and the Q&A session are being webcast via the Unisys Investor website. Second, you can find the earnings press release and presentation slides that we will be using this morning to guide our discussion, as well as other information relating to our third quarter performance on our investor relations website, which we encourage you to visit. Third, today's presentation, which is complementary to the earnings press release, includes some non-GAAP financial measures. The non-GAAP measures have been reconciled to the related GAAP measures, and we have provided reconciliations within the presentation. I'd also like to remind you that all forward-looking statements made during this conference call, including any references to guidance or color regarding expected future financial performance, are subject to various risks and uncertainties that could cause actual results to differ materially from our expectations. These factors are discussed more fully in the earnings release and the company's SEC filings. Copies of those SEC reports are available from the SEC and along with other materials I mentioned earlier on the Unisys investor website. Unisys does not assume any obligation to update the information presented on this call, except as Unisys deems necessary, and then only in the manner that complies with regulation FD. With that, I'd like to turn the call over to Peter.

Thank you, Ed. Good morning, everyone, and thank you for joining us to discuss our third quarter results. We continue to make progress in shifting our business to higher value solutions in the high demand focus areas of modern workplace and digital platforms and applications. Clients are seeing the value of our solutions in these focus areas as evidenced by revenue growth approximately at or above in both of them. Our focus area solutions are also higher margin, an indicator of increased profitability over time. As we discussed last quarter, we are providing more visibility into our enterprise computing solution segment, ECS, by differentiating our specialized services and next generation compute solutions from our licenses and support, which will allow us to highlight each of their unique strengths. Our transformation is beginning to take hold. It will soon be fortified by a new brand identity and marketing campaign designed to increase awareness for our company and our key solutions. We believe this platform will influence consideration in the market and be a catalyst for growth. Deb will provide detail on our financial results at the total company and segment levels, but first I'll give some insight into our transformation. Let's start with Digital Workplace Solutions, or DWS. Our primary focus in DWS is on higher growth, higher margin solutions that help clients streamline and optimize collaboration to maximize employee productivity and engagement. And we refer to this as modern workplace. We believe the modern workplace market is an approximately $40 billion market growing at a three-year compound annual growth rate figure of approximately 12%. We said last quarter that we plan to grow faster than the market. and we did just that in the third quarter, driving revenue growth in excess of 50% year-over-year. We also accelerated our modern workplace momentum in the quarter by securing a year-over-year increase in total contract value, or TCV, of signings of more than 50%, and a year-over-year increase in annual contract value, excuse me again, or ACV, of signings of more than 50%. An example of success in modern workplace is the expansion of our work in the third quarter of a large financial institution to provide digital workplace solutions. This contract will help improve communication and collaboration between teams regardless of location. We also sign more than 20 new logos in Modern Workplace for specific scope solutions, which in time can lead to full service relationships. Wins like these are helping shift our business mix toward Modern Workplace, which we expect to represent approximately 15% of DWS revenue in 2022 versus 7% for last year. we expect approximately half of our DWS revenues to be in modern workplace in 2025. As we look to the future, our pipeline for modern workplace is more than 400 million as of the end of the third quarter, more than doubling year over year. We expect the margin in modern workplace to be in the mid 20% range by 2025. The more we move our DWS portfolio to modern workplace, the more profitable we expect to become. We earned significant recognition in modern workplace from a leading industry analyst in the third quarter. ISG recognized Unisys as a global leader for every services quadrant in its 2022 future of work provider lens. We also continue to build partnerships with key players in the modern workplace market, For example, in the third quarter, we signed a new logo client through the partnership we recently announced with 1E. We feel very good about the prospects for this partnership. In short, our modern workplace strategy is working. Our solutions align to a fast-growing and higher margin market and one in which we are positioned to take share. Turning to cloud applications and infrastructure solutions, or CA&I, we continue to shift the mix of our CA&I business towards solutions in hybrid and multi-cloud management, cybersecurity, application modernization, cloud native application development, and data analytics and insights. We refer to this focus area as digital platforms and applications, or DP&A. This is the higher growth, higher value piece of our CA&I business. We believe the DP&A market is approximately $230 billion, growing at a three-year CAGR of approximately 19%. In general, we expect to grow this business as fast as the market over the next three years. From a revenue perspective in the third quarter, we saw year-over-year revenue growth for DP&A of 18%. We expect DP&A to represent approximately 30% of CA&I revenue in 2022 versus 20% for 2021. We expect approximately 40% of our CA&I revenue to be in DP&A in 2025. Clients are seeing the value of our DP&A solutions as also evidenced by more than 100% year-over-year growth in signings for ACV and more than 50% year-over-year growth in TCV signings for this focus area in the third quarter. Our DP&A pipeline is also growing. It was more than $800 million in the third quarter, a year-over-year increase of more than 50%. As a third quarter example of success in this area, We signed a DP&A contract with a current DWS client that engineers consumer product goods. This contract enables Unisys to deliver and support secure access through Microsoft Azure to the client's domain, including enterprise applications, an excellent example of what we call cross-selling. Regarding profitability, we anticipate our DP&A margin to be in the mid-20% range in 2025. Again, as with modern workplace, the more we move our CA&I portfolio to DP&A, the more profitable we expect it to become. The market continues to recognize our leadership and momentum in this area as well. For example, during the quarter, industry analyst firm Nelson Hall recognized us as a leader in its end-to-end cloud infrastructure management services 2022 report. Unisys was named as a leader in each of the report's five focus areas. Microsoft Azure capabilities, cloud orchestration services, cloud management services, AWS capabilities, and overall capabilities. In addition, our CA&I team has just achieved the AWS Migration Competency designation. To earn this designation, one must demonstrate deep AWS technical experience and proven client success in specialized areas across industries, use cases, and workloads. AWS validates candidates against a high bar to achieve this designation, and we expect it will accelerate our momentum in DP&A. As we did with DWS and CA&I last quarter, we are introducing a new focus area for ECS this quarter in order to provide additional insight into our business. We call it Specialized Services and Next Generation Compute, or SS&C. This focus area covers managed application services, managed services, industry solutions, and overall compute capabilities in each instance where we have significant intellectual property. One area we are excited about within SSC is our air cargo industry solution. We continue to provide comprehensive and robust air cargo management to our clients as we have for many years. We expect to enhance value for existing clients and attract new clients through the deployment of richer data analytics capabilities to further improve efficiency in cargo operations. SS&C is already a $200 million annual revenue business. This represents approximately 30% of ECS revenue, but this percentage is more likely to fluctuate based on the size of the license and support business in any given quarter. We expect to grow the SS&C business between mid and high single digits annually through 2025. Our margin in SS&C can also fluctuate depending on the mix of what we sell, but we expect it to be typically in the low to mid 30% range. The remaining portion of ECS is licenses and support, or L&S, which is the part of our business that consists of ClearPass Forward and some other IP-related licenses and support. This is the portion of this segment that typically gets more attention in conversations with you because it's larger. But given its dependence on the timing of renewal schedules, it is more variable quarter to quarter and even year to year. The market for our L&S business is unchanged, and we do not expect significant growth. While it is possible that new capabilities and solutions could be classified and commercialized in a more traditional licensing model, we believe it is much more likely that we will drive growth in a services or an as-a-service model as part of SS&C. In the third quarter, L&S revenue was down 12.7% due to the timing of license renewals. Given the heavily weighted renewal schedule we saw in 2020 and in 2021, Coupled with some client-driven early renewals in 2022 that were scheduled for 2023, we expect 2023 revenue will be down approximately 25% year over year. Based on the current renewal schedule, we expect 2024 to grow in the low single digits, with 2025 to grow low double digits. With 2020 as its base, we expect a five-year CAGR of approximately negative 3.5%. On the profit side, the margin percentage for L&S will fluctuate based on the volume because of a relatively fixed cost base. We expect margin in the mid 70% this year, approximately in the mid 60% in the next two years, and then returning to the low 70% by 2025. It is clear that SS&C and L&S have unique strengths, and we're pleased to be able to highlight them for you going forward. Both are important for our business. Moving to our brand identity, we expect the launch will occur in the fourth quarter of this year. Brand is the last mile of our transformation, and the new brand will bring our solutions to life in a meaningful, compelling way. We believe our new marketing campaign will increase market awareness, which in turn will help drive key sales metrics, such as leads, pipeline, wins, and ultimately revenue and margin. The new identity addresses how we help clients meet the changing needs of the market, while also serving as a key influential factor in our ability to retain, attract, and inspire talent. This is the most significant brand transformation for the company since 1986. We are very excited about it and we believe the market will be too. The Anusis transformation is taking hold. At the same time, we experienced some unexpected challenges since the last earnings call. that have led us to lower our revenue and profitability guidance for the year, which Deb will provide color on in her remarks. With that, I'll turn the call over to Deb to discuss our financial results.