Unisys Corporation New

Good day, and welcome to the Unisys Corporation second quarter 2023 earnings conference call. All participants will be in a listen-only mode. If you need assistance, please signal conference specialists 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 this event is being recorded. I would now like to send a conference call over to Ms. Michaela Paworski, Vice President of Investor Relations. Ms. Paworski, the floor is yours, ma'am.

Thank you, Operator. Good morning, everyone. This is Michaela Paworski, Vice President of Investor Relations. Thank you for joining us. Yesterday afternoon, Unisys released its second quarter financial results. I'm joined this morning to discuss those results by Peter Altebef, our chair and CEO, Deb McCann, our CFO, and Mike Thompson, our president and COO, who will participate in the Q&A session. Certain statements in today's conference call contain estimates and other forward-looking statements within the meaning of the securities laws. We wish to caution listeners of this call that the current expectations, assumptions, and beliefs forming the basis for our forward-looking statements include many factors that are beyond our ability to control or estimate precisely. This could cause results to materially differ from our expectations. These items can also be found in the forward-looking statements section of today's earnings release furnished on Form 8-K and in our most recent Forms 10-K and 10-Q as filed with the SEC. We do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events. We will also be referring to certain non-GAAP financial measures such as non-GAAP operating profit or adjusted EBITDA that excludes certain items such as post-retirement expense and cost reduction activities and other expenses the company believes are not indicative of its ongoing operations. as they may be unusual or non-recurring. We believe these measures provide a more complete understanding of our financial performance. However, these non-GAAP measures are not intended to be a substitute for GAAP. The non-GAAP measures have been reconciled to the related GAAP measures. We have provided these reconciliations within the presentation. The slides accompanying today's presentation are available on our website and were furnished on our form 8K filed this morning. With that, I'd like to turn the call over to Peter.

Thank you, Michaela. Good morning, and thank you for joining us to discuss Unisys' second quarter 2023 results. We had another quarter of better-than-expected revenue and profit, positioning us well as we enter into the second half of the year. Excluding our license and support solutions, which fluctuate based on renewal timing inside a year and between years, we experienced year-over-year revenue growth and margin expansion. Revenue and pipeline continue to expand in our next-generation solutions, which includes modern workplace, digital platforms and applications, or DP&A, specialized services and next-gen compute, or SS&C, and certain micro-market solutions. Second-quarter revenue in these higher growth and margin solutions grew approximately 14% year-over-year. Our next-gen pipeline is 55% larger than a year ago, providing a strong foundation for future growth. we're seeing a growing number of opportunities and proof of concepts involving generative AI. Hyper scalers and enterprise software companies are continuing to release new tools and technologies, which our teams are adopting to enhance our next generation AI solutions development. Looking more closely at second quarter performance, total company revenue was 477 million, a decline of 7.4% as reported and 6.3% in constant currency. The decline, which was expected, was driven by lower L&S revenue within our enterprise computing solutions, or ECS segment, due to the timing of ClearPass Forward license renewals. This was partially offset by better than expected performance in the rest of the business, which we call our ex-L&S solutions and includes our digital workplace solution segment, or DWS, our cloud application and infrastructure segment, or CA&I, as well as the SS&C portion of ECS and our business process solutions. Second quarter XL&S revenue was $396 million, a strong year-over-year increase of 6.5% in constant currency. We achieved year-over-year constant currency revenue growth of 7.7% in DWS and 2.6% in CA&I, with both segments benefiting from increased levels of project-based work in the quarter. SS&C grew 14.5% year-over-year in constant currency. are our next generation solutions within ECS and generate revenue streams from specialized services, application expansion, and modernization. Contract signings in the first two months of the quarter felt much like a continuation of the first quarter. Financial services clients remained cautious and commercial clients were slow to make decisions on new investments due to lingering concerns around inflation and macroeconomic conditions, which was a headwind to new logo signings. However, general activity levels with clients picked up in June. Our trailing 12-month EX L&S book-to-bill was 1.0 times, unchanged from last quarter. Excluding L&S, second quarter total contract value, or TCV, was down 2% sequentially and declined by 4% year-over-year. The year-over-year declines were due to lower signings with new logos and the fact that this quarter was a lighter renewal quarter due to timing, which was expected. A significant portion of our anticipated TCV for the remainder of the year is renewals. New and expanded scopes within existing clients remain strong, growing TCV 14% versus the second quarter of last year. We had several sizable sightings within CA&I that incorporated new or abandoned DP&A solutions. For instance, we signed a four-year cloud security innovation agreement with California State University. the largest higher education system in the United States, and a Unisys client for more than 15 years. The contract includes a renewal of services for cloud transformation and cloud security modernization of their ERP system, which supports the institution's 23 campuses, and Unisys will now undertake multiple additional projects to better protect student data, enhance cybersecurity, and integrate data across CSU. CSU's benefits from this new agreement will include operational and administrative efficiencies, cloud savings, reduced technology costs, and the reduction of technical debt. We also expanded our DP&A footprint with a large financial services institution in the U.S. after receiving their supplier of the year recognition for two years running. Unisys will support additional aspects of the client's cloud migration and maintenance across their business lines. In DWS, we expanded our work with a large Canadian telecom company to support a communications technology integration for one of their financial services clients that recently acquired 530 regional bank branches. As part of this project, Unisys will manage more than a dozen technology vendors, standardized technology services, and upgrade devices. In ECS, we expanded our relationship with a leading global telco company, to include a cloud migration for our clients' voicemail services. We also signed several new managed services contracts, including work to support ClearPass forward technology refreshes and strengthening relationships with important LNS clients, including one of our largest financial services clients. We also launched collaborative DWS client innovation sessions in EMEA, which has led to several modern workplace engagements and are expanding this initiative to other geographies in the third quarter. Our ex-LNS pipeline also accelerated as the quarter progressed, growing 15% sequentially and 22% year over year. Growth was strongest in the new logo pipeline of 47% sequentially and 97% versus a year ago. We've added approximately $1 billion in net new logo opportunities. We expect the new logo pipeline being built today to contribute to bookings in 6 to 12 months as those opportunities move through the funnel. We're increasing the speed and agility of our review and proposal process, and our sales teams are aligned around point-of-sphere solutions targeting prospective clients where we see long-term growth opportunity. This is the most evident through our next-gen pipeline growth. which was 25% on a sequential basis and 55% versus the prior year period. Next gen new logo pipeline grew more than 50% sequentially and more than doubled year over year. Modern workplace pipeline was driven by interest in our unified experience management solution, which we refer to as experience as a service. This offering leverages our PowerSuite software, and is based on experience-level agreements, or XLAs. We also added several sizable opportunities related to device subscription services, or DSS, and device asset management. Our DP&A pipeline saw a notable uptick in opportunities across a range of offerings, including detection and response, digital identity management, security advisory consulting, and DevSecOps. We also saw numerous new DP&A opportunities in application managed services and development. Across our business units, we are also seeing growing client interest in solutions incorporating advanced data and artificial intelligence. Within ECS, we unveiled our Unisys logistics solution and are actively working on pilots with existing cargo portal clients. Unisys Logistics is a proprietary SaaS application that delivers complex real-time logistics optimization and leverages quantum computing, data, AI, and transportation industry expertise. We believe generative AI represents a significant market opportunity for the IT services industry. Our portfolio of solutions, engineering capabilities, data expertise, and our partner ecosystem position us well in this area of growing demand. In DWS, we're working with clients on chatbot automation solutions that incorporate generative AI to deliver more human-like interactions. Our footprint and diverse client base within DWS combined with our experience in chatbot design It gives us an advantage in providing generative AI innovation in DWS. In CA&I, we're having client discussions related to our core AI capabilities, which include strategy, design, infrastructure, and development services to support both cognitive and generative AI workloads. We also have strong data engineering capabilities that are helping clients deploy data lakes, data fabrics, and purpose-built vector databases for AI, which position us well for future services related to generative AI. Across the company, we're using or have initiated access to generative AI platforms being built by our partners, such as Microsoft 365 Copilot, Google Palm, and Vertex Studio, as well as services from AWS, Snowflake, Salesforce, ServiceNow, and Adobe. We featured a number of our data and AI solutions at our June Analyst and Advisor event, which was attended by more than 100 industry analysts and advisors from 31 different firms. Turnout was more than double that of last year's event, and attendees included prominent firms such as Avisat, Deloitte, E&Y, Everest, Forrester, Gartner, HFS, IDC, ISG, and Nelson Hall. Connecting with influential analysts and advisors is important for our business because when decision makers evaluate technology industry service providers, they often look to this group for insights and recommendations. During the event, we were able to make connections and meet one-on-one and educate these key influencers about our strategy and solutions. Turning to profitability, our second quarter X L&S gross margin expanded to 16% and 10.4% in Q2 of 22. The margin improvement was broad-based across DWS, CA&I, and SSC. We continued to improve our labor efficiencies, which was down 440 basis points year-over-year and 350 basis points from the first quarter. At the overall company level, we are leveraging advanced technology tools to rapidly match talent to demand, further bolstering our ability to meet client expectations and fill roles quickly. Our workforce transformation team has developed efficiency plans to include elements such as role redesign, account rotations, and additional moves to low-cost geographies. Excluding field services, 61% of headcount is now in low-cost markets, up from 58% in the prior quarter. 75% of all Q2 hires were in low-cost countries, a 12% increase over the same quarter last year. Our trailing 12-month voluntary attrition was 14.4% in the second quarter, down from 19.2% in the second quarter of 2022. Voluntary attrition in the month of June was 12% annualized, the lowest monthly rate we have had since December of 2020. While voluntary attrition levels have reduced across our industry, in part due to easing of the labor market, we believe our investments in the associate experience are having a meaningful impact on retaining talent. We have implemented enhanced new leader training, onboarding processes, and channels for associates to recognize one another's successes. We have also invested in diversity, equity, and inclusion, or DEI, both in talent acquisition and retention, and our metrics continue to improve as a result. Excluding field services, women now make up 36.9% of our global associate population. up from 35.4% a year ago. And underrepresented ethnic groups are now 31.5% of our U.S. associate population, up from 29.5% last year. We were recently recognized as a best employer for women by Forbes, and for the third consecutive year, a best place to work for disability inclusion by the Disability Equality Index.