Unisys Corporation New

Good day and welcome to the Unisys Corporation first quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need 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, this event is being recorded. I would now like to turn the conference over to Michaela Pawarski, Vice President of Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone. Thank you for joining us. Yesterday afternoon, Unisys released its first quarter financial results. I'm joined this morning to discuss those results by Peter Altagap, our Chair and CEO, Deb McCann, our CFO, and Mike Thompson, our President and COO, who will participate in the Q&A sessions. As a reminder, certain statements in today's conference call contain estimates and other forward-looking statements within the meaning of the securities laws. We caution listeners 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 differ materially from our expectations. These items can also be found in the forward-looking statement section of today's earnings release furnished on Form 8K and in our most recent Forms 10K and 10Q 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 exclude certain items such as post-retirement expense, 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, they are not intended to be a substitute for GAAP. The non-GAAP measures have been reconciled to the related GAAP measures, and we have provided reconciliations within the presentation. The slides accompanying today's presentation are available on our investor website. And with that, I turn the call over to Peter.

Thank you, Michaela. Good morning, and thank you all for joining us to discuss the company's first quarter results. We had a solid start to the year with revenue and profits slightly ahead of expectations. keeping us on track to meet our full year financial guidance. And we are continuing to make progress towards our long-term cash flow objectives. Growing XLNS solutions and expanding our XLNS gross margin are important elements of our strategy to enhance profitability and cash generation. We showed improvement on both fronts during this quarter. XLNS revenue grew 4% year over year, and we expect growth to accelerate in the second half of the year as revenue ramps from XLNS New Business signed over the past several quarters and based on the accelerated cadence of project work in our pipeline. First quarter XLNS gross margin expanded year over year as we continued to deliver on additional efficiencies while making near-term investments to achieve future delivery cost savings. During the quarter, we saw continued momentum in new logo and next generation client signing. which is a positive signal of growing market demand for our solutions and bodes well for future XLNS revenue growth and profitability. We also believe we have the potential to accelerate growth through offerings that expand our addressable markets, such as Unisys Logistics Optimization. In addition to improving XLNS performance, increasing operational efficiency is another important element of enhancing our free cash flow. During the quarter, we continue to streamline our general and administrative costs, and we are working towards a meaningful reduction in SG&A as a percentage of revenue over the next few years. Beginning next year, we also anticipate improving free cash flow conversion, in part as legal and environmental payments are expected to decline. Looking more closely at first quarter client signings, total company TCV declined 1%, And XLNS TCV declined 20% year-on-year, primarily due to timing of the renewal schedule, given we had significantly more TCV up for renewal last year. XLNS new business TCV, which excludes renewals, was down 2% year-over-year, but with a favorable mix of projects that will contribute to revenue this year, particularly in the second half of this year. New logo TCV more than doubled in the first quarter on both a year-over-year and sequential basis. New logos are expected to contribute more meaningfully to our 2024 new business signings. Adding new clients to our base is an important component for sustaining faster growth in the second half of the year and in future years by expanding our access to addressable IT spend and opportunities for expansion, new scope, and cross-selling. Within our go-to-market processes, we are continuing to see efficiency gains in lead generation, scoping, and proposals. I'll now discuss a few examples of XLNS new business wins we secured in the first quarter. In EMEA, we signed a large new logo contract integrating multiple segment offerings and including modern workplace and digital platforms and application solutions. This contract with a prominent UK infrastructure and construction company include services such as device and experience management, service desk, security, and hybrid cloud. We also signed a new logo contract in the United States with a global B2B data storage provider for digital workplace solutions. Our new client was seeking to consolidate multiple vendors to streamline operations and attain cost savings. This contract includes significant opportunity to expand its initial scope, supporting internal employees the services to support our clients' customers. In CA&I, we signed an expansion with a large state government in the United States. We already provide digital identity and access management solutions for many of our clients' citizen-facing services. This contract expands the offering to our clients' internal employees, facilitating secure access to government records from any location. Within ECS, we had application modernization wins with two existing clients in the financial sector. This included a contract with one of the largest global financial services companies in Latin America for the modernization of a loan servicing application running on our systems. We were also selected by one of the largest banks in EMEA to modernize a part of their core banking application layer. While this project is relatively small in scale, Unisys was selected over an incumbent And the win demonstrates the potential for our services to expand into our clients' application layers that surround our ECS platforms. Turning now to an analysis of our pipeline. Total company pipeline grew 6% sequentially in the first quarter and 8% in ex-LNS solutions. Our clients are facing growing IT complexity, evolving cyber risks, and pressure to adopt AI and deliver cost efficiencies. and our solutions are well aligned to these goals. Moving to a discussion of pipeline in our segments. In digital workplace solutions, our pipeline was up 10% from the fourth quarter. We are continuing to see strong client interest in solutions that drive efficiencies, such as device subscription services, where our pipeline grew more than 50% sequentially. Our device subscription services now typically include higher margin modern workplace services, related to managing device performance and technology stacks and leverage service data and analytics to optimize Vint. We also saw a sequential increase in DWS pipeline related to field services, where we see an opportunity to drive incremental margin by increasing utilization rates, as well as upsell and cross-sell opportunities. By remaining committed to excellence in field services, While some of our competitors may be deprioritizing these solutions, we see an opportunity to gain share and increase margins in a consolidating market. Managing servers and devices places us at the heart of an organization's IT operations and employee experience and opens the door to numerous higher margin ancillary services aligned with our modern workplace portfolio. In our cloud applications and infrastructure segment, Our pipeline increased 6% sequential. We're seeing clients continue to shift workloads into multi-cloud environments and view IT infrastructure as increasingly critical to the success of the broader enterprise. Our pipelines with public sector and financial clients both had double digit sequential growth in the first quarter. And we are having more strategic discussions with banking, education, and state and local government clients about their IT roadmaps and AI adoption strategies. Clients in these sectors require technology service partners that not only offer a range of modern digital capabilities, but that have deep expertise within the systems they are transforming, the highly regulated environments in which they operate, and the evolving security threats they face. Our specialized services and next gen compute pipeline within the ECS segment was up 7% sequentially, with momentum strongest in specialized managed services that address technology skill gaps. In the first quarter, we continue to innovate in the travel and transportation market, including within our suite of cargo industry solutions by improving the user interface in our cargo management system and adding functionality allowing airlines to advertise on our cargo portal reservation system, which now includes a marketplace used by freight forwarders to search and compare routes and pricing, and by airlines to list their available routes and capacity. During the quarter, we signed a new logo airline to our cargo portal. Our decades of innovating for the cargo industry and deep client relationships give us an advantage in scaling emerging offerings such as Unisys Logistics Optimization, our quantum and AI-infused industry solution for optimizing cargo capacity, inventory, and routing. We're actively building out our go-to-market channels for this advanced industry solution and have already onboarded sales and marketing leaders with deep industry expertise. We will provide Unisys Logistics Optimization in several ways, including as a service in the cloud, as well as natively integrated into AI-ready servers sold by one of our largest alliance partners. We're encouraged by the value proposition Unisys logistics optimization can deliver for our clients. More broadly, artificial intelligence, including generative AI, continues to be front and center in most of our client conversations. Clients, of course, are commercial, financial, and public sectors, are continuing to face pressures to formulate adoption strategies and detailed roadmaps. We have a wide portfolio of AI initiatives, prioritizing projects that matter most to our clients, as well as capabilities to accelerate our own efficiency, effectiveness, and performance. During the quarter, we increased our data, AI, and industry solution marketing and thought leadership to research, blogs, conference presentations, and event panels to build awareness for our AI capabilities with clients, prospective clients, industry analysts and advisors, and campus talent. One result of these efforts was our inclusion in Avasant's new radar view for applied AI services. Internally, we're continuing to invest in upscaling our global associates and expanding our adoption of AI capabilities across our company. At the end of the first quarter, 96% of associates had completed persona-based AI training. Providing all our associates with AI training, regardless of role, is an example of our ongoing commitment to developing our associates. Our trailing 12-month voluntary attrition was 12.1% in the first quarter, down 430 basis points year over year. In the first quarter, we launched an enhanced career passing framework, which will provide more mobility and development opportunities for our associates while increasing visibility into our talent bench for better internal fulfillment. We also enhanced our early career program for attracting, training, and retaining associates. This program strengthens demand planning, campus hiring, onboarding, and training processes. We believe Unisys can provide our associates with a wealth of experiences and training and that supporting career development is a central tenant in our approach. With that, I'll turn the call over to Deb.