Unisys Corporation New

Good morning and welcome to the Unisys Corporation Third Quarter 2024 Financial Results and Conference Call. All participants will be in the 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 1 on your telephone keypad. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Michaela Paworski, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. Thank you for joining us. Yesterday afternoon, Unisys released its third quarter financial results. I'm joined this morning to discuss those results with Peter Altabeff, our Chair and CEO, Deb McCann, our CFO, and Mike Thompson, our President and COO, who will participate in the Q&A session. 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-GAP financial measures, such as non-GAP 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 GAP. The non-GAP measures have been reconciled to the related GAP measures, and we have provided reconciliations within the presentation. The slides accompanying today's call are available on our Investor website. With that, I'd like to turn the call over to Peter.

Thank you, Michaela. Good morning, everyone, and thank you for joining us to discuss the company's third quarter results. It was another solid quarter of execution, and we are pleased to be raising our full-year non-GAP operating margin guidance and have an improved outlook for 2024 free cash flow. Third quarter revenue grew .2% in constant currency, which keeps us on track to achieve our full-year revenue guidance range. Our results provide a number of encouraging signs for future revenue and our ability to accelerate growth next year. For example, new business TCV was up significantly year over year again this quarter and with a higher contribution from new logo signings. We generated solid sequential growth in our pipeline with solutions that are well aligned to market demand. We expect an incremental $40 million of revenue upside this year in our L&S solutions, and we are slightly increasing our previous L&S forecasts for the next two years. Our results also demonstrate year over year expansion in our gross margin and non-GAP operating margin, which are benefiting from our delivery and operational efficiency initiatives. Over the coming quarters, we expect to further enhance our pre-pension free cash flow as new business signings generate increasing revenue, we execute our efficiency plans, and as legal and environmental payments decline through 2025 and 2026. Looking more closely at our third quarter client signings, new business TCV grew 50% year over year and is up 32% year to date. Similar to the first half, new logos were a strong contributor to new business in the third quarter, and new logo TCV more than doubled year over year for the third consecutive quarter. Adding new clients to our base is important for future growth as they increase our potential to generate revenue from new scope and in-house. We have a number of these opportunities with new logos signed in the first half of the year. In CNI, new logo signings were particularly strong, including in application development and cloud service engagements with public sector clients. For example, one of the most populous cities in the United States chose Unisys to transform, simplify, and streamline its licensing and permitting processes. As part of this engagement, we will partner closely with this client to create an innovative city-wide system with a single point of entry, secure identity management, and data protection. In DWS, we also had a notable public sector new scope win with an existing large nonprofit U.S. hospital system client. Unisys will provide a variety of digital workplace solutions to modernize and upgrade end user devices and operating systems, and work with individual hospitals and offices to ensure compliance with system-wide standards. This new scope adds to the IT support we already provide to nearly 200,000 end users at this client. In ECS, there is demand for specialized services to modernize the infrastructure and applications adjacent to our platforms. As an example, during the quarter, we signed a new scope to modernize mission-critical infrastructure for an existing large European financial services client. In sales and marketing, we have accelerated our -to-market speed. Improved sales processes and technology adoption, including the adoption of new AI tools, are helping us prospect, scope, price, and propose at a faster pace, leading to faster average sales cycles in our third quarter cycles. Targeted solution-focused campaigns and relevant thought leadership are improving the quality of our leads and new logo win rates, which are higher in the first three quarters compared to 2023. I'll now discuss some of the trends we are seeing in our pipeline. Total pipeline grew 9% sequentially, including 10% growth in our XL&S pipeline and positive sequential pipeline growth in all geographic regions. We are building awareness of our innovation with existing clients through our client technology officers, and new business pipeline with existing clients increased more than 20% sequentially in our XL&S solutions. In CA&I, we have strengthened relationships with large key public sector clients, where we saw an increase in new opportunities, driven by interest in our application development capabilities and security managed services. In DWS, we have a number of new opportunities in communication and collaboration, unified endpoint management solutions, and frontline worker enablement. Many opportunities in our new logo pipeline include solutions from both DWS and CA&I. Initially engaging a new client in multiple segments increases the stickiness of the new relationship and also provides access to more adjacencies for expansion. In the ECS segment, we are seeing new opportunities to help existing clients modernize and expand the digital capabilities in their application layers, especially in the financial services and public sectors, where our teams have deep industry and data expertise. We are seeing client demand for AI enabled solutions in all three segments, and we are increasing adoption of AI in our delivery and internal corporate functions. There are more than 120 active AI projects across the company. The majority of these projects include generative AI, and many are forming the basis for standardized solution architectures. About 50 of these projects are in production, and about 40 of them are client-facing. As an example, in DWS, our Unisys Service Experience Accelerator is a generative AI foundation and knowledge generator that we can deploy within a client's trusted environment, allowing it to securely leverage operational data and maintain data sovereignty. In CA&I, we are a custom engineering and education companion for one of our higher education clients. This generative AI offering uses specified open source textbook content while interacting in multiple languages. It reduces barriers to education caused by language limitations and the need for physical textbook ownership, with the result of making education more accessible to a diverse student body. We expect specialized generative AI knowledge assistants that are specific to an industry, function, and organization to become commonplace productivity drivers. These assistants can quickly identify gaps and inconsistencies in knowledge and generate content to accelerate code generation, solution development, and training, building shared intelligence across delivery and solution architecture. In DWS and CA&I, we are deepening our capabilities in managed services that are required to run and optimize AI workloads, such as multi-cloud management and data center management solutions. These include managing and servicing data, and where applicable, the physical infrastructure required in AI factories. In our corporate functions, we have engineered specialized generative AI assistants to navigate internal systems and policies more efficiently. In ECS, we are innovating our travel and transportation solution portfolio. This includes Unisys Logistics Optimization, our cargo capacity warehousing and routing solution that leverages both AI and quantum annealing. We are enhancing this solution by expanding cargo and container types for capacity optimization and are adding revenue management capabilities to enable financial forecasting and contract optimization through the platform. We will also begin offering multimodal routing in the near future. Recognizing our innovation in travel and transportation, Avacyn included Unisys as a disruptor in its Air, Freight, and Logistics Digital Services Radar View published during the third quarter. We are also increasing awareness in our travel and transportation portfolio enhancements with our base of airline and freight forwarder clients. These existing relationships position us as a known provider in the industry for scaling new solutions such as Unisys Logistics Optimization. Also in the third quarter, we added a new airline client through our Cargo Portal Solution, which will allow this top five global air cargo carrier to sell capacity to freight forwarders booking through our portal. I'll now touch on the progress we are making from our workforce initiatives. Our success with new logos has created a host of new opportunities for associate development. And our initiatives to map talent and facilitate mobility have allowed us to improve internal fulfillment rates on new logos. As part of our internal efforts to improve delivery efficiency, we are also increasing campus hiring and optimizing our labor markets. We are investing in technology, process improvement, and talent initiatives that prioritize skill development and career growth for our employees while expanding our capabilities in areas relevant to our clients. Our trailing 12-month voluntary attrition is low at 11.8%, which compares to .3% a year ago. Before turning the call over to Deb, I want to share some of the recent acknowledgments we received from third-party analysts and advisors. These industry experts influence client decisions and access to RFPs, and we have been building awareness and relevance with this group. Unisys has received a number of new recognitions from these industry experts. Since June, Avisant, Everest, ISG, and Nelson Hall have published reports recognizing our solutions. These include leader designations from ISG in global digital workplace services, from Everest in a new report for digital workplace services for mid-market enterprises, and from Nelson Hall in -to-end cloud and infrastructure management services. I'll now hand the call over to Deb to discuss our financial results in more detail.

Thank you, Peter, and good morning, everyone. As a reminder, my discussion today will reference slides from the supplemental presentation posted on our website. I will be discussing total revenue growth, both as reported and in constant currency, and segment growth in constant currency only. I will also provide information excluding license and support revenue, or XL&S, to allow investors to assess the progress we are making outside the portion of ECS where revenue and profit recognition is tied to license renewal timing, which can be uneven between quarters. As Peter discussed, we continue to lay a strong foundation for future growth in the third quarter. Growth in new business signings remains strong on a -over-year basis, and we are attracting new clients, which will fuel new scope and expansion. Backlog is up from the prior year, and our pipeline grows sequentially. Additionally, ECS revenue and profit is exceeding our forecast, and we are delivering on our efficiency plan, translating to profit and free cash flow upside for the full year. Looking at our results in more detail, you can see on slide four that third quarter revenue was $497 million, an increase of 7% -over-year for .2% in constant currency. Growth was driven by L&S. Excluding license and support, third quarter revenue was $393 million, a decline of .3% -over-year and .1% in constant currency. -to-date, XL&S revenue is up .9% -over-year for 1% in constant currency. We expect full-year XL&S revenue growth near the low end of our previous range of .5% to 5% in constant currency, primarily due to lower in-year revenue from our mix of 2024 signings. New logos were a much stronger contributor to our growth in new business signings -to-date. Many of these were long-term contracts that expand our revenue base and give us increased confidence we will grow XL&S revenue closer to our long-term target rates in 2025. I will now discuss our segment results in constant currency terms. Digital Workplace Solutions revenue was $131 million, a .1% decline compared to the prior year period as expected. The third quarter and -to-date declines were primarily driven by lower discretionary volume with clients, including third-party technology revenue. New business signings in the DWS segment are at 46% -to-date. The majority of those signings in the second and third quarter are just beginning to generate revenue and will support revenue growth into 2025. Cloud Applications and Infrastructure Solutions revenue was $132 million, a .5% decline compared to the prior year period. The decline is driven by some lumpiness in non-recurring revenue and project volumes with commercial clients in the United States. Enterprise Computing Solutions revenue was $158 million in the third quarter, an increase of .2% compared to the prior year period. Specialized Services and Next Generation Compute Solutions revenue grew .5% in constant currency, led by growth in specialized services with commercial sector clients and application services revenue with financial services clients. License and support revenue within ECS was $105 million, an increase of 57% -over-year in constant currency. This exceeded the $90 million we had expected for the quarter, predominantly due to a third quarter renewal we had expected in the fourth quarter. We now expect approximately $415 million of L&S revenue for the full year, compared to our previous outlook of approximately $375 million. The majority of this upside is related to an increase in deal sizes within our expected fourth quarter revenue. We do not anticipate this revenue and profit upside will negatively impact our future overall expectations. For 2025 and 2026, we anticipate annual L&S revenue of $370 million on average, a slight increase from our prior expectation. It is important to remember that the timing and exact amount of L&S revenue can be difficult to forecast with precision, given it is dependent on renewal timing, which can change based on client budgeting decisions and renewal size, which can change based on consumption levels and contract duration, among other factors. We exited the quarter with a backlog of $2.8 billion, up 18% -over-year, with aggregate DWS and C&I backlogs up nearly 25%. Trilling 12-month -to-bill is 1.2 times for both the total company and our -L&S solutions. Moving to slide 6, third quarter gross profit was $145 million, a .2% gross margin. This compares to gross profit of $95 million and a .5% gross margin in the prior year period, an expansion of 870 basis points. This was primarily driven by L&S solutions, with additional benefit from increased profitability in the remainder of the business. Excluding license and support, gross margin was 17.9%, up 390 basis points -over-year. As a reminder, in the third quarter of 2023, we also recognized a revenue reversal related to a previously exited contract, which had a 200 basis point impact on -L&S gross margin. The remaining 190 basis point improvement was due to improved delivery efficiency through workforce optimization and increasing use of automation and AI. On a sequential basis, our third quarter -L&S gross margin included an incremental 70 basis points of impact from workforce optimization investments we made to drive future gross margin expansion. We are pleased that our improved profitability -to-date is being driven by improvement in our -L&S solutions, and we continue to expect full-year -L&S gross margin to expand towards the 150 to 200 basis point range that we are targeting annually through 2026. DWS segment gross margin was .3% in the third quarter, up 150 basis points -over-year, driven by delivery improvement. Future DWS margin improvement is expected to come from a combination of higher value new business and frontline worker delivery improvement, where we continue to invest in technology and training to improve associate utilization and productivity. The ANI segment gross margin was .3% in the quarter, up 100 basis points -over-year. Workforce optimization initiatives, including expanded campus hiring, are continuing to yield positive results. Going forward, we expect to see increasing gains from the use of automation and AI and our focus on further optimizing labor markets. ECS segment gross margin was 60% in the third quarter, up from .2% in the prior year, due to increased revenue from our L&S solutions over a relatively steady cost base. Moving to slide seven, third quarter non-GAAP operating profit margin was 9.9%, up from .1% in the prior period, and above the -single-digit color provided last quarter, primarily driven by L&S revenue. Operating expenses also declined on a sequential and -over-year basis, driven by a decline in legal expenses as well as G&A cost savings. We remain focused on streamlining corporate functions, rationalizing real estate, and centralizing IT while also investing in -to-market. We are targeting run-rate SG&A expenses of approximately 17% of revenue by the end of 2026. Third quarter adjusted EBITDA was $77 million, and adjusted EBITDA margin was 15.5%, compared to 8% in the prior year period. For the first nine months, our adjusted EBITDA margin was 13.7%, an expansion of 100 basis points. Third quarter GAAP net loss was $62 million, a diluted loss per share of 89 cents. This compares to a net loss of $50 million, or 73 cents, in the third quarter of 2023. The GAAP net loss includes both a non-cash goodwill impairment of $39 million related to the DWS segment, or a 56-cent impact to GAAP DPS, as well as a tax accrual established for certain foreign subsidiaries of $29 million, or a 42-cent impact to GAAP DPS. The tax accrual is related to historical profit generated in those jurisdictions and increases our flexibility to allocate this capital more optimally across the business. Excluding these two non-cash items, GAAP net income would be a gain of $6 million, or 9 cents per share. On an adjusted basis, third quarter net loss was $6 million, or a diluted loss per share of 8 cents, compared to a loss of $22 million, or 33 cents per share in the prior year. Excluding the net impact of the tax accrual, we would have generated adjusted net income of $23 million, or earnings per share of 34 cents. Turning to slide 8, capital expenditures totaled approximately $18 million in the third quarter and $59 million -to-date, which is relatively flat -over-year. As a reminder, a significant portion of capital expenditures relate to research and development for our L&S platform, and we are maintaining a capital light strategy. Free cash flow was $14 million in the quarter, compared to negative $26 million in the prior year period, driven by L&S renewal levels and the $9 million benefits related to a favorable settlement of a Brazilian tax matter, for which we recognize the gain in the first quarter. These were partially offset by working capital dynamics related to L&S collections that are expected to benefit the fourth quarter. -to-date, free cash flow is negative $0.4 million, compared to negative $8.5 million in the prior year period. Excluding pension and post-retirement contributions, environmental, restructuring and other, and certain legal payments, which includes the tax settlement, adjusted free cash flow was $28 million in the third quarter and $38 million for the first nine months. Moving to slide nine, cash balances were $374 million as of September 30th, compared to $388 million at year end. Given our increased cash generation outlook, we expect year-end cash balances to be up on a -over-year basis. Our net leverage ratio is 0.4 times, down from 0.6 times at second quarter. Including all defined benefit pension plans, our net leverage ratio is 2.8 times, compared to 3.3 times last quarter. Earlier this week, we strengthened our liquidity position by obtaining a two-year extension on our AVL facility, which has capacity of $125 million with an accordion feature up to $155 million and matures at the end of October 2027. Our AVL remains undrawn, and this extension aligns the facility with our $485 million senior secured notes, maturing November 2027. I will now provide an update on our global pension plans. Each year end, we provide detailed estimated projections for expected global cash pension contributions and gap deficits, which change based on factors such as financial market conditions, funding regulations, and actuarial assumptions. We also provide quarterly updates, which are estimated and do not have the same level of detail. Based on asset returns and market conditions, we estimate that as of September 30, 2024, both our gap deficit and expected cash contributions for the next five years, which is 2024 to 2028, are essentially unchanged from year end 2023. Turning to slide 10, I will now discuss our financial guidance. For the full year, we continue to expect total company revenue growth of negative 1.5%, positive .5% in constant currency, which based on recent foreign exchange rates, now equates to reported revenue of negative 1% to positive 2%. Non-GAP operating profit margin is now expected to be between .5% and 8.5%, an increase from our previous guidance of .5% to 7.5%, primarily due to higher expected L&S revenues. In the fourth quarter, we anticipate approximately $20 million of legal, environmental, restructuring, and other charges in aggregate, primarily related to restructuring and other, as we continue to streamline our portfolio and accelerate our G&A efficiency initiatives. For the full year, we now expect approximately $30 million of pre-cash flow, up from prior expectations of approximately $10 million. The increase is primarily due to improved profitability and lower legal, environmental, restructuring, and other payments, which is partially offset by fluctuations in working capital, largely related to L&S collections. We continue to expect declining legal, environmental, and other payments during the coming years, during which we also expect an approximate $30 million partial reimbursement of certain environmental costs once cleanup work has been approved and finalized. The remainder of the assumptions underlying our pre-cash flow expectations are essentially unchanged and can be found on slide 10 of the supplemental presentation. With that, I'll turn the call back to Peter.

Thank you, Deb. Before taking questions, I want to emphasize three important points we hope you take away from today's remarks. First, we are increasing our 2024 profitability guidance, primarily due to an increase in our L&S revenue expectations, and we are slightly raising our outlook for average annual L&S revenue in 2025 and 2026. Second, we have increased our full-year free cash flow expectations from $10 million to approximately $30 million and obtained an extension on our ABL, strengthening our liquidity position. And third, our new business signings are up 32% -to-date and 50% in the quarter on a -over-year basis, driven by long-term contracts that expand our recurring L&S revenue base. Operator, please open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Rod Borges with Deep Dive Equity Research. Please go ahead.

Okay, thank you. Hey, so I want to first ask about the L&S revenue outlook. You had an above-expected renewal in L&S in Q3. Sometimes that can pull from future revenues, but you're increasing your L&S revenue outlook for the next couple of years. That's encouraging. I just wanted to ask about what is enabling you to increase your L&S revenue outlook? Thanks.

Yeah, thanks very much. For those of you new to this call, that's Rod Bourgeois. I will have two folks on the call with me, Mike Thompson, who is our Chief Operating Officer and President, and Deb McCain, who you've already heard from as the CFO. The three of us will go back and forth on questions. At a very high level, Rod, thanks for your question. You're exactly right in what you took away from our discussion. We did raise in-year L&S revenue guidance or projections, and we specifically slightly increased the 2025 and 2026 average. We also made a reference in the remarks to the fact that we do not expect that these changes will lower the expected revenue that we have from L&S in the future. We really believe these are incremental additions to our overall profitability, and we're enthusiastic about it. Again, we only slightly raised the 2025 and 2026 L&S projections, so not the same level as the changes in 2024, but we're not reducing them anywhere. Mike, any further insight into that?

Yeah, thanks for the question, Rod. Just maybe a couple things, and I know you know this business well, but for the group on the phone here, clearly it's a very sticky business. If you recall back when we were doing our Investor Day, we talked about that average being around $360 million per year. As Deb indicated, we've increased that to $370 million. I think what you've seen from us over the last several years in that business is that we've continued to be able to have strong pricing power in that, and we continue to see strong consumption in that business. That's the reason for the incremental uptick in that business. To Peter's point, it's not a pull from the future, although obviously the short-term aspect of the renewal and the length of that contract term is, but in our long-term projections, as indicated, we're picking those both up in 2025 and 2026, albeit slightly. Again, I think a good proof point on the stickiness of that business, our ability to maintain pricing in that business, and the continued consumption in that business. Hopefully that gives you a little follow-up, Rod.

Yeah, just a quick follow-up on that. I mean, there is a view that the L&S business is a legacy business that has the propensity to fade over time, but yet your revenue outlook is going up, and you mentioned increased consumption volumes. I think that trend started over a year ago, and it seems to be continuing to happen. Does that mean when you renew an L&S deal, the renewals, are they coming in consistently at higher volumes, and that's what's contributing to the somewhat better revenue outlook? Is it the renewals embedding higher volumes? Is that what's going on?

I think some of it is embedded higher volumes. Some of it is also increased pricing as you think about the longer-term aspect of the support component of that. As you know, Rod, these deals are three, five, and seven-year, if I look at them in those three buckets. I think there is a mix of what I would consider consumption and price power when we talk about that. Internally, when we think about this business, you use the term a legacy business, and it's true that it's been a strong business for us for decades, but we think about it through the lens of L&S ClearPath 2050 and our roadmap and the things that we've done over the course of the year. We've done it over the course of the last, I'll say, three to five years in building that business up and really making it future-proof, making it cloud-enabled, open AI. We have a lot of apps development and modernization around the perimeter, and we continue through that apps modernization to drive traffic to the core L&S. We have a very long-term view of this business, and I would say, at least in the client signings that we've seen recently, where we've been surprised in the sense of enhanced revenue, it's really around the extension of these deals. And I think, again, that speaks to the stickiness of it and the support from our client base for long-term view on the support of this business. A five-year deal turning into a seven-year or a three-year turning into a five or seven-year really gives us great comfort that there's strong support for the continued growth in this business.

Okay, got it. And then just real quick, in the DWS business, you cited some weakening in the discretionary volumes in that business. Can you just give some color on the discretionary business that weakened? And then is the outlook there more stable, or is there further – are you seeing any further risk on the discretionary side in DWS? Yeah,

let me take that at first, Rod, and again hand it over to Mike. We expect our signings for DWS over the course of the year to be very strong. What we have seen so far in the year is that the signings have been largely longer-term and less project work. So they have resulted in less revenue in an immediate context because it takes longer-term contracts longer to begin to be revenue producing. That's why when you see our -to-date new business in DWS, it's very strong, but less strong from a revenue standpoint. We also expect a strong quarter of DWS signings in the fourth quarter. So from our perspective, it has been a bit weaker in the discretionary short-term project work. But long-term, we feel very good about the prospects for DWS. We believe that that market in general is still beginning to kind of work its way through. We have been committed to that market. We stay committed to that market. We think that's a differentiator for our company, and we intend to get market share as some other people do not necessarily focus in that market. So we feel very good about that market. But for the short-term, it has had slightly less short-term discretionary revenue. Mike, thoughts on that?

Yeah. Look, I think you covered the primary points, Peter, on that. The only thing I would add, Rod, as you know and see, the market in general has still been a little soft. I would say we are seeing, at least based on our pipeline, kind of a little bit of a renewed exposure in that. Clearly, the deals that we've signed already to Peter's point are longer-term deals. As you know, we've got a three- to six-month transition. So that backlog in those businesses, we see, as Deb indicated on her comments, a strong backlog, which really support growth in that business, in line with our expectations in 2025 and beyond. And the other thing I'll say is there has been a little bit of a mixed shift in that business in the sense that when I look backwards, there's a third-party component in there that has not been as fully resonant in the current quarter. But we still expect, as we progress forward, that that will pick back up. So probably a little lighter third-party component, which is some of the weakness that we're seeing on a -over-quarter or -over-year expectation. But the reality is the backlog already has these longer-term deals in it. And as Deb indicated on her comments, when you have that support in your recurring base, it is a growth opportunity on top of that, a new scope and expansion, post the revenue record, it's been normalized. So to Peter's point, we feel really good about the strength of that business, really good about the ultimate growth potential in that business, aligned with our expectation, and probably starting to see some benefits from a little stronger market demand.

All right. Thank you,

guys. Next question comes from Joseph Safi with Canaccord. Please go ahead.

Hey, everyone. Good morning. Thanks for all the color. Just following up on Rod's question on L&F, I get the dynamics on maybe pricing and consumption, but it does feel like the upside in Q3 was pretty big. And then Q4 clearly looks like it's going to come in pretty strong. And when you kind of add up that upside, it seems more than the kind of fine tune up to the outlook. So just want to drill down into that a little bit more and then I'll follow up. Thanks.

Yeah, this is Peter. Thank you very much, Joe. So the upside in the third quarter numbers, as Deb mentioned, is largely pull through from – culture is the wrong word. It's largely revenue that we had been expecting in the fourth quarter that's coming into the third quarter. The upside in the fourth quarter is not. So the upside in the fourth quarter is revenue that was not in our guided numbers and was not reflected in, let's say, the 25, 26, and is really incremental revenue. So that's revenue coming in from a variety of sources. There's not just one thing, but we consider that incremental revenue. And while we are slightly increasing the 25 and 26 average, we're obviously not pulling that incremental revenue into a -to-year analysis. But we're excited about it. As Mike said, it's all good news. And I think it does show the strength of really our approach to Clear Path Forward. Chris Aerosmith, who leads that team for us, about two years ago started what Mike referred to as Clear Path Forward 2050. And Clear Path Forward 2050 really provides a roadmap, not just for the next year or so, but really a long-term roadmap around all sorts of things. So that includes going out into the future post-quantum encryption. So it's very vibrant. It shows the clients that not only are we investing, but we're investing effectively in that market. We will always have up and downs. Depending on cycles and contracts, we can have a quarter up or a quarter down, or we can have a year up or a year down. But it is a vibrant, important part of this company. And I think you're seeing that in the numbers. Mike?

Yeah, again, I think you covered a bunch. And Joe, I think we picked up a handful of these all rods. But again, I think consistently over the course of the last couple of years, we're seeing strong consumption. When we typically have a client that ends up either signing early or wanting to extend, that's usually a byproduct of enhanced consumption and maybe getting a little bit of inside baseball here. But when we talk about that, it's really that we have a consumption model embedded in a contract. And when they consume that and they go beyond that need, they typically have an uptick in pricing. So what ultimately happens instead of paying the uptick in pricing at kind of list pricing rates, they come back and they want to extend the contract for a longer duration. And then obviously there's an upfront revenue recognition with that. But at the end of the day, it's about they're using the consumption and then some. And it also proves the pricing power and value of the ClearPass Forward operating system to those particular clients. So again, feel really good about the longevity of that. Feel really good about our ability to maintain that base, in fact, enhance that base slightly. And then feel really good about the continued use and our ability to modernize around that base so that the end user experience is enhanced utilizing the legacy tools. So it really gives us a lot of vectors to kind of attach to that existing client base. And I think that's what you've been seeing over the course of the last couple of years and what you're seeing as the basis for the increase in 25 and 26.

Great. That all makes sense. And it's nice to see. So and then maybe just secondly, you know, it does feel like, you know, new TCV signings are up, which is great. Maybe kind of just and I know you talked a little bit about duration on some of that TCV, that new TCV. We maybe kind of touch on renewal dynamics outside of new contract TCV and how that's trending and how that may affect or influence the outlook moving forward. Thanks a lot, guys.

Mike, that one is

yours as well. Yeah, thanks again, Joe. Look, I would say, you know, as Deb indicated on her commentary, the signings were all primarily for longer term contracts. The one thing we probably didn't note in there and should have, they're also multi-segment, right? They're primarily a mix of DWS, NCA, and I, which, as we've talked about in the past, is a much stickier proposition for us. Most of those signings are kind of three year duration type things, which are pretty consistent to our managed service base. And so when we see, I'll say the average contract length, it's been pretty consistent across the board. And we continue to have very strong renewal rates, right? We talk about that in the 95 plus percent range from renewal base on the existing client base. So that continues to trend in that same manner. We're not only maintaining those clients. I would also add that a lot of those renewals that we do end up being renewals plus, right? We've been able to effectively add some new scope or expand that renewal. So we talk about those renewal rates and it's really important for us to maintain and keep that base to support our future growth. But most of that is coming with renewal plus. And that plus can be either new work, new scope, bringing in some of the new solutions, ultimately modernization and or helping our cross-sell opportunities. So we feel great about the renewal base as we have historically. And I think that speaks to our really strong MPS scores and CSAT scores that our clients continue to renew with us at that clip level and then are continuing to add to those renewals. And then the new base that we brought in, Joe, just adds to that renewal base. And as you know, we have a very strong, if you think about our renewal base year on year, %-ish of our revenue is kind of recurring. And then we keep adding these longer term contracts to the renewal base that allows for continued expansion in the future. So from a strategic point of view, very happy to see that and very consistent with what we talked about even back in our investor day from 23, very consistent with that modeling, very directionally consistent with that modeling.

Great. Thanks for that color, Mike. Thanks, everybody.

Thank you, Joe.

The next question comes from Anya Soderstrom with Sudodi. Please go ahead.

Hi, everyone. I congratulate you on a nice progress this quarter. And thank you for taking my questions. I have a follow-up on the LNS revenue as well and the outlook there. To what magnitude do you expect it to increase in 2025 and 2026?

Anya, this is Peter. I got most of the question. LNS. What is the question about 2025 and 2026?

You were talking about the outlook. Would you expect the revenue to be higher for 2026 and 2025 for LNS? Can you just speak to what magnitude?

Yes. So if you look at what we had previously guided to, we had previously guided to revenue of about $370 million on average for 2024, 2025, and 2026. We had already guided to $375 million for 2024, which implied a slightly lower average than $370 million for 2025 and 2026. So what we're doing today, obviously our 2024 number has now gone above that $375 million, but we're also increasing the 25 and 26 only average to $370 million. And we also want to highlight the fact that the increase this year is not expected to decrease our expectations for 25 and 26. Those expectations have slightly increased. Deb, any further color on that?

No. I think that is exactly right. Exactly right. So the math you went through. So, nope, it's good. Thank you.

I don't know if that answers the question or not.

Yes, it did. Thank you. That was helpful. And then I'm just curious about the goodwill impairment for DWS. What's that for?

Right. Hi, thank you. Peter, don't need to take that?

Please.

Okay. So, yes, it was a non-cash impairment we took in the third quarter. And really it was triggered by economic and industry dynamics that overall, and you probably hear it on several calls, are impacting the pace of client signings. And so when we kind of apply that market lens to our forecast, you know, resulted in an impairment. So I think, you know, many large competitors in the market are facing significant challenges in the DWS solutions, which we have to take into consideration as we do our evaluation testing. You know, we're still, as Peter, as we've talked about, really enthusiastic about the DWS space. We're looking for Unisys to take share. You know, and as we've talked about, 46% -over-year growth in our new business, TCV. So we're seeing a lot of really good indicators and ongoing demand for our solutions. But, you know, when we take that market lens, kind of apply it to our forecast, that's really what resulted in the impairment. So it is non-cash. So, you know, it impacts our EPS. And as I mentioned on the call, you know, without that, as well as with the tax accrual, you know, we would have been a lot higher with our EPS. But that's the result of that. So does that answer your question?

Yes, that was helpful. And then I'm just curious about the margin expansion in the xLNS. You see good expansion there as well. And you forecasted for this year. But where are you in the innings with efficiencies there? And how should we think about that margin expanding next year? Will that be driven by continued efficiencies or more by scale? So

when we think about margin expansion, we're really thinking about it three ways, Anya. One way is we're selling more value added solutions. So we think the pricing that we're getting for our newer solutions will be at a higher margin than the previous solutions that we offered. That's really true kind of across the board. There's obviously competitive pressure, but we think we're adding more value to our clients than we had before. So we the pricing we expect inherently to have more margin. The second part of that is the delivery efficiencies within the things we are providing to our clients. So delivery efficiencies and the third is really our SG&A. So our SG&A, we have a very specific plan to reduce SG&A over time. So all three of those really will affect our profit margins going forward. And Deb, if you want to give color on any of those three, please go ahead.

Yeah, I think, Peter, you covered everything. I think the efficiencies we laid out when we talked about our investor day, that improvement in gross margin that we expect each year. And I think we're achieving those and we'll continue to as we laid out.

Okay, thank you. That will follow me.

The next question comes from Arun Sajrari with BNP Paribas. Please go ahead.

Hello, everyone. Thanks for squeezing me in. Just wanted to ask on the XLNS side. Sounds like you're, it's good to see the new business pipeline was up sequentially pretty nicely. If you could unpack that and also maybe talk a little bit about, I think the XLNS revenue has been flatting out. It's been a bit of a bullish ex foreign currency for the last couple of quarters, but the new business pipeline, it sounds like the outlook overall there is improving for growth to trend back, I guess, maybe to the middle or hopefully the higher end of your one and a half to five range. But just if you could sort of address that specifically, I know you've discussed it in the context of DWS, but just would love to hear sort of a broader look on the XLNS side.

Yeah, Arun, thanks very much. Obviously, we are very pleased to see the pipeline increasing sequentially, 9% and 10% for that XLNS pipeline increasing. We're also very enthusiastic about the backlog increases. Mike, any further color on either of those that you want to add?

Yeah, look, Arun, thanks for the question and I'm glad you pointed it out. I do have a couple of things I'd like to add there. So, you know, we talked a little bit about the softness and discretionary spend in general in the sector. But what we also talked about is this increase in pipeline and the increase in backlog. And based on the increase in backlog at our renewal schedule, I think the way that you've characterized your question even is really great in the sense that it gives us a tremendous amount of confidence that the growth trajectory that we have put forth for that business is starting to be underpinned in our backlog, right? So really the strength of that business and starting to see some of that softening and the contracts we already signed for that business in the year is really giving us that high degree of confidence. And I would almost tie it into Anya's question a little bit. We've seen the margin improvement in that XL&S business to the tune of, as Deb indicated, about almost 300 basis points of improvement across the board, I think, when we look at the overall XL&S space. And to Peter's point, a lot of the future is coming from increased revenue. So we've been able to prove the dynamics of our delivery, drive that margin benefit, and do that on a fairly flat revenue base, as you indicated. And now we're seeing the backlog really support revenue growth, which will help expand those margins in the future. I think Deb talked about 150 to 200 basis points improvement over the next two years in that XL&S space. And to Peter's point, some of that's from top line growth, which we feel like is embedded in our backlog, and then some continual delivery. So that's the reason why we feel very strongly about that market in general. I don't think we got our strategy right. I think that the kind of external efforts that Peter mentioned around our selling and our go to market are starting to really resonate. Peter talked about the industry analyst component of that, so that the visibility, the introduction to RFPs are also building up our pipeline and our backlog, and then ultimately translating that to wind. So again, feeling pretty comfortable and strong about returning to that growth trajectory on the top line and having that enhance the profit that we've already seen.

Thank you for that, Mike. That was helpful. And then just one other quick thing. Is there, as your outlook for L&S has improved, is there any, can you talk about the attach of XL&S to L&S revenue? At a high level, has that changed in any way, or do you see that changing in any way? That's all I have, thanks.

Yeah, Mike, Mike already, well, I think Mike, as you talk about that, there's really two questions. One is a fundamental effort, Aruna, we've had company-wide, and I mentioned it in my comments, to attach, even at the time of signing up a new client, more than one segment. And so that would be DWS and CA&I or ECS. So, and we've been very effective with that. Now, your question is very specific. It's when, you know, as we sign L&S business, have we been able to attach DWS or CA&I business to L&S? So Mike, do you have any specifics on that element of the overall strategy?

Yeah, Aruna, again, thanks for the question. I would say that the closest and easiest attachment that we see is really around apps modernization. You know, we talked briefly around that user experience, and it really sits around the core. So we've actually had some pretty good success on the app modernization side attached to specifically ClearPass Forward clients and ClearPass Forward ecosystem. I mean, we have clients that have hundreds of applications that are kind of custom apps that sit on top of our ClearPass Forward operating system, right? So who better to help modernize that? And that's the attachment either to CA&I or SS&C, which is the kind of next gen component of our ECS practice. There's a really definitive attachment there. That is a market we target explicitly. And it's a market that we've seen real good take up rates and also growth, not only growth we've already seen in SS&C for that apps modernization, but growth in the pipeline to continue to modernize around the operating system to get the benefits of some cloud type activity on top of the current operating system. And it also help us direct that consumption to maintain that base. So there's a lot of real benefits for us to do that, and it's probably much more akin to attachment to CA&I as well as the other components of ECS.

The next question comes from Kellan Deleza with Jeffreys. Please go ahead.

Hey guys, thank you for squeezing me in and congrats on the strong quarter and the raise to the outlook here. Just one question from my end. Obviously the new logo signing is very strong and the pipeline grows sequentially. Can you just parse out maybe a bit more specifically where you're seeing success with new customers across capabilities or geographies or end markets just so we have a sense of where that new activity is coming from?

Yeah, thanks very much. And one of the things that is interesting about this company is from a geography standpoint, we have a lot of diversity. We have about 44% of our revenue in the US, so about 56% outside the US, 28% in EMEA, and about 16% and 12% respectively in Asia Pacific and Latin America. And the result of that diversification means we really are not overly dependent on any one country or any one region, and as different countries and regions experience different growth rates, we can kind of migrate a bit our emphasis to those areas where we think there's bigger growth. Mike, any specifics on that question?

Look, I would say, Kellan, first thanks for the question. I think the diversity not only from a geography perspective but also from a sector or segment perspective is true. We are seeing our solutions and frankly our strategy is our solutions, although geared to a specific industry when we have dialogue on how it applies, are homogeneously on the same page. So I don't think that there's any kind of one sector or region that dominate that spend, which is great. We want to have solutions that are universally applied. They always have a very specific industry slant or sector slant or even region slant when we tailor it to our clients. But in general, I would say we're seeing a much more combined offering when we go to market and the success that we had. I mentioned on one of the other comments earlier here, most of the new logos and the new business that we're signing are either adding a component to an existing base that gives us a cross-sale component to it, or the business itself when it's a new logo has both. Our DWS and CA and I component pieces in it. So one of the beauties of our strategy, I think, is that regardless of the starting point, there's a connection to the other solutions that we do. And it really depends on the scope of the client, RFP or RFI that comes our way. And we can pivot our messaging to be tailored to that specific ask. So I guess the macro view is pretty diverse both regionally and by industry and can be tailored to those. So our solutions in general are resonating. And I think that you could look at that, how it resonates both from the industry analyst perspective and the things that Peter mentioned around how we sit in those various quadrants and then in the solutions that we've had success in penetrating this soft market with.

Okay, great. That's very helpful. Thank you for the time today.

Thank you.

The question and answer session has now ended. I would like to turn the conference back over for closing remarks.

Thank you, operator. And I really want to thank everyone for your indulgence in keeping you a little longer for this. There's a lot to cover. There is still more on our website, which is actively updated. And I encourage you to kind of take a look at it as you go about your other efforts. We're frankly very, very excited about what we announced this quarter. You know, the increased profitability guidance, the increased expectation on free cash flow, the increase in new business signings year to date up 32% and 50% for the quarter, which we think that ultimately that will expand our recurring XL&S revenue as well as obviously the good news on L&S that you heard today. So thank you again for following us and we look forward to the next call.