Unisys Corporation New

Good morning and welcome to the Unisys Corporation fourth quarter and full year 2024 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. 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 fourth quarter and full year financial results. I'm joined this morning to discuss those results by Peter Altadev, 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 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, Miquela. Good morning, everyone, and thank you for joining us to discuss the company's fourth quarter and full year 2024 results. Our fourth quarter results were solid, with 10% sequential revenue growth, both as reported and in constant currency, and our non-GAP operating margin was a strong 11.6%. Full year non-GAP operating profit was $176 million, representing an .8% margin, up 180 basis points year over year, and above the top end of our upwardly revised guidance range. We exceeded our initial free cash flow outlook and are delivering on our goal to improve cash conversion with lower aggregate legal, environmental, and cost reduction payments. Free pension free cash flow nearly doubled to $82 million in 2024. Our 2025 outlook continues to advance us toward our long-term goal of expansion in free pension cash flow, with approximately $100 million expected in 2025. Our outlook reflects continued execution of our ongoing strategy to improve revenue growth and profitability of our ex-LNS solutions, enhance our high-margin LNS revenue, streamline corporate costs, and improve cash conversion. With the growth and margin of our new business signings in 2024 and our investments to improve delivery and optimize our workforce, we expect to provide an underpinning for another step up in ex-LNS profitability in 2025. We are also raising our LNS revenue expectations to approximately $390 million in 2025 and $400 million in 2026, at an average expected gross margin of approximately 70%. This $395 million average LNS revenue for 2025 and 2026 is a $25 million annual revenue increase to our previous expectation of $370 million on average for the next two years. This is the latest in a string of positive revisions that reflect the success of our ClearPath Forward 2050 strategy and further support the longevity and inherent value of our LNS solutions. Our optimism stems from our clients' long-term commitments to an expanding use of our platforms, which is also accompanied by a strong flow of demand for support in modernizing and optimizing the surrounding IT estate. Looking at client signings, fourth quarter new business TCV was approximately $220 million, our strongest quarter of the year, and up 24% compared to the prior year period. Full-year new business TCV was approximately $790 million, up 29% compared to 2023. New logo TCV more than doubled year over year, both in the fourth quarter and on a full-year basis. We believe this substantial improvement in new logo conversion marks a positive evolution in our ability to expand our client base. This means we will have a higher baseline potential for new scope and expansion in 2025, and we already have follow-on opportunities in the pipeline or being qualified with our 2024 new logos. Our new business success in 2024 provides underlying confidence in an inflection in ex-LNS revenue growth in 2025. As margin accretive signings increase as a proportion of our DWS and CNI revenue, we expect a multi-year tailwind to our ex-LNS gross margin. Our fourth quarter signings include several notable examples. In DWS, we signed a significant field services expansion with one of the largest global OEMs related to high-end enterprise storage systems in the United States, Canada, and Latin America. We expect this engagement will increase the volume of higher value, higher margin field services we provide for this large client, enhancing segment profitability and beginning to offset some of the volume declines in lower margin field services we experienced in 2024. In a separate field services new business win, Unisys was chosen by one of the largest global quick service restaurants to provide network deployment and ongoing support for more than 10,000 U.S. restaurant locations and new restaurant openings. These sizable wins with global blue chip clients are a testament to our leadership and innovation in the digital workplace market. In CNI, we signed a fourth quarter new logo contract with a public sector utility expanding our footprint in Latin America. Unisys will provide a range of security managed services to our clients' eight subsidiaries, including extended detection and response and continuous threat exposure management. In ECS, we had several fourth quarter wins in specialized services to support modern donation and continued use of our LNS platforms. In travel and transportation, we won a large managed services contract expansion with a leading international cruise line and client of over 40 years. Unisys will refresh, expand, and manage the client's mission critical reservation system infrastructure and take over administration of databases that maintain reservation, excursions, promotions, and travel agent interface data. We also secured long-term LNS renewals during the quarter, including with travel and transportation clients in Spain and Asia Pacific. In the public sector, Unisys secured a significant LNS renewal with a client in Europe which included infrastructure and application services for a law enforcement system that runs on our software. In several cases, our ability to provide modernization services from both ECS and CNI was a consideration for clients, demonstrating our clear path forward 2050 strategy at work. The wins we have shared with you throughout this past year illustrate the evolution of client perception in our solutions. We see similar trends with independent analysts and advisors that influence client IT decisions. Most recently in the fourth quarter, we improved to a leader position in a major IDC report on worldwide digital workplace services and received new leader acknowledgements from Avacant for Generative AI Services and from Everest for both mid-market digital workplace services and analytics and AI services. We were also recognized as a leader in eight areas of multi-cloud services by ISG. In reports published during 2024, we have received 16 leader designations, six of which are new, from highly reputable firms including Avacant, IDC, ISG, Everest, and Nelson Hall. In DWS, we received numerous leader designations for our global digital workplace offerings as well as recognition in the future of work, end user computing, and the ServiceNow ecosystem. In CNI, we were awarded leader rankings in cloud services as well as designation for solutions in areas such as security, data center services, Microsoft services, cognitive and self-healing IT infrastructure, and artificial intelligence. These recognitions are important validations of our investments in innovation, sales, and marketing and help us get invited to more opportunities. I'll now discuss four key 2025 priorities that will position us to capitalize on market demand. Artificial intelligence, application services, ClearPath Forward 2050, and -to-market. We expect artificial intelligence to accelerate in 2025, and we are continuing to invest in our AI-enabled solutions and the services to build a strong IT foundation to support adoption. This foundation requires orchestrated operations across multi-cloud environments, data and application layers, and devices that deliver intelligent end user experience to access knowledge. In CNI, we are infusing AI into cloud services and development to increase automation and delivery speed and efficiency. We are also developing specialized AI agents for clients that train on client-specific data to automate specialized tasks. In EWS, we are investing in our generative AI-enabled technology framework called Service Experience Accelerator, which is the foundation of our next generation of service desk. We believe this accelerator has the potential to disrupt the digital workplace market by addressing client data, security, and cost considerations. The platform significantly reduces client costs and deploys in the client's environment to provide client control over the use and security of their data. We are also expanding our liquid cooling expertise within field services to support power-intensive AI workloads of the future. These AI-related investments compound on the strong foundation laid in 2024 to support our growth plans. Over the past year, we streamlined and modernized our field service dispatch and ticketing systems and bolstered our Salesforce and ServiceNow relationships, which allow us to onboard clients and scale delivery at a faster pace. We have also secured several framework agreements that are not reflected in our reported TCV or backlog. A second priority in 2025 is application services, where we are centralizing our capabilities and sharpening industry focus. Effective January 1, 2025, we executed a realignment to fast-track those efforts by consolidating most of our operations that are currently reported in all other, into our ECS and CANI segments. These solutions are largely concentrated in Europe and Asia Pacific and broadly consist of application services for public sector clients, which will move into CANI, and business process services in the financial and public sectors, which will move into ECS. Our IPSL check processing joint venture will continue to be reported within all other. We have also moved ECS client application services into CANI. This centralizes our application development capabilities into one application factory, having a deeper industry focus and connection to all of our clients, including the ECS client base. This will enhance cross-selling, standardized development, and foster innovation within a central pool of application talent, which we can leverage to more effectively deliver faster and better solutions for our clients. A scaled application factory also elevates our position within the fast-growing application arena and will allow us to pursue larger engagements. A third priority is focused on supporting our ClearPath Forward 2050 strategy. In the fourth quarter, we went live with a major new ClearPath Forward release that delivers performance, scalability, and security enhancements. The release also includes new capabilities to prepare clients for post-quantum cryptography challenges, including PQC compliant encryption for certain data. We're continuing to elevate our presence in Air Cargo through our industry solution portfolio. In the fourth quarter, we went live with an enhanced version of Unisys Logistics Optimization for cargo capacity planning and rolled out initial multimodal routing capabilities. We also enhanced our Cargo Core offering with functionality for compliance with new customs regulations and fully onboarded one of the largest global air cargo carriers into our cargo portal. A fourth priority for 2025 is advancing our go-to market by investing in innovation through thought leadership, industry expertise, and our alliance partners. We are expanding both our team of client technology officers with key clients and our industry vertical teams where we see the largest opportunities for growth. Finally, we are intensifying our efforts to strengthen and expand our partner ecosystem, including relationships with key existing hyperscaler, OEM, and enterprise software partnerships as well as with new partners that ensure we can deliver and incorporate a diverse set of emerging technology into our client's environment. Before turning the call over to Deb, I want to briefly touch on our workforce initiatives. In 2024, we focused on career growth and cost-effective talent management by evolving career pathing and early career development programs and launching a new talent mobility platform. We also continue to promote a positive workplace, resulting in finishing the year with low trailing 12-month voluntary attrition of 11.8 percent compared to 12.4 percent a year ago. In 2025, we will increase our focus on talent transformation initiatives based around three key objectives. Our first objective is optimization of our internal labor. This includes initiative, increasing campus hiring, talent rotation, and upscaling and redeploying associates. Our second objective is increasing utilization to enhance productivity and minimize external hiring. And our third objective is cost reduction, which includes initiatives related to contractor reuse and scaling capacity at key delivery centers in lower-cost domestic and international labor markets. With that, I'll turn the call over to Deb to discuss our financials in more detail.

Thank you, Peter. Good morning, everyone. As a reminder, my discussion today will reference the supplemental slides posted on our website. I will discuss 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 XONS, to allow investors to assess the progress we are making outside the portion of ECS for revenue and profit recognition is tied to license renewal timing, which can be uneven between quarters and years. As Peter mentioned, we are pleased with the improvement in our non-GAAP operating margins and the strong -over-year free cash flow growth we were able to achieve. The operational improvements we have made in our segments are leading to sustained XL&S growth margin expansion, which is being enhanced by stronger L&S performance as clients continue to commit to and increase usage of our operating system. The resolution of several legal matters in 2024 eliminates the future headwind to cash from legal costs related to these matters. We also continue to expect higher conversion in 2025 and 2026 as environmental and cost reduction payments decline. Looking at our results in more detail, you can see on slide 4 that fourth quarter revenue was $545 million, down .2% -over-year as reported, and .5% in constant currency. During the quarter, L&S revenue came in stronger than our already increased expectations, while XL&S revenue declined .7% as reported and .8% in constant currency. For the full year, revenue was $2 billion, down .3% on both a reported and constant currency basis and within our guidance range. Excluding license and support, full year revenue was $1.58 billion, down .6% -over-year, both as reported and in constant currency. Caused by certain headwinds, we view as temporary. We remain optimistic about the strong levels of new business we have signed and the growth prospects for both DWS and CA&I in 2025. I will now discuss our segment revenue, which you can find on slide 6 in constant currency terms. Digital Workplace Solutions revenue declined .2% -over-year to $128 million in the fourth quarter. For the full year, DWS revenue was down .2% to $524 million. Both the fourth quarter and full year declines were driven by lower hardware and isolated lower margin field services volumes. We expect that during the year, DWS will positively inflect as recent new business signings ramp, including increased higher-end field services volumes. We also expect growth in technology and services revenue related to a stronger PC refresh cycle in 2025, including advisory, device subscription services, and modern device management. The segment's new business signings were up more than 40% in 2024, with favorable margins and strong contribution from new logos. We expect these signings to contribute to segment growth in 2025. Cloud applications and infrastructure solutions revenue declined .2% -over-year to $132 million in the fourth quarter. For the full year, CA&I revenue was down .8% to $527 million. The decline in the fourth quarter was driven by lower third-party technology revenues and volume with certain clients related to the timing of project uptake, which can be uneven. We anticipate improving project volumes in 2025 as clients continue to adopt and optimize hybrid multi-cloud strategies and modernize their data and application layers to support AI. Our combination of physical infrastructure, cloud, and application expertise positions us for growth in both high-value project work and recurring services to secure and intelligently manage hybrid IT states that are becoming increasingly complex. As we saw in DWS, our CA&I new business signings also increased more than 40% in 2024, and we expect our central application factory to expand our opportunity in high-growth areas of the market. Enterprise computing solutions revenue was up .2% -over-year to $209 million in the fourth quarter. For the full year, ECS revenue was up .3% to $651 million. During the quarter, L&S Solutions revenue grew .4% to $152 million and $432 million for the full year. This exceeded our expectation of $415 million, which we had increased from $375 million in the third quarter. The $17 million of fourth quarter upside was driven by increased client consumption on our platforms as we continue to see expanding usage at many of our larger clients. Specialized services and next-generation compute solutions with NECS grew .3% in the fourth quarter and .3% for the year, led by growth within financial services clients. This quarter, we are beginning to provide TCB disclosures in absolute dollar terms, which we believe brings our disclosures more in line with the broader IT services peers. Fourth quarter total contract value was $752 million, including $218 million from new business signings and $534 million from renewal. Full year TCB was $1.9 billion, with new business TCB of $791 million. Trailing 12 months book to bill was one time for the total company and .9 times for our XL&S Solutions, and we exited a year with backlog of $2.8 billion compared to $3 billion a year ago. The modest declines in backlog and book to bill were the result of renewal timing, with lower aggregate TCB up for renewal in 2024, with additional impact from movement in FX. 2025 is expected to be a higher renewal TCB year, benefiting backlog and book to bill throughout the year. This also provides a good opportunity to secure expansion and new scope that clients may seek to integrate when renewing existing contracts. Moving to slide 7, fourth quarter gross profit was $175 million, a .1% margin compared to .5% in the prior year period. Fourth quarter XL&S gross margin was 15.7%, down from .5% in the prior year. Contractions in both the total company and XL&S gross margin during the fourth quarter were primarily driven by incremental cost reduction charges during the quarter. For the full year, gross profit increased more than $30 million to $586 million, a gross margin of 29.2%, which included delivery improvement in our XL&S Solutions. Full year XL&S gross profit was $278 million, a .6% gross margin compared to .1% last year, an increase of 250 basis points, which includes a one-time benefit from a previously exited contract. I will now touch briefly on segment gross profit, which you will find on slide 8. GWS segment gross margin was .9% in the fourth quarter, up 60 basis points year over year. Full year GWS gross margin expanded 170 basis points to 15.7%. These gains are the consequence of technology investments we are making to modernize our delivery capabilities and boost employee productivity. We are also benefiting from our strengthened leadership position in the market relative to our peers and an increased focus on value-based pricing. The ANI segment gross margin was .4% in the fourth quarter, down 90 basis points year over year. For the full year, the ANI gross margin was 16.5%, up 110 basis points year over year. Our workforce optimization efforts, such as increased automation and expanded campus hiring, continue to drive positive outcomes. Looking ahead, we anticipate greater benefits from automation, AI, and labor efficiency as we scale key delivery centers. We also expect our new central application factory, industry sale leads, and increased ECF cross-selling to accelerate the mix shift to higher margin solutions in CA&I. ECF segment gross margin was .7% in the fourth quarter, down 270 basis points year over year. Full year ECF gross margin was 60.2%, down 100 basis points year over year. The fourth quarter and full year margin decline was primarily driven by a slightly higher mix of hardware and our L&S deals within the period. Moving to slide 9, fourth quarter non-gap operating profit margin was .6% compared to .5% in the prior period. Fourth quarter adjusted EBITDA was $91 million, a margin of 16.8%. For the full year, non-gap operating profit was .8% compared to 7% in 2023, exceeding the top end of our guidance range of .5% to 8.5%, which was raised during the third quarter earnings call. The year over year improvement in guidance speed was driven by a combination of an enhanced margin profile in our XL&S solutions, upside in our L&S solutions, and SG&A efficiencies. Full year adjusted EBITDA was $292 million, representing an adjusted EBITDA margin of .5% compared to .2% in 2023. We remain focused on streamlining corporate functions, rationalizing real estate, and centralizing IT while also investing in -to-market. Fourth quarter net income was $30 million and $24 million on an adjusted basis, translating to diluted earnings of $0.41 or $0.33 on an adjusted basis. The fourth quarter included a $40 million benefit related to a favorable settlement of a lawsuit we had brought to protect our intellectual property and confidential information. For the full year, GAAP net loss was $193 million or a diluted loss per share of $2.79 and includes a negative $130 million settlement charge related to our first quarter pension annuity purchase. On an adjusted basis, net income for the full year was $32 million or diluted earnings per share of $0.45. Turning to slide 11, capital expenditures totaled approximately $211 million in the fourth quarter and $80 million for the full year, relatively flat on a -over-year basis. As a reminder, a significant portion of capital expenditure relates to research and development for our L&S platform, and we are maintaining a capital-light strategy in our XL&S solutions. Free pension, free cash flow, which is free cash flow prior to pension and post-retirement contributions, was $82 million in 2024, up from $44 million in 2023. We generated $56 million of free cash flow in the fourth quarter, bringing our full year free cash flow to $55 million compared to negative $5 million last year. This was driven by lower international pension contributions and net legal payments as well as XL&S profit improvements. This put us ahead of the upwardly revised expectations of $30 million for the full year, primarily due to high fourth quarter L&S revenue and $15 million of the previously mentioned $40 million legal settlement received in the fourth quarter. The remaining $25 million is due to us in mid-2025 and is assumed in our 2025 outlook. Moving to slide 12, cash balances were $377 million at year end compared to $388 million at the end of 2023. Our net leverage ratio, including all defined benefit pension plans, was 3.0 times at year end, relatively flat on a -over-year basis. As a reminder, we strengthened our liquidity position by obtaining a two-year extension on our ABL facility, which has a capacity of $125 million with an accordion feature up to $155 million and matures at the end of October 2027. Our ABL remains undrawn and its maturity is aligned with our $485 million senior secured notes that come due in November 2027. I will now provide an update on our global pension plans, beginning with slide 13. Each year, we provide more detailed estimated projections for expected global cash pension contributions and gap deficits relative to our quarterly updates. These projections change based on factors such as financial market conditions, funding regulations, and actuarial assumptions. Our global gap pension deficit, which can be seen on slide 13, was approximately $750 million at year end 24 compared to approximately $700 million at the end of 2023. On slide 14, you can see a detailed projection of our expected cash contributions. Volatility in contributions is lower in the first five years of the projection and informs our near-term liquidity needs. For the five-year period beginning in 2025 through 2029, contributions are expected to be $585 million, $10 million higher than our projections at the beginning of 2024. Turning to slide 15, I will now discuss our financial guidance for the full year. We expect total company revenue growth of positive .5% to positive .5% in constant currency, which based on January 31, 2025 foreign exchange rates equates to reported revenue growth of negative .9% to positive 0.1%. Our growth range assumes XL&S constant currency revenue growth of approximately 1% to 5% and license and support revenue of approximately $390 million. As a reminder, the timing and exact amount of L&S revenue can be difficult to forecast with precision, given it is dependent on renewal timing and size, which can change based on consumption levels and duration preferences, among other factors. We expect non-GAAP operating profit margin to be between .5% and .5% for the full year. Our profit guidance reflects a decline in L&S profit contributions due to renewal timing and coming off a strong 2024. We expect this to be partially offset by approximately 150 basis points of improvement, an aggregate of $1.5 million in C&I gross margins and a reduction in SG&A. For the full year, we expect to generate approximately $100 million of pre-pension, pre-cash flow and slightly positive pre-cash flow after funding our pension contributions, allowing us to preserve our strong cash balance. Our pre-pension, pre-cash flow outlook reflects significant improvement in cash conversion as environmental, legal, restructuring and other payments are expected to be a net positive of $10 million, which includes a one-time collection of the remaining $25 million owed to us as part of the favorable legal settlement negotiated in the fourth quarter. We have settled several matters contributing to our elevated levels of legal payments in prior quarters and also expect lower cost reduction in other payments this year. Our cash outlook assumes capital expenditures of approximately $95 million, cash taxes of approximately $60 million and net interest payments of about $15 million. Cash interest does not include any assumption of refinancing. However, we are monitoring credit market conditions along with our banking partners to be prepared to opportunistically take advantage of any favorable opening to refinance in 2025. Looking specifically at the first quarter, Exelonis revenue is expected to be approximately $370 million, which includes more than $10 million of expected FX impact relative to the prior year end, equating to a low single-digit decline year over year in constant currency. The majority of the constant currency Exelonis decline is due to a benefit in the prior year related to the favorable settlement of a previously exited contract. We also expect a slight decline in Exelonis revenue from our IPSL joint venture, which has zero margin and is reported within all other. Based on renewal timing, first quarter L&S revenue is expected to be approximately $70 million compared to $93 million in the prior year. First quarter is expected to be our lowest L&S quarter of the year. Full year L&S revenue is expected to be back half weighted with a split of approximately 40% in the first half and approximately 60% in the back half. Given the cadence of L&S renewal timing and the impact of FX, this translates to a total company reported revenue decline of approximately 10% or 7% in constant currency and a low single-digit non-GAAP operating margin. While we do not provide financial guidance or cash flow color beyond the current year, I wanted to touch on the potential path that we see for achieving improved pre-pension pre-cash flow in light of the expected increase in pension obligations next year. We expect much of the incremental cash flow to come from increasing gross profit in our Exelonis solutions, where we are targeting approximately 150 basis points of annual gross profit margin expansion resulting from delivery optimization and a creative new business momentum. We have demonstrated our ability to deliver gross profit improvements these past few years and expect that we will continue to do so. We also anticipate some incremental L&S gross profit in 2025 based on our expectation of $400 million in L&S revenue. In addition, we expect further improvements in SG&A. As a reminder, we also expect an approximate $30 million reimbursement of environmental costs in 2026. An increase in interest payments, assuming a refinancing in 2026, would largely be offset by a further reduction in our baseline environmental restructuring and other payments. This pathway should lead us to the pre-pension pre-cash flow needed to fund our future pension contributions and organic investments for profitable growth. With that, I will turn the call back to Peter.

Before we open the call to our Q&A session, I want to thank you for all of your attention to our company. For several years, I have been joined by both Deb and Mike Thompson, our President and Chief Operating Officer, in the Q&A session of our earnings calls. We announced in December 2024 that effective April 1, 2025, Mike will become our CEO, and I will continue as Chair of the Unisys Board of Directors. Thank you also for your support of Mike. Given that change, I'm asking Mike to take the lead on this Q&A session and working with Deb on the earnings calls going forward. Operator, please open the call to comments and questions. Thank you.

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're 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 comes from Rod Bourgeois with Deep Dive Equity Research. Please go ahead.

Great. I also want to just give my kudos to Peter and to Mike for this transition. You guys are both class acts, and I wish you guys the best. Just to jump into the first question here, given the low growth exit rate in the ex-LNS business as you exit 2024, you've got a pretty significant growth rebound expected during 2025. I know some of that is coming from the strong new TCB bookings that you've had. Can you give us some more visibility into how you're looking at that growth trajectory in ex-LNS? How much of your confidence in that growth inflection point is coming out of work that's already booked in the backlog where you have visibility into the ramp up? I'm also wondering if you have any assumption that these weak client volumes are going to come back, or is all of the assumption based on what you're seeing in the backlog? Thank you.

Hey, Rod. Thanks for the question and your opening comment there. Much appreciated. Obviously, thanks for the following, the company, et cetera. Your viewpoints here are always insightful, and we appreciate the time following this. Your question has a couple parts to it, so I'll try to break it down into those. I think in general, as you know, from an industry perspective, we did fairly well in relation to the peers in 2024, but clearly we were behind in our expectations in ex-LNS revenue growth. You're exactly right that we're looking at that inflection in 2025. We're calling for, as Deb alluded to, 1 to 5% growth in ex-LNS on cost and currency basis. I think that comes from really probably three component pieces, and I'll break those down to give you a little bit more color. The first, as you've alluded to at the end of your question, was in relation to the backlog conversion. Clearly, we had very strong new business signings in both CA&I and DWS from a new business TCB perspective, both of which were roughly 40% increases. I think we called 29% year over year in new business signings. We've got this, I'll say, lapping component of new business that we've signed in the back half of 2024 that we're going to see the benefit of in 2025, and a reminder that those new business signings are also kind of our new solution components, which are higher margin elements to that. That's number one. Number two, when you look at what happened in 2024 specifically with kind of the low volume components of our field services work, specifically PC-oriented, you're seeing from an industry perspective, we're all expecting an uptick in that PC refresh cycle. I think those volumes will start to come back. Moreover, as we announced earlier in some of Peter's early commentary, we've accelerated with one of our large OEM global partners a field services component on higher margin storage work. Not only are we lapping year over year the PC volume decline, but we're also picking up additional field services work at a higher margin profile as well. I think what we saw at the end of 2024 was kind of a little bit of a renewal in the work effort from volume-based projects starting to come back. We'll see that pick up. We see the margin inflection on the PC refresh and our DSS offerings that we think are going to be pretty strong in 2025. We're not seeing any pickup in the type of work that we're doing. Much of that is in backlog already. If it's not in backlog, if we look at just in general our pipeline and visibility to deals we expect to close in 2025, those deals are in a much more mature stage. We're a little over 20% more into our later stage process when you talk about closing out our -to-market contracts. A lot of it is visibility to backlog. A lot of it is later stage work. A lot of it is lapping just what I would say are quarterly or back half of the year lower volumes that we expect to recover in 2025. Hopefully, Rob, that gives you the type of color that you're looking for and kind of where that inflection confidence is coming from.

Yeah, super helpful commentary there. My follow-up is really about your ability to continue to drive the improvement in free pension, free cash flow, the reversal in the environmental, legal, and restructuring bucket, which had been very large in 2023. The reversal there is super encouraging, and I appreciate the color that you guys have provided on that already. Now I want to focus on the margin levers that you have. What I'm hearing is you have gross margin levers, and you're also continuing to do work on the SG&A front, although there are some investments in SG&A as well. Just to clarify, you clearly are citing gross margin improvement from here. Are you also expecting SG&A benefit to your overall operating margin? Then just the specific thing, within gross margin, can you give us a sense for how much of the gross margin improvement confidence is coming from cost takeout and productivity versus pricing and mix shift? Because it does sound like you have opportunities on the productivity side, but also on the mix shift and on the pricing side. Can you give us a sense of the balance of those two buckets in your gross margin trajectory? Thank you.

Yeah, sure. Again, thanks, Rod, for the question and the clarity here. You're really right on all accounts here. If we just talk about the gross margin, I'll stay on the operations side for a minute, and then I'll flip over to SG&A and maybe ask Deb to comment on the SG&A component as well. But if you think about the gross margin improvement in the business, you're seeing what we're calling in 25 has two components. It has the L&S step up in top line that is also an increase in gross margin as that top line pulls through. And you'll note that when we when we Deb gave the commentary around the L&S gross margin for 2024, it was a higher mix of hardware components in that. And in general, was sitting at probably the low to mid 60% gross margin rates. Here, we've got a step up in both top line primarily based on consumption. And so this 2050 program has been helpful in driving additional gross margin dollars. We're also talked about that being in the approximately 70% range. So there is a pick up to your point on the top line from an L&S perspective. If I shift to XL&S, we've got really two things at play. One, as you've just alluded to, there is a there is a top line benefit to gross margin because we're selling our solutions at a higher margin from the start and they're more valued solutions. So it's not the whole point of our strategy shift was to kind of move up that stack. And we're seeing some of the benefit of that coming through. And we see this continued workforce modernization. So Peter alluded to that in his opening remarks and gave three elements of that, you know, as it pertains to the shifting of the workforce, the upskilling and right skilling of the workforce, as well as the efficiency and utilization play. So I would think from an operational perspective, we're calling for about a point and a half on the aggregate in XL&S margin improvement. And I would say, you know, if I look at that proportionally, it's probably about a half a point or so pull through the top line and a point from efficiency in the workforce. Right. And it's also just the efficiency and how we're delivering our solutions. Right. When you talk about the application of AI and AI ops and orchestration, et cetera, right, that just being able to deliver that in a more efficient way is where a good chunk of that comes from. You're right in that we're also expecting continued improvements in SG&A as well. Deb mentioned a couple components of that, and Deb, I'll ask that if you want to weigh in here on the SG&A components for 2025.

Great. Thank you. And thanks, Rod, for your question. The, you know, we definitely are making progress executing what we had laid out at Investor Day in 23. Our SG&A initiatives were streamlining corporate functions, rationalizing real estate, and centralizing technology. And we're, you know, we've made a lot of progress at that. To your point, you had made, we are also reinvesting some back into our -to-market and our portfolio. But we still will see, you know, a portion of our operating profit improvement in 25 will be from that continued SG&A reduction and progress we're making.

And I would say, Rod, just to close that out, I mean, obviously our focus is on prepension cash flow and kind of continual step up in that. You've seen that number almost double in 24. Deb talked about that being in the 100 million-ish range in 25. And, you know, the path to the 150 million-ish range in 26, which, you know, gets to comfort level that the contributions that need to be made in those out years are covered. And we're not tapping, you know, into our cash balances to do that. So I think that's kind of the name of the game here.

Great. Thank you, guys. And thank you to Peter. You will be missed. Talk to you guys later. Thanks,

Rod. Thanks very much, Joe. The next question comes from Joseph Voffe with Kinecord. Please go ahead.

Hey, everyone. Good morning. Nice to see progress in the business. And, you know, yes, big congratulations to Peter and the team for everything they've accomplished over the last few years. And with Mike at the helm, I'm looking forward to more progress in the business moving forward. So maybe we just drill down on L&F a little bit more. It's obviously a big lever moving forward. You know, we did see a step up in the guide after Q3. You exceeded that. And then we have another step up here. We drilled down a little bit on where that uptick is coming from. Is it broad-based? Is it a function of the new release of software, AI, or verticals? Any color there would be appreciated. And then I'll have a quick follow-up.

Sure. And thanks for the question, Joe. And I agree with you and Rod. You know, Peter will certainly be missed. And looking forward to continuing the great legacy he has left us here. So appreciate the opening comments there. Look, I think you know, Joe, this pretty well. This business has continued to outperform. We continue to see clients over the broad-based signed contracts for longer durations continue to invest in the IT estate around the L&S platform in general. I think, you know, interestingly enough, when you think about what's going on, you know, obviously in the world today, and you think about the AI component of that, and you look at this business, I don't think it's really any different, right? The value in the AI is really about the large language models and the data. And when you think about our L&S operating system, it's got tremendous amounts of data that is secure and usable from that perspective. So when you look at the work that we're doing in the planning process around ClearPass Forward 2050, it's really about the ecosystem around the L&S platform. And I think what we've seen over the course of the last couple of years, and we expect to see prospectively, which is why we've raised our color guidance there up in both 25 and in 26 for an average of roughly 25 million per annum of an increase in those years on a top-line basis. It's because we're getting that strength from our clients in their increased consumption and their willingness to sign longer-term deals, right? They're coming to us wanting to extend the life of the deal and also giving us work in the application space that sit on top of that platform to help modernize that infrastructure. So this has not been new, right? I think we've seen this trend of overperformance from this business probably over the course of the last two years. And then, as you know, we have a pretty deep line of sight into the clients that utilize this platform and work with them fairly exclusively in how we can continue to modernize. And we're seeing that take-up rate. So we're pretty excited about the longevity of this business. We think it fits in really nicely to what you would consider a modernization story. And as you know, it's the most secure operating system on the planet when you talk about according to NIST and the value that that brings. So you've got this tremendous data set that can be utilized in a modernized way. So we're seeing really, I'll say, strong client support of that. And that's given us confidence to increase our color there.

That's great. Thanks, Mike. And then maybe on the operations side a bit, I know Peter discussed this, I guess, the repositioning or restructuring in application services in the Software Factory. Is there anything special to note there on timing this occurring now? I know you've done a lot of repositioning internally over the last few years. Did something new pop up on the roadmap or was this kind of planned? But there were other things to do first. Just some more color there would be appreciated. Thanks a lot. Yeah,

good. Great question. And thanks, Joe, again, for your continuing following the story here and being spot on with these. Look, the applications factory, as we're calling it, is nothing new. You're right. When we did our first premise of what the future strategy of the company would look like, this was under consideration then. Right. But we had so much to do in order to, you know, kind of get the new strategy in place. We had a lot of change going on. And it just wasn't the time from an adoption perspective. So, you know, we kind of left these areas sit in there. I'll say legacy business ownership. Some of it was in ECS. Some of it was in BPS, which is in our was in our other segments. We kind of let it mature a little bit there, but was always intentional to bring this together to get the leverage that we wanted out of this business. We're just at a point where we're mature enough, I think, in both our leadership, our structure, our solution development, and wanting to get deeper into the industry verticals where it made sense to do it now. So there's really no magic bullet as to why, you know, other than it's the majority of our solutions and of our management team and of our strategy that allowed us to do it effective January. Now, we will be putting out, you know, so an AK shortly that relates to the kind of restatement of those segment data so that everyone has the ability to model. We'll put two years out by quarter. That'll be probably filed after we file the K, which we expect to be a little later this week. And that'll give the kind of movements out of ECS into CA and I and out of all other into CA and I and give a good viewpoint. But look, we know that apps modernization in general is a fast moving element of the industry and the segment, and we want to take advantage of that. So we're putting some, I'll say more wood behind the bat. We're bringing these teams together. It's giving us a good geography base, especially in a media to grow from, which we've seen some good growth over the course of the last year. And so we think it's the right time to do it. But there's no like triggering event, if you will. It's kind of always been in the hopper. And this is just the time we thought was the most advantage to us to pull it together and take advantage of the growth that we're seeing in new business.

That's great. Thanks for that color, Mike, and congrats to the team. Best of luck to everybody.

Great. Thank you,

Joe. The next question comes from Maroon Chachadri with BNP Paribas. Please go ahead.

Yes, hi. Thanks for sneaking me in here. Congrats again to Peter and Mike on the recent announcements and appreciate the continuity by your leadership of the board, Peter. Just very quickly from me, just a couple of things. First, I think you've kind of talked about the higher renewal TCV year in 2025 versus 2024. Is there any way you can quantify, I guess, how much higher of a TCV renewal year 25 is relative to 24?

Yeah, I don't know that I have the percentage that I can give you a room, but there's really two reasons for that. One is just the timing of the renewal cycle, right? And that does ebb and flow a little bit. The other was there were a couple deals that we expected to renew at the tail end of 24 that got pushed into 25. So when I look at it from that perspective, I would say 25 is probably a little bit more of a normalized renewal cycle if there is such a thing. So not really a percentage that I would give you. I guess the thing I could tell you is if I look at kind of backlog conversion, the expectation is the backlog conversion of revenue in 25 is going to be fairly consistent to what it was in 24. And we're expecting that renewal cycle to be stronger in 25 both for just the due dates on when they come up to bid and I guess secondarily the rollover of a couple things that we expected to have happen in 24 that got pushed into 25.

Got it. Thank you for that, Megan. And I assume that's also the push from 24 to 25 for some of those renewals is basically what impacted the book to bill. Is there some kind of connection there as well?

Yeah, you're exactly right, Arun, and thanks for calling that out. I should have done it as well. Yeah, we were certainly expecting a higher book to bill in 20 and in 24 and it wasn't in relation to these expected closings. But as you know, tail end of the year, you've got these closings, they push out a week or two and they change fiscal year. So I think you'll see a higher number than normal in 25 based on that, right? From a book to bill perspective and the increase in backlog and TCV. But if you're looking at the two years combined, it's normalized and aligned to what was in our strategy from inception.

Appreciate it. One more from me. And that is, in terms of the, it was really great to see the LNS revenue transition here and the continued input with prior guidance versus prior guidance. But can you talk about sort of just to get a sense for how broad that is across your LNS base? Is there any way you could sort of talk about how many customers, I guess, accounted for this pretty significant improvement from the beginning of the year to the end of the year in terms of your expectations for the overall LNS evolution?

Yeah, look, I would say in general, and maybe tying this back into Joe's question, the favorable, I'll say, market conditions that we're seeing is across the whole base, right? It's not like it's a specific client. Now, as you know, these LNS renewals come up, these are five or seven year deals, right? So when they come up for renewal is more a timing on the renewal schedule, which is why we break it out and it's lumpy. But I would say in general, you know, we've seen increased consumption and we've seen increased desire to extend contracts, right? And that's across the base, not a one offer or a one project oriented thing. And it's been pretty consistent over the last couple years in that manner. So it's not some anomaly of, in our opinion, of a one off thing. And there's a reason why we have ClearPath 2050 as our mantra here, right? We have seen and continue to see the increase in consumption and the insight from our clients that there's a long tail here and they like this platform. It works well for them in the business and they've seen our ability to modernize around it. So it's really been a pretty favorable experience from our perspective.

Thank you, Mike. And then one last thing, maybe for Deb, the just in terms of the free cash flow guidance, so to make sure that the 2025 guidance includes the remainder, I guess, the 25 million remaining in the legal settlement that was announced in Q4. And then on a sort of a longer timeframe, your, I think we saw in 2025, there was a small reduction in pension funding requirements relative to your expectations going into the year. Any other possibilities like this in 2025 that could impact 2026 and beyond in terms of reducing the front end of the pension cash obligations? Thank you.

Right. So just to clarify, in our 100 million of pre-pension, free cash flow color that we gave, that does include the 25 million expected from that settlement. So that's your first question. And second, I think from a pension perspective, I'm not sure, you know, we did have a slight uptick in the contributions for the, you know, this next five years, which is what we typically focus on since that's the, you know, less volatile, more of the volatilities out in the later years. And also, you know, that's what we really focus on to look at our liquidity needs and our, you know, near term that five years. So, you know, slight uptick there, but we feel like, you know, we're still on a path to be able to fund those with our pre-pension, pre-cash flow.

Just remember, when we do that pension analysis annually, right, that the full analysis is done, the actuarial viewpoint, there is typically very little movement in the first 18 months on the contribution side. When you see a movement in that, it typically comes in later in those contributions schedule as they pertain to actuarial assumptions. So I expect that the next several years of those contributions are pretty much locked, floated. And if we do see any movement up or down, it would be probably two years and beyond when we look at that. So that's Deb's point on the short term liquidity component of it.

Thank you both. Again, if you have a question, please press star, then one. The next question comes from Anya Soderstrom with Sudoki. Please go ahead.

Hi, and thank you for taking my questions. I also want to thank Peter for his time and look forward to continue working with Mike. Most of my questions have been addressed already, but I'm just pleased with the much stronger LMS expected in 2026. How is that going to impact your cash flow expectations?

Hi, Anya. It's good to hear from you. Thank you for the question. Deb, why don't you field that one?

Okay, great. It will help. So as far as that kind of expected potential bridge to 2026, that is an element of it. So that SL and S going from what we're expecting to be 390 million in 2025 going to 400 million in 2026. And it is at that higher margin, approximately 70% that we laid out. And so given that, it does contribute a decent amount to getting to that bridge. In addition to a bigger component is the SL and S gross margin improvement, which we've kind of proven that we've been able to continue to increase that approximately 150 basis points, particularly CA and INDWS, which we're calling for. Again, in 2025, and then also you can expect that continue in 2026. So that's a bigger piece of it, that gross profit from SL and S. But that L and S bump of that 10 million more of revenue will also be a contributor to it, along with SG&A improvements, as I mentioned, and then continued improvement in cash conversion.

Okay, thank you. And then in terms of demand in the commercial vertical, is there any industry that's worth calling out either on the negative side or the positive side?

Yeah, I wouldn't say that there's any industry I would call out, certainly on the negative side. We don't really have anything to call out there. We have, as you know, really focused in public sector, diving a little deeper into higher ed. We have a pretty strong presence in travel and transportation, and obviously in financial services. So we're pretty, as you know, Anya, pretty evenly distributed amongst those various industries as far as our business is concerned. And we're fairly evenly distributed from a geography perspective as well. So I think we have a really nice mix of diversity, both in geography and segment that kind of insulate one another from any specific anomalies. And again, we've got clearly a focus area in public sector. And as a reminder from that perspective, you're talking state and local business domestically and internationally, clearly foreign countries, etc., that make up our public sector. So nothing I would call out in particular other than to say that they've all been, at least where we're playing, all been performing pretty well as of late.

Okay, thank you. That was all for me.

Great. Thanks, Anya.

This concludes our question and answer session. I would like to turn the conference back over to Peter Althebeth for any closing remarks.

I'll do quick closing remarks, but then I'll let Mike actually do the final closing remarks. I really want to appreciate and thank each of you. Joe, Arun, and Anya, thank you for your remarks following Rod's. Thanks for your support. And it's encouraging and totally expected that you are supportive of Mike in the new role. He will be terrific in this role. And I can tell you he has the support of both our board of directors and our entire leadership team. With that, over to you,

Mike. Great. Thank you. And I would like to acknowledge Peter here as well. Thank you, Peter, so much for your leadership in the company. And as a reminder to the folks on the phone here, Peter is staying on as chair of the board. So we're lucky to keep him with us for an extended period here on the board side of the equation. So thanks, Peter, for your guidance. Look, I'll just wrap by saying, number one, thanks for taking the additional time. I know we went over, but it's always good to get the questions and get the color out. And I think we continually try to give more and more transparency in our remarks than in our content. And by that, I would also remind you all to visit unisys.com investor relations website. There is a ton of information that we talked about here and additional information. Again, from a quarterly perspective and an annual perspective, exceeded our upward guidance as far as profitability is concerned. Met our revenue guidance, improved our operating and free cash flow, and hopefully gave you some good color into what we're expecting in 25, which is the continual improvement of the margin component of this business, as well as seeing growth in that XL&S business as well, driving additional profitability and cash flows. Right. That's what we're focused on. I know that you'll see the continuity in the strategy and the team and looking forward to our next call. So thanks a lot for your time and attention and looking forward to Q1. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.