Q3 2019 Earnings Call
Good afternoon, and welcome to the Unisys Corporation third quarter 2019 earnings Conference call. All participants will be in a listen only mode. It should you need assistance. Please ignore conference specialist by pressing the Starkey followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Please note this event is being recorded.
I would now like to turn the conference over to Courtney Holben <unk> VP of Investor Relations. Please go ahead.
Thank you operator, good afternoon, everyone. This is Courtney Holben Vice President Investor Relations. Thank you for joining us.
Earlier today Irrs, that's released its third quarter 2019 financial result.
Joined this afternoon to discuss those results by Peter I'll today, our chairman, President and CEO and Mike Thompson our CFO .
Before we begin I'd like to cover a few details.
First today's conference call and if you're in a fashion not being webcast, where the NSS investor website.
Second you can find the earnings press release in the presentation slides that we will be using this afternoon to guide her discussion as well as other information relating to our third quarter performance on our Investor website, which we encourage you to that.
Third today's presentation, well just complimentary to the earnings press release includes some non-GAAP financial measures. The non-GAAP measures have been reconciled to the related GAAP measures and we provided reconciliations within the presentation, although appropriate under generally accepted accounting principles. The company's results reflect charges that the company believes.
Our not indicative of its ongoing operations and that can make its profitability and liquidity results difficult to compare to prior period anticipated future periods or to its competitors result. These items consist of pension debt exchange cost reduction and other expense.
Management believes each of these items can distort visibility of trends associated with the company's ongoing performance.
Management also believes that the evaluation of the Companys financial performance can be enhanced by used to supplemental presentation of its results that exclude the impact of these items in order to enhance consistency and comparative that's what the prior or future period result, the following measures are often provided and utilized by the company's management analyst and investor.
Sorry to enhance comparability of year over year results as well as to compare results to other companies in our industry non-GAAP operating profit non-GAAP diluted earnings per share free cash flow and adjusted free cash flow EBITDA and adjusted EBITDA and constant currency. In addition, this quarter, we will be continuing to reach.
<unk> non-GAAP adjusted revenue and related measures as a result of certain revenue and related.
Reimbursements from the company's check processing JV partners for restructuring expenses included as part of the company's restructuring program for more information regarding these adjustments. Please see our earnings release and our Form 10-Q for the quarter.
From time to time you does this may provide specific guidance regarding its expected future financial performance.
Such guidance as effective only on the date given.
This is generally will not update reaffirm or otherwise comment on any prior guidance, except as unisys deems necessary and then only in a manner that complies with regulation FD.
And finally I'd like to remind you that all forward looking statements made during this conference call are subject to various risks and uncertainties that could cause the actual results to differ materially from our expectations.
These factors are discussed more fully in the earnings release and in the company's SEC filings.
Copies of those FCC reports are available from the FCC and along with other materials I mentioned earlier on the Unisys Investor website, and now I'd like to turn the call over to Peter. Thank you Courtney and thank you all for joining us to review our third quarter financial results. The third quarter reflects continued progress on a number of our.
Cities, including total company revenue growth and margin expansion.
Our focus on security and differentiated IP is resonating and helping us win contracts and our US federal sector continues to see strong performance.
In addition cost management helped drive improved profitability and also helped drive improved adjusted free cash flow year over year.
non-GAAP adjusted revenue and non-GAAP adjusted services revenue grew for the sixth consecutive quarter.
Services non-GAAP adjusted operating profit margin also expand.
[noise] technology revenue was up year over year in the quarter.
In light of the overall revenue growth, we have seen so far this year as well as our expectations for the rest of the year, we're increasing our non-GAAP adjusted revenue guidance for the full year 2019.
From 2% to 5% to 3% to 7%.
Mike will provide more detail on this and on our financial results overall, shortly but first I wanted to provide some more insight into the business.
At the segment now level as I noted we saw continued growth in services revenue.
Intelliserv and cloud for today have begun to differentiate our go to market efforts much as stealth and security have been doing.
The product ties nature of these solutions also allows us to bid contracts at more attractive margin profiles than otherwise would be possible.
On last quarter's call, we discussed a number of recent wins involving cloud 14, so I'd like to spend a moment on two recent wins with Intelliserv.
During the third quarter, we signed the contract with new Treco to expand the solutions. We provide to include a secure highly automated enterprise service management platform.
The solution Leverages Intelliserv as well as service now technology to enable the an omni channel approach to service does support for an improved end user experience.
During the quarter. We also signed at expanded contract with Bancolombia to support the banks digital transformation powered by Intelliserv.
We will also be providing security services via still biometric identity management software for critical transactions.
We were pleased to see another quarter of year over year services operating profit margin expansion increased efficiency of our services delivery engine remains a top priority for us and we are working to further integrate intelligent operations automation and emerging technologies.
Our land and expand strategy within services also aims to enhance margins as well as drive revenue growth. We again saw a number of examples this quarter of client entering into contracts with us for new or expanded application services project based work or software and those include the new Treco and bank.
Lumpier contracts I, just mentioned as well as most of the additional contracts I'll highlight throughout this discussion.
Moving to our technology segment third quarter revenue was up year over year, we mentioned in the second quarter that several technology deals have been signed earlier than expected.
In the third quarter, we had one large contract move in the other direction. We now expect that contract to be signed in the fourth quarter.
Further we had a technology contract in our U.S federal sector that had a large third party component in the third quarter, so that impacted margins for the segment.
Security continues to be a critical element in our offerings.
As we have consistently discussed security for Unisys does not just mean, our Standalone security solutions, such as stealth or trust check rather security is an inherent part of much of the work we do across the company and we continue to incorporate our specific security solutions more broadly into our services offered.
Thanks.
It has differentiated our go to market efforts and help drive a number of recent contract wins.
During the third quarter, we announced the Unisys became a member of the cyber security coalition a partnership among more than 60 organizations from the public and private sectors and academic world that have joined forces in the fight against cyber crime. The organizations key focus areas, our cyber security awareness.
Enterprise Security architecture cloud security and compliance all to help tackle cyber security threats and attacks.
With respect to stealth specifically, we continue to evolve our offerings Unisys stealth security software now Leverages, the new Microsoft as Youre service Tag Discovery application programming interface or CPI for additional security for clients accessing cloud based assure services.
The safety gives enterprise clients the ability to incorporate stealth while accelerating the migration of sensitive workloads into issuer.
I'll now provide some color on our various sectors.
As I noted our U.S federal sector continues to be one of the key drivers a strong financial results with a number of large recent contract wins and with 53.6% revenue growth year over year.
During the third quarter, we signed a contract was $214 million with the US deferment of information services agency or DISA, which is the agency that provides enterprise ITD support to the full spectrum of military operations.
Under the contract we will be using intelliserv to optimize modernize and consolidate service desk and field services for 19 of the Defense Department fourth the state organizations, a group of agencies and field activities that reside outside of the military branches and provide support functions.
As a critical to the military services.
This award marks the second contract is a has awarded to US in 2019. Following the award of an approximately $150 million contract in the second quarter to support. This is joint service provider program for the secure management and maintenance of the department of defense infrastructure.
We also signed a $100 million plus new blanket purchase agreement with the civilian agency to provide a wide range of cloud services, leveraging our cloud Forte solutions across multiple cloud service provider platforms.
In our public sector, our recent large wins with state governments continue to contribute to revenue growth for the company in the third quarter non-GAAP adjusted revenue for our public sector was up 11% year over year.
And during the quarter as another example of our land and expand strategy units assigned at expanded contract with the Queensland Department of Transport and main roads in Australia to provide the departments new facial signature image processing system for its smart card driver's licenses.
Zoo the solution utilizes unisys stealth multifactor identity management and authentication to automate the process of biometric enrollment and the capturing of biometric data across physical and digital travel channels, including mobile devices.
In our commercial sector non-GAAP adjusted revenue was down 15% year over year, largely due to a difficult compare in technology as a result of a large renewal that we signed in the prior year period.
We also signed a contract in the third quarter to help mass cargo the cargo division of Malaysia Airlines expand its range of cargo booking options with the new online booking service that allows customers to access space has been.
Service purchasing and delivery tracking services and do this all via the Internet.
We will provide our digi connect systems integration services to link the airlines website to our core Unisys to just sticks air cargo digital logistics management solution.
Encouraging more customers to use online booking services is a key step in that airlines digital transformation.
Speaking of Airlines and airports, we also signed a new scope contract in the third quarter with Bangalore International Airport limited to integrate and manage all IP for phase one of the Bangalore Ru airports second.
Terminal known as T to.
The airport is the third busiest in India and under the contract Unisys will manage the implementation of more than 20, New I T systems and will also undertake systems integration of a complex network of 90, and non ITC systems supporting the upcoming.
T two infrastructure.
Lastly, financial services non-GAAP adjusted revenue grew 9% year over year, driven largely by a particularly strong technology quarter.
In addition to the bank Columbia contract I mentioned earlier Unisys signed a new agreement was a leading provider of consumer credit products based in the U.S to help it migrate to a public cloud environment.
The move is a key part of its digital transformation efforts and will allow for greater business flexibility improved security and reduce downtime.
So in conclusion, we feel good about the revenue momentum and margin expansion in the quarter, we have been listening to our clients and evolving our solutions and the market is responding positively we remain focused on improving efficiency maintaining cost discipline to help further drive improvement in margins over time aspire.
Actually in light of their impact on cash flow, which is a critical area of focus for US Mike will now provide more detail on our financial performance Mike.
Thank you Peter good afternoon, everyone and thank you for joining us today to discuss our third quarter results in my comments I will discuss both GAAP and non-GAAP results and provide color for our key business drivers reconciliations of GAAP to non-GAAP measures can be found within our earnings presentation.
We're pleased to see continued progress in our financial results during the third quarter. Please turn to slide four which shows some of the key metrics each of which was up year over here and ahead of consensus estimates were available.
You can see here the continued revenue growth and margin expansion that Peter mentioned earlier.
Our go to market efforts continue to be differentiated through our focus on security, our new cloud offerings and digital workplace services and we again saw revenue growth for the total company supported by revenue growth in both our services and technology segments.
We have also continued our sharp focus on reducing our cost of delivery and small expansion year over year in services margins at both the gross and operating level.
With respect to specific results non-GAAP adjusted revenue grew 9.6% year over year to 750.8 million in the third quarter or 11.3% on a constant currency basis.
This represents the sixth consecutive quarter of year over year non-GAAP adjusted revenue growth for the company.
This was supported by continued strength in us federal non-GAAP adjusted revenue for this sector was up 54% year over year to 206 million, representing the highest growth rate we've seen for this sector and over 15 years.
As with the company overall the growth in our U.S federal sector was all organic.
non-GAAP operating profit margin expanded 100 basis points year over year to 8.7% and adjusted EBITDA margin expanded 10 basis points year over year to 14.1%.
non-GAAP EPS was up 25.6% year over year to 49 cents per share.
While not explicitly highlighted on this slide I'll remind you that the convertible note transaction, we undertook in the quarter resulted in a 20.2 million or 35 cents per share charge in the quarter, which impacted GAAP EPS consensus estimates did not reflect this charge had they done so we would have beaten estimates on all the metro.
As shown on this slide as well as GAAP EPS.
Please turn to slide five for more detail on our segment results.
As we've discussed we saw revenue growth in the quarter for both services and technology segments.
Third quarter services non-GAAP adjusted revenue grew 7.4% year over year, marking the sixth consecutive quarter of year over year growth for the segment.
As we noted we saw improved services margins overall in the third quarter with services non-GAAP adjusted gross profit margin up 140 basis points year over year to 16.8% and services non-GAAP adjusted operating profit margin up 190 basis points year over year to 4.5%.
We were pleased to see this overall margin expansion as well as they continue decrease in the impact that transitional business was having on our services margins.
Transitional business margin impact a decrease since the beginning of the year and we expected to continue to do so going forward.
We maintain our focus on continuing to expand our margins over the longer term, including through the use of third party labor where efficient further implementing automation exiting operations in countries, where there are structural impediments to profitability and continued best shoring of labor.
As previously noted this year, we still anticipate some restructuring actions and we expect these would be roughly consistent with the size and scope with the restructuring we announced in Q4 of last year. At this point there are no immediate plans for additional actions beyond this.
Services backlog ended the quarter at 4.2 billion relative to 4.9 billion in the prior year period.
The prior year growth rates represented the highest growth for that metric that we've seen since 1999.
We have consistently noted that such growth or backlog levels were not necessarily sustainable expected are needed.
Although this year's level is down year over year, it is substantially aligned with our expectations.
We still view this as a solid level that support our medium term revenue growth expectations, which continue to be in the 2% to 4% range.
I would also highlight that we only include the funded portion of our US Federal services backlog in this metric the funded backlog for us federal was down 12% year over year in the quarter. However, this is largely due to timing in funding considerations.
When including US federal U.S federal unfunded backlog, which represents the total future revenue potential the total backlog for us federal in the company overall increased over the year.
Given the level of us federal backlog, we currently expect that sector to see revenue growth above 20% for the full year 2019.
I will the $4.2 billion of total company services backlog, we expect approximately 580 million to convert into services revenue in the fourth quarter of this year.
With respect to technology, we saw revenue growth of 25.2% year over year as noted while significant this growth was slightly lower than anticipated given that we had one contract that was expected in the third quarter that we now expect to sign in the fourth quarter.
As we frequently discussed while we have good visibility into renewals coming into the year. There can be variability in terms of exact timing renewals within a year, we still maintain our expectations for the full year 2019 of technology revenue being roughly flat relative to non-GAAP adjusted technology revenue in 2018.
Profitability for technology was impacted by the delayed contract as well as the third party component of a U.S federal contracted Peter noted.
This third party component was expected in conjunction with the contract. So it does not impact our profitability expectations for the full year 2019.
Technology gross profit margin was 51.1% versus 62.4% in the prior year period.
Technology operating profit margin was 33% relative to 39.7% in the prior year period.
I'll now turn to slide six which provides more detail on EBITDA and cash flow.
We've already discussed adjusted EBITDA, which all expanded margins in the quarter. Our improved profitability also translated to another quarter of year over year improvements in cash flow.
Operating cash flow was up 33.2 million year over year to 17.7 million relative to a use of cash of 15.5 million in the prior year period.
Free cash flow for the quarter improved 48.9 million year over year to use of 14.3 million from a use of 63.2 million in the prior year period.
Adjusted free cash flow was up 41.9 million year over year to 35.5 million versus the use of cash of 6.4 million in the prior year period.
Lower year over year Capex also helped drive improvements in free cash flow and adjusted free cash flow.
Capex for the quarter was 32 million versus $47.7 million in the prior year period.
As we previously discussed our Capex target is between five and a half and 6.5% of revenue.
As noted last quarter, our current expectation is to be at the high end of that range for 2019, as we expect full year capex to be approximately 180 million as a result of slightly higher spending than initially anticipated on certain new contracts.
We continue to seek out opportunities for third party financing of Capex, where that were available to help mitigate the impact on cash as a result of this we expect full year cash usage for capex to be lower than our original expectation of 170 million. Despite the highly year, despite the slightly higher expectation for capex overall.
In the second quarter, we provide some color on how we think about security and the revenue it drives.
In the third quarter, approximately 20% of total revenue was security related.
In that number we're including specific security solutions, such as stealth managed security services work, such as border security or identification processing and revenue from clients, whose mission is security driven and the majority of the work that we provide a security related.
As we noted last quarter. This by no means covers all instances in which security is relevant at Unisys, but allows us to look at a discrete subset of our overall business for insight into the most tangible ways security is driving results.
Please turn to slide seven for a discussion regarding pension.
With respect to the pension obligations, we continue to assess options for proactively manage managing these obligations, including the recent application we filed with the IRS for minimum funding waves and potential capital market alternatives.
In the interim as we've done in recent quarters, we wanted to provide some informal color as it pertains to pension metrics.
The slides in the appendix of our earnings presentation have not been updated to reflect the changes that will walk through here.
While GAAP pension deficit values can fluctuate significantly we believe the more relevant analysis relates to expected contributions and their impact on cash flow.
Changes in interest rates have virtually no near term impact on the funding liability used to calculate contributions as the discount rates for funding purposes are constrained to based on averages over 25 year period.
Changes in interest rates will affect the funding liability over time, but this impact is muted for several years.
Contributions are much more sensitive to asset returns than to interest rates in the near term as a result, a decline in interest rates with all else being equal actually have a beneficial impact on contributions in the near term.
This is because of returns on fixed income portion of our portfolio will benefit for such from such declining rates and will offset the muted impact of the discount rate.
Reflective of all this based on September Thirtyth returns and market conditions. Our estimates suggest that with rates haven't declined substantially contribution requirements through 2024 would have been about 145 million lower than our 20018 estimates while the deficit would have increased by approximately 100 million.
Also on slide seven you can see some illustrative examples of how returns and discount rates can impact our obligation.
This slide again highlights the importance of asset returns.
In addition to the illustrate of examples you see on this slide on an actual historical basis annualized returns on assets over the past 10 years have enabled us to fund 3.7 billion and benefit payments without a material decrease in the asset levels, even a discount rates have declined over that same period.
Additionally, the illustrative examples on the slide highlight what I just discussed while interest rates can have an immediate and significant impact on the accounting deficit. They have a more muted impact and less near term impact on cash contributions.
You can also see here theoretical illustration of how returns on fixed income portion of the portfolio, resulting from rate declines helped offset the negative impact of declines have in the discount rate on both required cash contributions and the accounting deficit.
Incremental returns on non fixed income portion of the asset portfolio further offset any negative impacts of potential interest rate declines overall, we're very pleased with our results for the third quarter and on a year to date basis, given the results in our expectations for the rest of the year, we're increasing our non-GAAP adjusted revenue guidance for.
The full year 2019.
As a reminder, we increased our non-GAAP adjusted revenue guidance in the first quarter to 2% to 5% year over year growth, we're now increasing that range to 3% to 7% year over year growth or 2.84, or 5 billion to 2.955 billion.
We're also reaffirming our guidance for non-GAAP operating profit margin of 8.25% to 9.25% and reaffirming our guidance for adjusted EBITDA margin of 14.4% to 16.0%.
As we look to the remainder of the year, we continue to focus on operational discipline and efficiency of our active approach to managed to pension obligations. We look forward to continuing our work on these brands to drive towards a strong finish for 2019 with that I'll turn the call back over to Peter. Thank you, Mike Operator, we're ready to take questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if you're using speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
The first question will be from Jon Tanwanteng with CJS. Please go ahead.
Good afternoon, gentlemen, great quarter. Thank you for taking my questions.
John Thanks, very much for for being on the call.
My first one is.
Are those large state contracts that you signed last year now it there.
Average lifetime margins or is there is still somewhat to go before you get there.
There is still somewhere to go so as and you can see the changes in Mike's comments. So when we talk about transition margins I think we're down about 140 basis points because of transition margins.
That's good that that will diminish pretty quickly through the fourth quarter, we'll still have a remnant of that going into next year, what we're expecting some substantial improvement Mike any further color now thats exactly right. If you recall John in Q1, we were talking about that being roughly 180 bips drag we've.
Seeing two sequential quarters of reductions on both of those and we expect by the end of the year that essentially will be done talking about that.
Great. Thanks for that color and then in terms of the pipeline going forwards.
You mentioned being more selective in your margin profiles and then probably on year.
Ability to select projects the require less upfront cash investment can you comment on that compared to what you've been sign over the last year for 18 months or so and then if that really as improving by how much.
Yes, a little bit it's it's a little bit like finding the porridge exactly the right temperature so.
End of 17 and through 18, we science of substantial state and local deals that have driven revenue the ones. We just talked about John .
There are a little more capital intensive than some of the other work we do so we've been pretty careful this year, given our cash flow requirements that we not load off with those so we have been more selective.
Going forward, we believe that we'll be able to expand a little more capital on deals, which is going to actually open up the pipe a little bit, but but things have happened since that right. So intelliserv and cloud Forte have now come online to give us much better applications infrastructure.
And field services and service desk foundations, so while we're going to open up that type of it in 2020, we still expect to get our higher margin profile for the same dollars because of the new systems, Yes, John I would also may be chime in there we talked about this last quarter as well, but over the last eight.
I mean months, we've signed 2.1 billion of TCV and our federal business.
As you recall, our federal business is a little less capital intensive and the margins come online a little quicker than the due on the commercial side because the federal business typically you're building assets for the government so that timeframe in which you're working on that is revenue recognized immediately so for those two reasons I think.
Give you some insight as to why we think thats going to happen.
Okay, great. Thank you and then just touching on the federal business, which you just thanks.
I mentioned conveniently.
You are seeing 20% growth in that segment this year.
Given that most of these contracts were signed midway through the year should we expect to see that momentum increasing or continuing at least through 2020.
Yes, John I mean, I think we're we've been.
As we've talked about last quarter, we had 33% in last quarter were up 54%. This quarter. So we've really been as we've consistently said all year hitting above our weighed in in that sector and we really see no curtailment from that right now so we're pretty bullish on.
But again as as mentioned by Mike.
It works a little differently than.
73% of our business on enterprise. So you get that bump in revenue growth almost immediately with the federal deals. So you would not expect numbers like the ones. We put up this quarter to re occur because we've already taken that Bob.
Okay great.
And then finally, just going back that's helping you mentioned Peter the.
Opening up the pipeline and using a little bit more capital.
In terms of deals is that dependent on your ability to get this IRS.
Exemption or or you can do that without that.
We can do that without that we can do more of it with it. So I would say, it's a question of degree and not an on off switch and John I'd also remind you too if you recall when we did those deals in 18, we had a lot more of them going on than we historically have so we may have.
Been running twice as many deals so when we came into the year in 19, we had a lot of AD capex committed so as we work through the transition of those it frees up capex in 2020.
Okay, great that makes sense and one more final on I'm sorry.
Couple of weeks ago, you hosted a webinars on your security business and your technology platforms.
Clearpath was one of the businesses that seem very interesting demand that you're investing to put it on the cloud and.
Enable more developers to actually called on the platform.
Is it possible for that business to become a growth business going forward as opposed to the maintenance and recurring revenue stream that it is today.
Well you know, it's interesting and kind of depends on how you look at that business. So if you look at that business just as reflected in our technology segment.
Then in has been a slight decrease in revenue over time, if you open the aperture a bit and look at that business as including the warranty and maintenance work and including the services work, we do for clients that have that platform over the past several years, it's actually been a modest growth.
Business so.
Hands on the aperture.
What we expect to now that we are increasingly and we've been doing this for a while now and we it takes a while to get it all over but we are increasingly putting clear path into a cloud environment on a hybrid basis.
And we are increasingly developing the language skills that can be used so by the end of this year, you're going to see a lot more emphasis on using Python for instance.
I think what thats going to do immediately is allow existing clients to increase their workload using clearpath.
And move more things into that workload.
It's still unproven, whether we're going to get new clients into a clear path, we would like to do it. We just don't have a proof point yet so in terms of of the pathway are modeling is continuing to see slight decrease in the license revenue on Clearpath made up really buys a services and maintenance revenue.
So that overall, it's pretty much of a wash.
If the hybrid platform and the new Python language skills really get momentum that can turn into a positive.
Great. Thanks for the color.
The next question will come from Rod boost raw with deep dive equity research. Please go ahead.
Hey, guys Hey.
Nice nice quarter, it's interesting just to set the context from my question. It seems a year ago part of the worry was your revenue growth efforts were.
Having some margin tradeoffs, because the deal ramps, but now with the mix shifting to federal you're you're having better revenue growth and expanding margins.
So I guess, Mike My question related to that is.
Are you able to take some of the lessons learned from your federal business and apply it to your other businesses.
Such that you.
I have more ability to drive revenue growth and margin expansion from here.
Rob This is Peter Thats, a great question.
We don't really give margin data by segment. The only segment, we give revenue data by segment.
But what between by segment I mean between federal and.
And enterprise solutions segments, the bad word buying go to market.
But if you if you got into that and if you notice in my comments.
Give a shout out to the enterprise solutions business for driving profitability expansion year over year. So of the most significant increase in margins actually came from enterprise solutions not from federal the most significant increase in revenue came from federal So what are what I guess I would say is we act.
Finally, our already seeing.
You know some push that enterprise solutions on higher margins, we do not think that we are where we need to be or will be eventually so we see that push continuing but I would say you know kind of where we are showing that were on the path for increased margin on that enterprise solutions business in the services segment, which is a critical segment we need.
Good to grow it yet and route I would I would echo Peter's comments for sure.
Clearly, whether that's through automation, whether it's through the continue work, we've been talking about and transactional business. I mean, all of that is is he asked related and we continue to look forward to expanding that margin on the side. It's not your point is valid on federal clearly the topline has grown.
But the margins are fairly consistent so what's driving absolute dollars for sure but the margin profile is pretty consistent on the federal side.
Okay, and I don't want to ask for an outlook over the next year on margins, but what you're talking about these levers you do have you do have a headwind over time as your technology mix goes down, but it seems the leverage you're talking about on service margins.
At least right now appear sufficient to offset the drag from the technology mix going down is is that a good way to think about the trajectory that you're on right now with the margin side.
I visit Peter I think is an excellent way to think about the trajectory.
And remember I said that you are expecting slight decrease in technology, let's say in Clearpath forward made up on the revenue side by some of the Clearpath forward services, but but the Clearpath forward services don't come with the same margin profile as a clear path forward licensing. So we do expect.
To make up for that with higher efficiencies at higher margin, but it's it takes a push to get net higher margin, especially when you're growing revenue.
Okay, Great and then a one final just check on them on the pension side I know you're working on the IRS front.
You're also working on other attention related matters.
Without asking you to go through the whole laundry list are there other pension related initiatives that you can give us an update on right now and I know will probably learned more towards the end of the year, but is there any is there any other pension initiative that we should hear about right now.
Yeah, right I Wouldnt say that there are more initiatives Dan we've discussed in our prior calls I mean, clearly we're always looking to manage that pension obligation.
We've talked about Reginald originally about some bulk lump sum opportunities that we'd like to look at.
You've mentioned the IRS waiver clearly any type of Annuitization down the road looking at what we can do in our capital structure I think we talked about in our prior call on on capital structure that we've got a make whole provision coming.
Due in April of next year that we're kind of looking at what we can do in our senior secured notes and that might free up some opportunity for us to either upsize and rifai those nodes kind of push that out of the window, a little bit as far as the pension contributions are concerned and give us some more.
Opportunity to deal with the with some of the upcoming pension contributions I would tell you adjust in lieu of the comment here been having active discussions with the IRS and the PBGC in regards to the application and although there's no specific day that the IRS will say hey, this is.
When we will give you an answer we did request expedited processing and we've had again some some good conversations with both parties and at this point there are no open questions from my perspective that have not been answered to those parties. So we're anxiously awaiting their response.
Got it okay. Thank you guys.
Thanks, very much Rob.
The next question comes from his Shas fruit with Sidoti and company. Please go ahead.
Hi, Good afternoon, guys a couple of questions for me.
First of all of the federal sector UBS, it's going very fast odd is there anything in particular to read into that are you guys.
Underpricing contracts or something along those lines on you know theres been.
Obviously volume upticks associated with.
The large desal contract for example.
Right well.
It's a fair question if the answer is no.
It's certainly not not knowingly.
And the good thing about federal contracts as they tend not to be large fixed price contracts. So you tend not to get into too much trouble at once you've modeled it correctly.
What I would say is.
I go back to my remarks, and some of Mikes remarks.
I think part of the reason we have been successful in growing that business organically.
Is the solutions, we're bringing to bear so whether its stealth whether its cloud for today, whether its intelliserv.
We that is clearly those solutions around applications cloud migrations infrastructure security are resonating with the federal government. So I really think it's our job is the solutions, we're bringing to bear and there's also the team. We've we've built that team for a number of years.
And I will tell you would just have an extraordinary team in the federal government. So.
We're very fortunate to have both of those line up at the same time.
Okay, and just to follow up on that up on the public sector side.
Is the pricing similar or the profitability similar relative to the federal sector. At this point because you guys mentioned earlier on the call.
You know you.
Soon evaluate or bid for deals.
Some of the more capital intensive deals.
So the public sector is pretty different.
In that.
Unlike the unlike us federal whether its international public or state and local public there's more of a desire for governments in that context to have us bear some of the capital costs.
And and there is more of a appetite for fixed price deals. So you more you get you get larger deals that have a transition period, let's start out with a relatively more might is more marginal margin profile and have to grow that overtime. You also have what we talk about land and expand.
And our referred to the Australian situation, where although you can expand existing us federal contracts your ability to expand state and local and international contracts tends to be a little more and you sometimes make more of your profit margin on project expansion than you do the initial contract so I'd actually say.
The profiles little different but ideal to Mike on the yeah and look I think everything Peter said is exactly right I think if you look at the life of the contract over.
Overall, the margins are similar it's kind of their ramp up time and to Peter's point, it's the additional work and add on work that you get without having to kind of go through a new government contract bidding cycle that gives you the upside that you don't potentially get on some of the U.S federal contracts.
Okay.
Thank you my last question with regards to pension.
Mike.
Can you give us an update on the status of the Iris waiver any updates your most recent.
Discussions and and another part of that as you know you gave a illustrative example that you know you having more fixed income assets in the in the pension assets.
As of.
Very good hedge for rising rates can you are you guys evaluating like being more heavy.
Being more weighted towards more fixed income for you know for for a hedge.
Yes, if OXXO. Thanks. Thanks for the question I'll, just kind of reiterate the comment on the update from the IRS again have had several meetings in fact had meetings last week with the PBGC had good in person and calls with both parties. We've had several request for.
Information, which we've provided we've asked for expedited processing and to date. There are no open items to be responded to from either party. So you know we're anxiously awaiting a response from from the service on that.
Your second point. The illustrative example, you're exactly right in the fact that the fixed income portfolio as a natural hedge to the decline in interest rate. If I said this I didn't mean to but we're not increasing our position in fixed income as far as the asset mix is concern.
Earned.
That is that is the same as it's been historically were roughly 60 40 equities to fixed.
Yes that it is a.
The income the fixed income portfolio, just naturally hedge is that because as the interest rate declines that for pulp that portfolio asset returns increase so thats kind of where that natural hedge comes from and the real reason why you necessarily wouldn't move into more of that fixed is the return on asset.
Thats being so important to the overall pension contributions obviously moving more into fix would reduce the expected return on assets. So so we monitor and measure that on a regular basis to make sure. We have a good balance between returns and exposure to interest rates.
Alright. Thank you guys congrats on the good results.
Great exited product.
Next question comes from Thomas with Jet equity partners. Please go ahead.
Hello, Doug.
Good afternoon, congratulations on a terrific quarter.
Thank you. Thank you nice to see the stock respond.
Hi, Peter I guess my first question I have three questions. My first question is you announced a really nice meaningful financial services contract in the us.
Most of the ones.
That you've announced in the recent past the been international and I'm. It makes me wonder just so I could ask you.
Where where does the financial services business stand in the states what.
Especially as all of these new Fintech type of companies develop.
You know how how.
How's the momentum look in that business for you guys.
No I would say historically actually financial services in the us compared to our business outside the US has been relatively challenged and it's relatively challenged.
Because it's so intensely competitive.
It's not a question of weakness in the US. It's just it's a question of everyone in financial services is in the U.S.
And they're all here in strength, so we win our fair share, but if it's a it's a dog fight every single time.
Yes. So we are encouraged that we're seeing some improvement in the U.S. we.
We are signing some master service agreements with some very large you know top 10 global banks, including some in the U.S.
Those are more hunting license arrangements than they are specific commitments for business, but it really shows our relevance in that in that space. So I would say we are bullish on the U.S., but we're also cautious that it's just a very competitive environment I.
Let me my first thought was given your reputation for security.
Safety and security.
In terms of breaches and hacking and so forth.
I would think you would be thought of as the top contender for a lot of those.
For a lot of potential new business notwithstanding the fact that as you said, it's a very competitive market.
Well, so Doug you're exactly right I mean, the the when we announced this quarter was because of our security portfolio. The reason, we're getting those if you will master agreements with the large financial money Center banks is because of the security I mean that is how we're distinguishing ourselves.
So there's not a question about that.
We have some opportunities it depends on how you define financial services, but when you get into organizations, we've already proven the case.
Outside the us that you can put stealth into Ats you can put sales into automatic machines. You can do a lot at the periphery of the network on devices that are not necessarily as secure as core the network by putting stuff and so as you do that as those used.
Cases get proved out we expect to be able to increase their use in the U.S.
And then.
My second question is.
And again I don't I don't really no not really talked about this much but the Microsoft to win.
The Jed I contract versus Amazon is I would assume that that would be a positive four units.
I am I wrong in thinking that and what it would if Amazon had one that contract what does it then.
Not so good for Unisys.
It would not have matter so our our relationships with Microsoft and was a ws are both equally strong. So it is we don't have a particular horse in that race.
Okay, Alright, and then my third question as I mentioned the stock was responding nicely. This evening a really good quarter.
But it's a good quarter in that we've had a series are really good quarters I think.
Six five or six terrific quarters, and I am wondering just back to last quarter. When we saw the stock.
You know really tank in trade at Riddick, just a ridiculous valuation as far as I'm concerned six $6 plus.
Peter I don't have the proxy in front of me, but I'm fairly confident the majority of your compensation over time.
Going to come from.
Equity based.
Equity based components and I'm thinking that the majority of your.
Options overtime that you've been grant so far or if not underwater then pretty close to being under water. When you see the stock trade down to what we all think are fairly ridiculous levels.
Which basically extended up until.
A couple hours ago.
What do you think what do you what do you think and in terms of the stock in Europe .
The management team in the board's desire to buy stock for example in the open market.
Or how do you how do you view the stock price no. We don't really talks about the stock, but how do you view the stock versus.
The fundamentals of the company at this point.
Doug I'm thinking I need to bring you with my compensation Committee meeting next week.
You can look.
We've been we've been really clear, Mike and I have been very consistent on this.
And and Eric Hadow, NPV provider, who will lead our go to market as well our we have to we have to lead and drive operational performance. We think we've been doing that by the way and we have to exceed what we're doing.
The market ultimately will determine the price of the stock and we have confidence that if we continue to perform the way we've been performing the market will eventually react we understand.
The issues around the underfunded pension and we understand that can create a drag from time to time.
And we know necessarily control it but we are doing everything we can as you heard from Mike in terms of the IRS and the pension guarantee Trust company to deal with the pension at the same time. So what I would tell you is we're working all of these levers.
And and hopefully our shareholders will eventually be rewarded that is something we look forward to yes, and I guess I would echo that comment we just had an all hands meeting last week in.
Gave a little update on just kind of movement in the stock price and.
As you've noted we've had six straight quarters of year over year kind of growth on the services side and the message to the team was simply let's control, what we could control and let's keep executing against operations in closing out years I mean, we've raised guidance twice this year.
So it gives you a good sense of where our head is AD and we're trying to work on on both fronts will continue to look for opportunities on on the pension side to minimize some of that exposure, but most importantly, it's continuing to deliver operationally and that's what we can control and that's what we're focused on this.
Also in educational element in this I mean, I think you have seen from Mike in the last two quarters.
A real effort to make sure that our investment public understands you know the the short term and long term importance of interest rates and the short term and long term importance of the asset valuation.
And how that affects both the contribution levels as well as the gap levels you see a slide in our deck that weve never had before to try to illustratively explain.
How this goes back and forth, we do think that historically.
People have looked at interest rates only.
When they have evaluated us on pension side, and we think it is more appropriate to look at a combination of both interest rates and asset value. So we're trying to really kind of.
Perhaps a more full rounded view of our pension obligations out there, we think that will provide greater insight into how we're doing.
Right.
All right well listen again I appreciate all the hard work and I congratulate you on another solid quarter.
And I'll talk to you so.
Thanks, Thanks, Doug.
The next question comes from Bill Smith, with William Smith and company. Please go ahead.
Thank you Peter.
Mike Importantly, congratulations again on.
Another great quarter.
You really have the progress and the momentum and keep building. It every quarter. So it's really good to see units.
It hasn't been easy we all know that.
Can you are can you speak to a breakdown baby of your business in terms of.
Incentives and federal and hardware.
In the commercial your your business segments the percentage was that.
Our reflected there.
Yes, Bill I can take a lead on that and Mike and follow up if we look at our business through.
The business units, we have two business units the enterprise solutions team led by our cut though and the us federal led by.
PV.
US federal is about 27% of our revenue enterprise solutions is about 73 of those 73 points.
29 of the 73 are what we would call commercial business 20 points, our financial services and 24 is our public business. The public business include governments, both in the us and abroad.
And when we look at our business from an overall revenue standpoint.
57% of our business is now in the us in Canada and about 43% is comes from abroad.
And so the 57% or I guess us Canada whatever percentage of that is us is that allow you to use some of those dental Wellstat then oh.
Just to us business alone or how are you able to use those.
Yeah, absolutely continues to what extent vintages so.
Yes, there's really no restriction on on use within the U.S. and.
Income. So you know we've talked a little bit about some increase here in federal those can be utilized as well all of that is domestic so really no restrictions on use of those and our wells and as the as the income increases in the U.S. then that's all available to us when we talk about.
Our tax provision in general we tend to look at it through the lens of.
3% to 5% of international revenue was kind of how you look at the provision and the reason we do that is because all of the income on the U.S. side of the houses is.
Basically shielded through those into wells I'd also point to bill on this slide material that we have out there a slide 14 gives you all of the relevant breakdowns between sectors regions services and tech et cetera. So if you want to another focal point you can you can see that makes there as well.
And then can you comment Peter about your third party relationships at all and where you might be getting traction say that dealt DMC relationship or you mentioned as your.
Palo Alto some of the names that you've talked about in the past or are you getting any particular types attraction with.
Any of those third party partners.
Absolutely historically those core partnerships for us have been with Microsoft with eight Ws with Dell technologies.
And those have been the three most significant.
And on the security side, you have silence, you have logarithm and and Palo Alto as well.
What I would say to you is the while all of those continue.
The rising star that is relatively new for us is not in the sense of a business relationship, but a really strong partnership is service now.
And so we have really been elevated.
And we'll get our we'll get a release out on the shortly actually to a very very high level in the service now universe.
We are really a core partner they see us as a core partner and we see that.
And so that's that's a new Avenue for US you know the historic cloud providers.
Give us one set of clients, but working with service now actually gives us a second set of clients. So bill. It's a great question and I think I would single out service now not because it's ahead of ADW us or Microsoft or Dell, but because it's joined those ranks.
Okay. Thanks, very much congratulations.
Thanks.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Peter alphabet for any closing remarks.
Thanks, very much I like to thank everyone that joined US for this call I want to refer you to our Investor Relations section of the website where coordinate has.
Bunches of interesting data.
There was a reference already during the call to our Webinars series and we keep those active for awhile. So there are several there that I would call your attention too if you want to get more insight into the way the business actually operates.
And then finally, we remain as always available between calls and welcome conversations and questions. So thanks, very much and look forward to speaking with you on the next call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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