Q4 2019 Earnings Call
[music].
Welcome to the units this corporation fourth quarter and full year 2019 earnings conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist I 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.
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Now, let's turn the conference over to Courtney Holben, Vice President of Investor Relations. Please go ahead.
Thank you operator, good afternoon, everyone. This is Courtney Holben Vice President of Investor Relations. Thank you for joining US earlier today, you know says released its full year 2019 in fourth quarter Financial result, I'm joined this afternoon to discuss those results by Peter out about our chairman and CEO and my Thompson our CFO.
Before we begin I'd like to cover a few detailed first today's conference call in the queue and I sessions are being webcast via the edifice investor website.
And you can find the earnings press release and the presentation slides that we will be using this afternoon to guide our discussion as well as other information relating to our full year and fourth quarter performance on our Investor website, which we encourage you to visit.
Third today's presentation, which is 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've provided reconciliations within the presentation.
Although appropriate under generally accepted accounting principles. The company's results reflect charges that the company believes are not indicative of its ongoing operation and that can make its profitability and liquidity result difficult to compare to prior period anticipated future period or to its competitors' results.
These items consist of pension that exchange cost reduction and other expense management believes each of these items can distort the visibility of trends associated with the company's ongoing performer.
Management also believes that the out devaluation of the Companys financial performance can be enhanced by use of supplemental presentation of its results, but exclude the impact of these items in order to enhance consistency and comparative nest with prior or future period results.
Following measures are often provided and utilized by the company's management analysts and investors to enhance comparability of year over year result, as well 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'll be continuing to report non-GAAP adjusted revenue and related measures as a result of certain revenue unrelated but relating to the two reimbursements from other companies try 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-K.
From time to time Unisys may provide specific guidance regarding its expected future financial performance such guidance is effective only on a day give him.
This is generally will not update reaffirm or otherwise comment on any prior guidance, except as units. This 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 could differ materially from our expectation.
Factors are discussed more fully in the earnings release than in the company's STC filings copies are those FCC reports are available from the FCC and along with other materials I mentioned earlier on the units this investor website and now I'd like to turn the call over to theater. Thank you coordinate and thank you all for joining us to review, our full year and fourth quarter.
Our financial results 2019 was an exciting year for us and we made significant progress on a number of our key priorities, including total company revenue growth and expansion of services profitability.
Our focus on security and differentiated IP continues to resonate and help witness contracts.
2019, non-GAAP adjusted revenue and non-GAAP adjusted services revenue both grew year over year in fact, the fourth quarter represented the seventh consecutive quarter for non-GAAP adjusted services revenue growth.
Services non-GAAP adjusted operating profit also expanded year over year, both in the fourth quarter and the full year 2019.
As a result of this along with lower Capex, we saw significant year over year improvement to adjusted free cash flow and we achieved our guidance ranges on all three provided metrics for the fourth consecutive year since we reinstituted providing guidance.
Mike will provide more detail on our financial results, but first I thought I'd speak a bit about the business throughout both mikes and my commentary will be largely referencing numbers based on the 19th 2019 actual results, which include both U.S. federal and enterprise solutions.
But we will provide color in certain places on the expected impact of the U.S. federal transaction, including in our 2020 guidance, which will exclude U.S. federal.
After the close of the transaction, we will have significantly enhanced capital structure flexibility.
The shouldn't able to pro forma business to have a more dedicated focus on driving growth improved profitability and stronger free cash flow and an increased ability to invest both organically and inorganically to help achieve these goals like and I will highlight a number of opportunities we see as a result of.
This transaction and we also look forward to providing more detail at the Investor day that we intend to host on April 29th in New York.
Our services segment, so continued revenue growth in 2019.
Intelliserv in cloud Forte are differentiating our go to market efforts. The Productize nature of these solutions allows us to bid contracts at more attractive margin profiles than otherwise would be possible.
In the fourth quarter, we were awarded computable service provider of the year for cloud Forte for Microsoft Azure.
During the fourth quarter, we announced new features for cloud for Jay with as Youre, including cloud 14, navigator and cloud Forte compliance. These features enable clients to optimize operations and enhance security for workloads delivered through the Unisys cloud Forte service solution.
With Microsoft as Youre and in hybrid cloud environments.
Four day navigator builds operates and continually optimize is secure high performing systems.
Cloud for take compliance provides 24, seven real time security compliance monitoring and remediation for cloud infrastructures.
During the fourth quarter information services group, where I as GE recognize the company as a global leader in digital workplace services, specifically, highlighting intelliserv as a key strengths.
We expect to continue to benefit from both cloud Forte and sell Intelliserv pro forma for the us federal sale.
[noise], we're pleased to see year over year services operating profit margin to expand in 2019, increasing the efficiency of our services delivery engine to improve profitability remains a top priority for us and we continue working to integrate intelligent operations automation and emerging technologies.
Moving to our technology segment, which includes license revenue could for Clearpath forward stealth and our industry application products non-GAAP adjusted revenue was up slightly year over year, which was better than we expected.
Our clearpath forward operating system business remains healthy thanks to ongoing innovation of the platform such as language modernization modern front end support and our software series, which has the ability to run in private and public cloud environments.
We expect twentytwenty to be a lighter year for renewals of Clearpath forward based on the schedule of contracts.
But we expect this will rebound with a stronger cycle in Twentytwenty one.
We'll continue to receive revenue from our existing us federal clients, who use clearpath forward and FDIC will act as a value added resellers for this solution.
Moving now to security two of the solutions, we're going to discuss Unisys Trust check software as a service platform and stealth 5.0, we're just highlighted by CSL online as two of the hottest new cyber security products at the global Rsh.
Conference being held at right now.
As we have discussed though security for Unisys does not just mean, our Standalone security solutions. It also means incorporating leaving security brought more broadly into all of our service offerings.
This has differentiated our go to market efforts and has helped drive growth in recent periods.
Forrester recently recognized Unisys as a strong performer and it's zero Trust category based on the company's cyber security software solutions and services, including stuff.
At the IRS eight conference yesterday, we announced the new Unisys Trust check software as a service platform, which helps users quickly and easily assess the potential financial impact of cyber risks. This new version of trust check provides continuous access to a web based portal with risk pro.
Files and loss forecasts that our updated automatically as threats industry risks and trends change throughout the year.
We also continue to evolve our stealth offerings.
Also yesterday at the Rs say conference, we announced the release of stealth five Dot Oh, which provides protection for data in containers and kubernetes environments.
Stealth provides always on security and resilience to stop sophisticated cyber attacks.
Stealth dynamic isolation capabilities can effectively wall off a bad actor within 10 seconds of detection.
Thus, allowing the business to continue operations even have under attack.
We are expanding our partnership network for stealth in connection with the trust check and stealth five Dido announcements at our say yesterday, we also announced the formal launch of the Unisys Security Global Channel partner program. This program is expected to broaden the market reach and client base for our security solutions.
Registered partners in the program will have access to discounts demos collateral cobranded materials, and customizable marketing campaigns relating to style and other units the security offerings and will offer the opportunities for Webinars partner road shows and regional events.
In 2019 stealth revenue increased 17% year over year.
We will also continue to benefit from revenue related to our current U.S federal clients, who use though.
As as say I see will act as a value added resellers for stealth to its broader base of clients.
I'll now provide some color on our other sectors.
US federal as we discussed our us federal sector has been a key contributor to our strong financial results with a number of large recent contract wins that have contributed to non-GAAP adjusted revenue growth of 26.5% year over year in 2019.
Mike will provide some color on our expectations relating to the financial impact of the us federal sale.
Our public sector is a thriving sector for unisys and on an ex federal sale basis will represent approximately 30% of our revenue.
The public and sector contributed significantly to our access in 2019 was non-GAAP adjusted revenue growth of 7% year over year for the full year.
A number of sizable contracts with state governments related to infrastructure modernization have helped drive this growth.
We believe there is a demand for similar work with additional states and there was as a result of the increased flexibility pro forma for the sale of US federal we expect to be better positioned to pursue these opportunities with some sales effect efforts already underway.
We have also been seeing demand for new solutions from existing state clients as well as foreign governments.
And then as an example, a state government agency contracted with us to design and create a hybrid cloud environment to better manage the provisioning of resources and to streamline the delivery of data and services to as citizens.
Following a successful employment deployment Unisys has been awarded additional business to migrate select critical business applications to a new hybrid cloud environment.
Our commercial sector faced a difficult compare and technology in 2019 as a result of the Clearpath forward renewal schedule. This led total 2019 non-GAAP adjusted revenue for the sector to be down 3% year over year.
Services revenue for the sector was relatively flat, however, down less than 1%.
An example of our value to commercial clients involves a large quick service restaurant chain that selected unisys to design and build a cloud management solution.
The client was so pleased with unisys work and the ability to deliver a more modern cloud architecture that they recommended and introduce unisys to its supplier, who then signed a contract with us for our cloud foretaste solution to accelerate its own secure digital transformation.
Financial services non-GAAP adjusted revenue was also relatively flat year over year.
Revenue for our check processing JV declined year over year, but excluding this impact revenue for the sector was up 3% year over year on a non-GAAP adjusted basis.
With respect your revenue from this JV.
We expected to continue to decline in Twentytwenty.
From 145 million of revenue in 2019 to 105 million in Twentytwenty.
Due to secular trends with respect to check usage.
We expect additional modest declines during the duration of the contract until 2023.
An example of our land and expand strategy in financial services involves a large us based financial institution, which selected unisys to assess security compliance gaps and establish remediation protocols.
This initiative led to a contract to modernize their legacy infrastructure environment into a hybrid cloud environment.
Overall, we have made improvements to the both the operations and performance of the company that has allowed us to pursue external opportunities.
For instance, while 2020 is expected to be a year of transition for us.
As we expect to close the sale of the U.S Federal government.
Sector. During the first half we will start to rationalize the costs and build on opportunities right. After the sale.
And I have the confidence that we have the right team in place to help execute successfully on continued to drive the business forward.
Our anticipated capital structure provides increased flexibility both around organic growth via increased investments in solutions and more capital to put into client engagements and inorganic growth through external investments and M&A.
We expect internal investments to include increased focus on automation and AI within Intelliserv containers, and kubernetes capabilities within cloud Forte enhancements to dynamic isolation and biometrics functionality within stealth.
And increased cloud capabilities and micro services for Clearpath forward.
Outside of specific solutions, we also plan to invest in our sales team our cloud architects and our channel partner network with the goal of enhancing our go to market efforts.
The type of M&A opportunities, we expect to consider would provide scale in areas of our current focus or pointer spears for loose solutions that could enhance our overall go to market effort.
And finally as I noted previously the sale of US Federal brings a number of opportunities for leveraging our IP solutions with Sci seized client base.
So Mike will now provide more detail on our financial performance for the quarter as well as expectations for 2020, Mike.
Thank you Peter good afternoon, everyone and thank you for joining us today to discuss our full year in fourth quarter financial results in my comments I'll 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 saw a number of significant accomplishments in 2019, including the highest annual non-GAAP adjusted revenue growth that we've seen since 1998 and the highest annual non-GAAP adjusted services revenue growth since 2003.
We've seen continued year over year non-GAAP operating profit margin expansion and significant year over year improvement in adjusted free cash flow.
We also achieved guidance on all guided metrics for the fourth consecutive year.
Our go to market efforts continue to be differentiated through our focus on security, our new cloud offerings and digital workplace offerings.
As a result, we saw our second consecutive year of growth in non-GAAP adjusted services revenue and non-GAAP adjusted technology revenue.
During 2019, we contain we continued our sharp focus on reducing our cost of delivery and saw year over year expansion in services margins at both the gross and operating level.
With respect to specific results you can see on slide four that 2019 non-GAAP adjusted revenue grew 6.1% year over year to 2.93 billion or 8.6% on a constant currency basis.
Non-GAAP operating profit margin expanded 10 basis points year over year to 9%.
Adjusted EBITDA margin was 14.4% also in line with the guided range.
Non-GAAP EPS was $2 in 12 cents per diluted share up 8.7% year over year and ahead of consensus estimates.
The fourth quarter was slightly different this year given the technology revenue was more evenly distributed over the course of the year in 2019 and typically is the case. This had a number of implications across our reported metrics, including year over year compares on total revenue and profitability.
That said in the fourth quarter, we saw our seventh consecutive quarter of year over year non-GAAP adjusted services revenue growth and saw a margin expansion at both the gross and operating level in this segment.
We provided additional information on the quarter in the appendix of the presentation.
For the year I also noted that we saw growth in non-GAAP adjusted services revenue and margin expansion at both the gross and operating levels for this segment.
Full year non-GAAP adjusted services revenue grew 6.7% year over year.
Full year non-GAAP adjusted services gross profit margin expanded 40 basis points year over year to 16% and full year non-GAAP adjusted service operating profit margin expanded 120 basis points year over year to 3.6%.
Fourth quarter non-GAAP adjusted services revenue grew 1.9% year over year.
Non-GAAP adjusted services gross margin was up 110 basis points year over year in the fourth quarter to 15.2% and services non-GAAP adjusted operating profit margin in the quarter was up 140 basis points year over year to 2.5%.
In 2020, we remained focused on continuing to expand margins over the longer term, including through the use of third party labor, where efficient further implementation of automation existing exiting operations in countries, where there are structural impediments to profitability and continued best shoring of labor.
During the fourth quarter, we took some restructuring actions we have discussed on these calls throughout the year our intention to do so in the size and scope of those actions were consistent with the restructurings, we announced in Q4 of last year and also in line with what we indicated to expect total restructuring expense for the fourth quarter of 2019 was 23 million.
Ian.
The restructuring charges incurred in 2019 were not related to the sale of our us federal business.
Our current estimate is that we expect approximately 60 million of run rate savings to be taken out of the business. After we close that transaction.
Of this approximately 35 million is related to SDMA and largely expected to be realized shortly after closing with 25 to 30 million anticipated in 2020 in year benefit with approximately 10 million of associated takeout cost of restructuring charges to be incurred over the course of 20 to one.
We expect the bulk of the remaining amount to be related to gross margin and realize over the course of 2021 with the additional cost take out of approximately 10 to 20 million in the fourth quarter of 2020.
Finally regarding construction, we regarding restructuring we expect a non cash restructuring charge related to currency translation write offs associated with the legacy work we've been doing in EMEA of approximately 35 to 40 million in the first quarter of 2020.
Services backlog ended the quarter at 4.3 billion relative to 4.8 billion in the prior year period.
We have consistently noted that the levels of growth in absolute backlog were not necessarily sustainable expected or needed to achieve our near term goals.
The services backlog level is substantially aligned with our expectation with the exception of two large contracts that totaled approximately 200 million that were anticipated in 2019, but instead were signed in the first quarter of 2020.
We still view this as a solid level that supports our medium term revenue growth expectations, which continued to be in the 2% to 4% range.
Of the 4.3 billion of total company services backlog, we expect approximately 570 million to convert into services revenue in the first quarter of 2020 or 400 million on a pro forma basis.
With respect to technology, we had expected revenue for this segment to be relatively consistent year over year with non-GAAP adjusted technology revenue in 2018, and we ended up slightly better than those expectations with year over year growth and non-GAAP adjusted technology revenue of 2.7% for the full year.
As we look to 2020, we expect our first half second half split of technology to return to a more traditional structure, where revenue is more weighted to the second half of the year.
Specifically, we expect to split of revenue percent to be approximately 46 and 54 between the first half and second half.
We do not expect this to change material pro forma to the U.S federal transaction.
Overall, given a lighter renewal scheduled for Clearpath forward in 2020, we expect technology revenue to be down high single digit percentage year over year that said 2021 has a larger renewable schedule and we expect to make up for that anticipated decline in 2020.
I'll now turn to slide six which provides more detail on EBITDA and cash flow.
For the full year improved non-GAAP operating profit margin and lower capex translated to significant year over year improvements in cash flow.
Operating cash flow was up 50 million year over year to 123.9 million relative to 73.9 2018.
Free cash flow for the year improved 79.5 million year over year to use of 30, not 35.9 million from a use of 115.4 million in 2018.
Full year adjusted cash flow was up 65 million year over year to 127 million versus 62 million in 2018.
Capex was lower year over year, net 160 million versus our expectation of 180 million and versus 189 million in 2018.
Full year amount was still within our targeted range of 5.5% to 6.5% of revenue the lower than expected due to a few purchase orders that were delayed from the fourth quarter.
Pro forma for the sale of the U.S Federal we expect Capex as a percentage of revenue to be a bit higher than it's been in recent years as us federal was a relatively capital light business.
Going forward, we would expect the range to be between six and a half an 8%.
In 2020 pro forma for the sale of us federal we're targeting approximately $175 million of Capex.
We also will continue to seek out opportunities for third party financing for of Capex were economically advantageous to help mitigate any impact on cash.
Working capital usage is expected to be between 30, and 40 million range in 2020 pro forma for the us federal transaction.
Regarding other items that impact cash flows we expect net cash taxes in 2020 to be between 30 and 40 million.
We would not expect a change in that assumption as a result of the sale the U.S federal business.
Additionally, cash interest will be reduced significantly to approximately $30 million for 2020, as we will be taking out our senior secured notes in conjunction with the transaction.
Pro forma for that the only debt outstanding will be our remaining 84 million of convertible notes. This does not account for any potential capital raise that we may pursue post closing.
Please turn to slide seven for a discussion on pension.
On the top half of that slide you can see an updated required cash contributions as of year ended 2019.
As we've discussed cash contributions are more sensitive to asset returns than to interest rates in the near term as a result, and as we've highlighted in the last several quarters, a declining rates with all else being equal actually have a beneficial impact on contributions in the near term.
This was the case in 2019 as return on the fixed income portion of our portfolio benefited from such declining rates and this offset muted the decline in the discount rate.
As of yearend 2019, total expected required cash contributions through 2025 have come down by approximately 100 million from expectations for the same period as of yearend 2018, which we have shown in our previous earnings presentations.
On the bottom half of this slide you can see the pro forma contributions post the U.S federal sale.
We expect to Prefund required contributions to the U.S qualified pension plans for 2020, 2021 and 2022. Therefore, no additional contributions will be required to be made out of operating cash flows for those periods.
The international Pant plans will not be impacted by the proceeds from the transaction and the required contributions for those plans are expected to remain constant with what's shown in the presentation, even on a pro forma basis.
Pro forma numbers shown on slide seven reflect lower contributions in the outer years as well as a result of a higher asset base post closing.
We will continue to have pension expense in coming years. Despite the prefunding of contributions and we expect this amount to be approximately 90 million globally for 2020.
Moving to slide eight you can see that as of year end 2019, our underfunded pension deficit was largely unchanged year over year, ending 2019 at 1.75 billion versus 1.74 billion at the end of 2018.
If you turn to slide nine the discount rate using the calculation for this use planned declined by approximately 100 basis points over the course of the year. So only represents one element of the calculation and given that we saw asset returns in the U.S plan of 18% versus our expected return of 6.8% we were able to offer.
The negative impact of the declining rates.
Pro forma for the US federal transaction, we expect the pension accounting deficit will be reduced from 1.75 billion to 1.15 billion.
We're pleased that the market conditions have resulted in an improvement to our required cash contributions and that pro forma for the us federal transaction, we expect even more significant improvement.
That said, we'll continue to assess options for further proactive management of these obligations, including potential capital market alternatives and removal of pension liabilities through bulk lump sum offerings and door annuitization of a portion of the pension obligations.
Moving to slide 10, we still have 1.6 billion in worldwide gross deferred tax assets approximately 1.3 billion in the us.
Yes deferred tax assets, primarily pension in oil carry forwards related are expected to be available to offset any federal taxable income, resulting from the announced sale of our us federal business.
As a reminder of the company also also recently implemented a tax asset protection plan designed to reduce the likelihood of an unintended ownership change for federal income tax purposes, which could otherwise significantly limit utilization of certain use deferred tax assets.
Overall, we're very pleased with our results for the year as a reminder, we increased our non-GAAP adjusted revenue guidance twice over the course of the year and ended up with growth well above what was expected in our original guidance range.
We have consistently stated that our medium term expectations for revenue growth in the 2% to 4% range given that growth. This year was substantially higher than that and along with the changes that are anticipated related to the us federal sale, we expect 2020 to be a slight reset year.
As a reminder, due to the sale of our us federal business, the accounting rules require us to present, the federal business as discontinued operations for the full year 2020.
For our income statement. This means that we will remove the federal business from all lines and report the results in a single line item called discontinued operations.
In addition, we're required to require recast prior year periods.
Given that the guidance, we're providing excludes us federal from its numbers, it's our expectation that the transaction will close on schedule, but if for any reason. It does now will provide revised guidance, reflecting the full business at that point in time.
With respect to non-GAAP adjusted revenue growth, we expect a range of negative two to positive 2% in 2020, which implies total revenue of $2.16 billion to 2.25 billion pro forma for the sale.
As Peter noted we expect it revenue we expect revenue from our check processing JV to declined by approximately 40 million year over year, which is reflected in those ranges.
The guidance range for non-GAAP operating profit margin is 7.7% to 8.7% pro forma for the sale of us federal.
Which as we've discussed is a fully mature margin profile versus the expanding margin profile of enterprise solutions business.
Based on the realization of the remaining run rate cost savings associated with the sale of US Federal we expect there will be approximately 75 to 100 basis points of upside to non-GAAP operating profit margin in 2021.
We expect adjusted EBITDA margin to be in the range of 15% to 16.5% in 2020 pro forma for the sale of us federal business.
While we don't provide quarterly guidance I would note that we expect Q1 to be lower year over year, driven by the timing of the technology renewals along with the decline in our check processing JV. Additionally, as I noted two large deals that were anticipated to be signed in the second half of 19 were signed in the first quarter of 2020.
It is not only impacted 2019 backlog, but also slightly delays the anticipated revenue recognition.
Although not formal guidance.
If you apply the commentary are provided on cash flow related to items in our guidance ranges above it implies approximately 40 million to $105 million of adjusted free cash flow for 2020 on a pro forma basis, excluding any capital raise that we may pursue post closing.
We're currently not reflecting any material negative impact from their krona virus outbreak in any of our financial expectations and we do not anticipate material negative impact on results during 2020.
We employ approximately 430 associates in China and this time, we have no reported cases of infection amongst unisys employees.
We have implemented our business continuity planning procedures to address limitations on associates abilities to get into Unisys offices.
Let's discuss our revenue from clients in China, and the overall travel and transportation industry.
In 2019, we earned less than 5% of our turnover for total revenue from clients in China and in our global travel and transportation business on a combined basis and we expect a similar amount in Twoq 2020.
The work we do for these clients is typically not passenger volume related and we have not seen any material impact to revenue to date. However, it is a rapidly evolving situation that may over time have implications that are not currently anticipated.
Where there will be on data lead complexities related to our 2020 expectation and results in our strong execution in 2019 help enable opportunities for us put us on a solid footing from an operational perspective that will allow us to continue to embrace change in the organization that we believe will ultimately benefit all of our stakeholders we look.
Forward to providing more detail on the impact of the sale of our U.S Federal business. The company strategy going forward and are expected financial performance at the Investor Day, we intend to host on April 29th in New York with that ill turn the call back over to Peter.
Mike that's very helpful. As thanks, very much with that operator, we'll open up the call to questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble our roster.
Our first question comes from Jon Tanwanteng with CJS Securities. Please go ahead.
Good afternoon, gentlemen, thanks for taking my question.
My first one is on the outlook I was wondering what what assumption for growth and services are you, making for 2020, and we'll see operating margin improvement associated with that on an organic basis.
Yes, John we're looking for some positive growth in both of those metrics for 2020 and increased growth in 2021.
Okay in terms of.
Percentages can we think the low single digits like you've been targeting.
Yes look I mean, we've set our mid term range for that growth is always between two and 4% as we indicated in the opening remarks, our expectations. Our 2020 will be a slight reset, but clearly we've given that range of negative two to positive too and we'd like to continue that momentum.
Okay, Great and then on the technology side, you mentioned, a single digit declined year over year on renewals and that that makes sense, but what to see operating margin hit associated with that that kind of decline.
Maybe just a further one on technology in general what what is expected revenue from SSN Allergan included in the guidance.
Yes, so I don't know that we're ready to give specific numbers in regards to the say I see portion of that as you know John the.
Operating profit associated with our Clearpath forward business are pretty strong margins and so you know somewhere between.
Lets call it 60, and 80% impact of the decline is what we would expect to see flow through of the technology business.
For further slowdown in 2020, but just as a reminder, our renewal schedule in 2021 picks all of that backup.
Okay, great just to be clear you have put the.
I guess, the royalty and license from SSC into your outlook.
Of course, yes, but we don't know what else del Snell right. There are $7 billion company sure. All we've included in our outlook is the amount that we know that we already have in the book of business that we sold to them. So we're hoping as a channel partner, that's that's going to expand.
Understood Thats helpful. Thank you and then just one more question on cash flow.
And the color you gave was helpful to two things I wanted to ask how much capex was pushed out from this year and to kind of what our.
Exceptional cash items to expect either from restructuring or from the sale that does had been so if anything.
Yes, so the push out was about 15 million John into into 2020 and as far as.
The cash outlook I mean outside of what we've already talked about in regards to the restructuring right and those two components. We don't have anything additional that we would add from a cash outlook perspective.
So just to put to put up point on that Weve, calling for about 30 million of restructuring charges related to do that but just keep in mind that thats 60 million of kind of run rate save that we get for that 30 million output.
Understood. Thank you I'll get back in Q.
Yes, thanks very much.
Excuse me. The next question is from Rod bourgeois with deep dive equity research. Please go ahead.
Hey, there hey, so since you've announced the sale of the federal business I wanted to see if you could give us an update on the response youre getting from customers from clients and from partners in the market such as your channel partners. Clearly this is a big change there's a lot more at.
30 on the balance sheet going forward I know there was excitement about that but can you give us an update on the response that you're getting from those key stakeholders.
Yeah, Ryan let me start and then Mike can give you some specific responses in particular from the Investor group. So I'll start with a client group and in the marketplace.
Thank you from a client standpoint. The response has been really uniformly positive. So I think everyone understands the transaction for what it is.
We had as a company made really significant progress on two of our three zero challenges. The first challenge obvious had been a revenue growth. The company had not grown since 2003, we turned that around last year and then we expanded the revenue growth this year the second.
Was on profitability.
So that which allows us to reinvest profits into the company and solutions, we've gone from 6.2% adjusted operating profit in 2015% to 9% this year, but the third element that we had not been able to let's say do on our own.
It was really to to strike a substantial blow against the underfunded pension.
The underfunded pensions situation and what this does by giving US a $1.2 billion purchase price.
All of which will go effectively to reducing debt and pension is really move us from a company that had some challenges on a capital structure to accompany that is frankly now advantaged on a capital structure.
It puts us back into kind of the normal.
Kind of pack in our industry and actually better than normal in terms of our ability to put money into investments in terms, our ability to do select M&A and in terms of us our ability to really increased R&D, where we think we need to do that so I would tell you from a client standpoint, we've always.
When a pretty transparent company I would say very transparent that has stood us in good stead now they knew the challenges we had on the underfunded pension.
And they also know what this transaction does to relieve those challenges. So I would say a pretty big deal and our clients get it right, Yeah and may be one thing I'll add on the client side before hitting the other piece.
I think there were deals we weren't even invited to because of our overall balance sheet and to Peter's point, putting us in a sense of normalcy or actually better than normal see when you talk about our net leverage ratio being beneath industry standard said that actually gives us a leg up to compete on on some other big.
Is that we didn't have an opportunity clearly from the other two parties, whether it's the investor side and buy sell side on that and to our credit rating agencies that we've dealt with.
All of it has been overwhelmingly positive as you can imagine.
Breaking down our kind of net debt from 1.8 billion to roughly 800 million certainly de levers our balance sheet were two turns down from a net leverage perspective, we have good line of sight to improved cash flow as early as 2021 and we've given you the number for 20 Twond.
So I think from from that overall strength of the balance sheet and all of the things that Peter mentioned puts us in a really strong light and it doesn't even talked to our ability from the pension side I think coin to really start going after the removal of some of that liability.
As opposed to just being able to make those contributions in advance.
Great and then any any thoughts on how the customers choose your your actual employees are reacting is their excitement among the troops.
Yes so.
This is one of those where I believe there is excitement.
In really both groups. So obviously, we wanted to make sure that with respect to the us federal team.
So that they were going to a place where they could their careers could thrive.
Clearly that is the case at Sci seat.
Yes.
Mike mentioned FDIC has a larger footprint in the federal government than Unisys did.
And and they are obviously paying a premium team because they know the ability of that team and the ability to leverage that team inside their larger base. So from a standpoint of the team going to FDIC I think they understand the opportunities that they have with this.
Because the team here, while no one is happy to see their colleagues from federal leave because they were great bunch of folks I think everybody also understands.
The financial flexibility that that has given the remaining associates.
And those remaining associates or almost.
Almost 20000 of the 22000.
And I think for all the reasons I mentioned around the ability to invest more or on the ability to put more into our deals are on be invited to more deals about doing more aren't R&D about doing select acquisitions. This company has not done any acquisitions for 15 years, which is not to say that were.
To go hauled car.
A whole hoggart acquisitions, but there is a place for those in accelerating growth where you as a company has strategically aligned so it really gives us a lot more opportunities and with respect to capital structure, Mike alluded to it.
We have so many more.
Opportunities to lower our overall cost to capital now that were above or we will be above 80% under.
Funded on the on the pension we have opportunities that we did not have before to further decrease that pension obligation. So there really is a host of things we can do and I think the team here good.
Okay, Great and then one final question here.
You gave us good color on your technology revenues I understand the issue there with the renewal cycle. If we honed in on the services revenue outlook can you just talk to if there's if theres upside to your plan on services. What are the primary sources of potential upside and then what are the risk.
You have to navigate this year amidst the transition and I guess, what I, what I ultimately im trying to see see into is do you feel like you're in a better position for growth in 2021 and services. After you've had some time too.
To get the sale out of the way in some of these new investments in place. So just a little more color on the services revenue outlook sources of upside in potential risks.
So let me start with that and then let might get a little more into detail on that you know obviously when you look at our overall guidance and you see negative two to positive too.
You are looking at a zero or slight positive year in terms of overall revenue.
You get underneath that right and will you start splitting between services and technology. The first thing you see is a slight decrease in technology, which would imply an increase in services that's number one.
Secondly, as I indicated in my comments and Mike indicated you have 2% of services revenue actually a little more than that.
Going away through the IPO sell check.
Joint venture remember, we only own 51% of that that is not a profit making venture in the first place, but we consolidate all of that revenue. So just to get even on services revenue, let alone positive, which we expect to be you are already building in a 2% services revenue growth right. There. So thats all in terms.
As of what we've already built into the model on services now in terms of upside on services. Both in 2020 and beyond one of the things that I talked about in my comments was you know steltz ability to do dynamic isolation and what we call always on.
So this is the idea this is the.
This is the capability that we have now gone public with to dramatically reduce the amount of time once identified a bed player can roam around the system before we basically into it.
And we believe we can do that within 10 seconds of identifying a bad player with self capabilities. Okay.
Hi.
As to tell you that's at an enormous potential upside for this company, but we have to dramatically expand our distribution channel to get that market share on this capability. So Eric Cotto, who is you know as the president of Enterprise solutions has really been personally leaving an effort.
To expand that partner channel for us so that it is not just our direct sales team selling stealth and selling that dynamic isolation, but lining up a whole host of partners to do that.
How quickly that capability gets accepted and appreciated in the marketplace.
I think is a significant.
Unrealized potential upside in the model.
Okay.
Great. Thank you guys very much.
The next question.
His from Joe VAT fee with Canaccord Genuity. Please go ahead.
Hi, this is upon us any on for Joe. Thanks for taking my questions. My first question is on the new will invest services segment.
How are you neonodes affecting growth and margins there.
Are there a lot of contracts coming up for a new logos that that aren't being venue due to low pricing.
And is that a headwind to topline and.
At the same time, if they aren't being renewed its a tailwind to two services margins going forward any any color there will be helpful.
Yes, so thanks very much for the for the question and please give Joe My best.
What I would say to that as we have been selective. So it was very important for us to basically throw down the gauntlet and say hey, we're growing revenues, which we did for the first time in 2018, which we expanded in 2019, one of the things, though that we have done even while we have grown.
Revenues is to be more selective around renewals. So there are absolutely situations in 2018 and in 2019, where we basically took the tactive, we weren't going to you know tele other existing client, we weren't going to renew with them, but we were going to tell in existing client what it was going to.
Take to renew because some of those contracts were not as profitable as they need to be for us some of those clients reacted to that by saying I get it I'm onboard I want to renew other clients.
I just can't pay you that increased freight.
Thats, Okay with us so we really have been trying to balance.
Our desire to increase revenue with the desire to make sure the mix of our clients.
Goes more and more to the positive and you're seeing our profitability increase as a result, Mike Yes look I would say we've given you some backlog statistics, we have a very healthy pipeline.
Peter's point I think we've been a lot more selective about.
The deals that we are pursuing which is helping our win rates in those pipelines and the margin profile.
Those contracts are better right. So I think for all of those reasons that.
Peter alluded to we feel pretty good about the profit side of the equation and we're not going to fall back into perhaps what this company had done prior to this management team in 15 and earlier.
Just chasing topline growth, we want profitable top line growth we've got.
Again at a blue chip client base frankly, we've seen folks that thought they could go out somewhere else and do it cheaper and have come back to a subsequent to two going out into the marketplace. So we know we've got quality product and we know we've got a quality delivery team and we've got the the secure methodologies to supply.
Those infrastructures and so we think thats a real strength of ours.
Great. Thanks, Thanks for the color.
And secondly on the revenue guidance for 2020, what needs to happen for you to hit the hit the high end of the range.
And what that push it to work towards the lower end any any additional color their daily helpful.
Well I gave a partial answer to that already.
Which as you know we are expecting substantial growth.
In our stealth.
Revenue for this year, but it could be higher so that would be one.
Secondly, the two need the two new solutions that we outlined around cloud Forte and Intelliserv are getting.
Much more visibility much faster and.
And so the question will be how quickly does that increased visibility.
Drive revenue, we have assumed good revenue growth in both Intelliserv and cloud Forte any existing plan, but it can be higher in both cases.
On the flip side, what could drive at lower.
You could you know we mentioned the grown a virus, we mentioned, China travel and transportation that represents.
Combine the global travel and transportation and China combined represent about 5% of our revenues.
But I think we still are living in a world of uncertainty as to the health of that industry on a global basis.
As well as you know what will happen internally.
For our clients in China. So I think that's probably the most significant potential downside that I would see right now.
The next question is from E checks for UCC with Sidoti and company. Please go ahead.
Hi, good afternoon guys.
Two questions from the first of all.
Peter you briefly touched on this.
Our last answer and that is the technology segment.
Seems like you know, it's still being mostly driven by.
While award.
You mentioned that you lost out those going pretty well you do see of future, where you know you breakout style does a separate line items because you know thats a question I often get from a lot of different investors.
No we don't see that in the near term of because as I said it is still growing a grew 17% last year I would tell you that we expect that growth to substantially increase as a percent of revenue this year.
And and but up but I think it's this this is still a $2.3 billion to $2.4 billion organization.
After a federal and I think we will wait until that number becomes.
More material that said it continues to be a driver not only of its own but as an element of some really important larger sales. So it's important to says outsize.
Just its revenue.
With respect to the technology revenue in general you're exactly right. The majority of that revenue continues to be clear path forward, but I'd say continues not as a criticism I mean with all the we have done with that platform in terms of modernizing it in terms of creating public and private cloud capabilities in terms of modern line.
Mortgage all other things I talked about which are we are continuing we've actually been at now for a couple of years and that's in part why you're seeing the health of that platform those clients understand not only is it honestly the most secure platform and the planet According to the Anat.
But one that they can really have confidence in going forward. So we're not apologetic at all for our Clearpath forward revenue, we're very proud of it and issue. Okay. It's Mike I, just would add to Peters comment in regards to.
Their services revenue, that's tied to that Clearpath base as well right Theres maintenance revenue up in there. There is apps development work. So it's not just the license revenue that that brings in.
When you talk about Clearpath forward.
Yup.
Peter if I could just and I will follow up related to that and that does that you briefly mentioned in Delhi serve and I've got four days are those.
Leading.
SG application of that you have right now are I would you call out any any in a leader in that category maybe.
So, yes, I would say that respect to the platforms that are going to make up the majority of our gross going forward.
We would call out cloud Forte and Intelliserv.
And I know you are already familiar with what those are as well as still.
We continue to have other platforms that are interesting and that we have a lot of.
Expectations for.
So elevate in financial services for instance line site in border protection.
But you know line site is.
An extraordinary platform, but at the end of the day the number of clients is ever going to get is fairly limited there just aren't that many governments.
That our go to appreciate a solution like that whereas both intelliserv and cloud Forte.
Span, both government financial services and commercial and they really are applicable throughout our client base. So we think there's just more scale there.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
I want to thank everybody again for joining the the call. This really has been a very special year for this company.
You know being able to hit all of our guided metrics being able to hit you know the kind of growth that we have had the kind of operating profit that we have had are really all our records in my tenure here and going back a ways beyond my tenure. So we're very proud of the success we have had.
Very proud of the us federal team.
And and we think that the the transaction with Sci C is going to enable unisys to really hit the next level of its capabilities. So theres a lot of enthusiasm here for what's next there's lot of energy here I Hope you felt that during the call.
And we look forward to to the ongoing dialogue with all of you as I mentioned as Mike mentioned.
We do plan and we have currently penciled in April 29th in New York as our Investor Day.
And so we look forward to seeing everyone there.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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