Q2 2021 Unisys Corp Earnings Call
[music].
Good day, everyone and welcome to the Unisys Corporation second quarter 2021 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by persons 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 1.
Please note that this conference is being recorded.
I'd now like to turn the conference over to Courtney Holben. Please go ahead.
Thank you operator, good morning, everyone. This is Courtney Holben Vice President of Investor Relations. Thank you for joining US yesterday afternoon, Unisys released its second quarter 2021 financial results.
I'm joined this morning to discuss those results by Peter <unk>, Our chair and CEO and Mike Thomson our CFO.
Before we begin I'd like to cover a few details for.
First today's conference call and the Q&A session are being webcast via the Unisys Investor website.
Second you can find the earnings press release and the presentation slides that we will be using this morning to guide our discussion as well as other information related to our second quarter performance on our Investor website, which we encourage you to visit.
Third today's presentation, which is complementary to the earnings press release.
Some non-GAAP financial measures the non-GAAP measures have been reconciled for 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 operations and that can make its profitability and liquidity results difficult to compare it to prior periods anticipated future periods or to its competitors' yourself.
These items consist of post retirement debt exchange and extinguishment and cost reduction and other expense.
Management believes each of these items can distort the visibility of trends associated with the company's ongoing performance.
Management also believes that the evaluation of the company's financial performance can be enhanced by use of supplemental presentation of its results that exclude the impact of these items in order to enhance consistency and comparative net with prior or future period results.
The following measures are often provided and utilized by the company's management analysts and investors to enhance comparability of year over year results as well as to compare results to other companies in our industry non.
Non-GAAP operating profit.
Non-GAAP diluted earnings per share free cash flow and adjusted free cash flow EBITDA and adjusted EBITDA in constant currency.
For more information regarding these metrics and related adjustments. Please see our earnings release and our form 10-Q.
From time to time, Unisys may provide specific guidance or color regarding its expected future financial performance.
Such information is effective only on the date given.
This generally will not update reaffirm or otherwise comment on any such information, 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.
These factors are discussed more fully in the earnings release and in the company's SEC filings a copy.
Copies of those SEC reports are available from the SEC 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 good morning, everyone and thank you for joining us to discuss our second quarter results.
We achieved double digit year over year revenue growth and significant year over year improvements to profitability and cash flow, we executed against our strategy for sustainable growth and margin expansion that we described during our January investor presentation.
Which was enabled by our strengthened balance sheet for.
Progress in the quarter against our key strategic goals included advancing our gws transformation.
Broadening our cloud capabilities and expanding our enterprise computing solutions I would note that enterprise computing solutions. Our E. C. S is a new name for the segment previously referred to as clear path forward. This is a change to the segment name only not to the clear path forward product line.
Mike will provide detail on our financial performance and accomplishments, but first I will give some insight into the business starting with digital workplace solutions or dws. Our goal has been to transform this business to focus on higher growth and higher margin solutions to broadening our offering port.
Folio and increasing our focus on experience solutions through a build of Parker by approach our recognized leadership position in the dws market supported by our Intel US serve platform World class delivery capabilities, and NPS scores consistently and significantly.
It services averages positions us to achieve these goals for <unk>.
<unk> quarter continued our work laying the foundation for a sustainable growth through execution against this strategy with a focus on maturing and enhancing our solutions portfolio.
Speaking of organic developments, we are building out additional solutions to support cloud native virtual desktop interface.
Within workplace as a service and our hiring new consults to resources to expand our transformation services capabilities all within dws.
We also continue enhancing the automation and artificial intelligence capabilities into our solutions, including completing the migration of all service desk clients to our cloud contact center platform as of April.
Allowing for increased usage of conversational AI solutions in voice and chat and expanded deployment of all of our Intel or serve automation capabilities for these clients automation as a percentage of service desk ticket volume increased 500 basis points sequentially and 300 basis point.
Year over year in the second quarter.
With respect to a partner developments, we enhanced our modern device management capabilities, including by entering into several new partnerships. During the quarter. We are already leveraging these new partnerships to create more powerful end to end solutions for our clients.
We also acquired unify square a unified communications as a service or Ucas company with a focus on seamlessly managing securing and optimizing enterprise communications and collaboration.
Including through partnerships with companies, such as Microsoft and Zoom.
Unify square broadens, our ucas portfolio, which is projected to be 1 of the fastest growing portions of the dws market.
The acquisition also enhances our experience solutions and expertise, which improves the productivity of clients' digital workplaces and deliver higher value than our traditional dws offerings.
Finally, we also see significant cross selling opportunities as a result of this transaction, especially since the 2 companies have only 1 share significant client.
For dws during the quarter, 1 of the largest healthcare providers in the U S awarded US a contract under which we will proactively measure and improve user experience increased productivity of field services and service desk personnel decreased service tickets and enhanced device and software management.
With real time data.
A key differentiation in our proposal was our holistic approach to device management and proactive experience capabilities.
We also signed a contract with a consortium of U S based energy companies to provide a full range of solutions, including digital workplace applications support and cloud infrastructure with security oversight and protection.
Moving to the C&I segment, our emphasis is to grow cloud in our targeted markets. We believe our established credentials cloud for Te IP led platform and embedded security solutions position us to achieve this goal.
During the second quarter strong revenue growth continued in C&I with cloud revenue, specifically growing 28% year over year.
In July we completed a new release of capabilities within the cloud for a day platform with improved automation and standard repeatable approaches to increase speed and reliability of hybrid cloud deployments.
Security is embedded with cloud capable still an AI enabled threat protection and detection and faster remediation.
The new capabilities also allow for quicker applications for leases and advanced kubernetes and container deployments.
By focusing on our secure transition to the cloud, we differentiate ourselves with clients, including a number in the U S public sector as well as with third party advisors and industry analysts.
In addition to existing partnerships with Microsoft Azure and AWS, We recently announced joining the Google Cloud partner advantage program is a Google cloud and Google Workspace reseller partner.
With respect to client wins during the quarter, we expanded modernization and security work at the Georgia Technology Authority and with the Virginia Information Technologies Agency.
Both highlighting our opportunities for add on work and our continued success with U S State government clients.
We also signed a contract with the state of Wisconsin that spans both of our C&I and dws segments to provide a cloud based contact center solution.
We'll improve the experience of how citizens interact with government.
Turning to ECS as I noted this refers to the segment previously referred to as clear path forward.
Our near term goal for this business has been to grow revenue through expanding and enhancing ECS services, while maintaining the stability of license revenue.
We believe there is meaningful opportunity to expand the ECS services, given our relatively low penetration combined with our clients' increasing desire to migrate to cloud and hybrid environments and for a seamless application set that it works across these architectures.
Clients also need help managing application work flow creation and orchestration in these environments. We are uniquely positioned to help with all of this given our embedded IP.
We recently released a new version of clear path forward with enhanced capabilities and functionality day.
New release allows clients to enhance existing clear path, Florida applications, using Python and enhances interoperability with other environments. It is also uses enhanced security features.
<unk> expanded multifactor authentication and mobile device facial recognition and fingerprint identification.
Our partnership with Microsoft Azure Office, another Avenue for growth within the ECS as clients migrate to clear path forward cloud and hybrid environments. We recently went live with clear path forward for sure was the public sector client and we are in discussions with a number of additional clients.
We're seeing early stage traction with ECS services expansion with revenue from these services up 2% year over year license revenue in the quarter was also strong helped by higher volumes than anticipated, which Mike will discuss later.
We signed a contract with 1 of the largest financial services institutions in Brazil during the quarter for consulting and application services for their clear path forward and related application environment.
Including development and modernization relating to the integration of more than 90 systems to support the institutions mortgage processing operations.
Moving to our go to market metrics, our efforts across segments resulted in total company T C D being up 50% year over year in the second quarter and 24% sequentially.
Total company pipeline was up 2% sequentially go down 3% year over year.
However, as of the end of July pipeline was up 8% versus the end of the first quarter this year and 2% versus the end of the second quarter last year.
We continue to be recognized for our market leadership in important areas of the business, including being named a leader for managed security services in Australia, Brazil, and the U S and a leader in technical security services in the U S. All in Isg's provider lens for cyber security.
<unk> and services.
In late July we launched a new corporate website, which we encourage you to visit it is faster and more user friendly, giving visitors a richer experience and an easier way to learn about our solutions. We expect a new website to help visitors gain a deeper understanding of the outcomes our capabilities deliver.
And to lead to additional opportunities for us.
And finally with respect to work Force management, a work force management initiatives, such as Upskilling rotations work from anywhere it flexibility and enhanced recruiting efforts have been benefiting us.
Although total company last 12 month's voluntary attrition was 12, 9% in the second quarter versus $10.4 per cent for the first quarter.
Second quarter level was 210 basis points lower from the prior year period, and 480 basis points lower than the pre pandemic level in the second quarter of 2019.
Our attrition levels have not impacted the ability to meet client demand.
In part due to the work force management initiatives I highlighted.
Our open positions filled internally increased 13% since year end 2020.
Applicants for open positions increased 30% sequentially.
Our time to fill positions decreased 25% since year end 2020.
Referral based hiring has increased significantly relative to last year.
So in conclusion, we are energized by the progress we're making towards the goals we laid out at the beginning of this year.
I'd like to thank our associates for their continuing efforts.
These efforts not only include with respect to clients, but also include with respect to bringing on friends and others that they know into this company for shows quite a lot about our existing associates views of this company.
With that I'll turn the call over to Mike to discuss our financial results Mike.
Thank you Peter and good morning, everyone in my discussion today I'll refer to both GAAP and non-GAAP results. As a reminder, reconciliations of these metrics are available in our earnings materials.
As Peter highlighted we made continued progress in the second quarter against many of the key strategic goals that we outlined at our Investor day earlier in the year, while also achieving strong financial results, including double digit year over year revenue growth and significant year over year improvements to profitability and cash flow.
Peter covered much of the progress on our strategic goals. So I'll focus more on our financial accomplishments, including the fact that we were free cash flow positive for the quarter.
Overall, our second quarter results were in line with or slightly ahead of our internal expectations and we met or exceeded consensus estimates on all key metrics.
Revenue grew 18% year over year, and 1% sequentially supported by revenue growth in each of our segments.
Dws revenue grew 10% year over year, driven in part by growth in revenue from our new proactive experience solutions and the early results of the new partnerships that Peter mentioned <unk>.
Additionally, this was the segment in the quarter most impacted by Covid last year. So the post Covid recovery also contributed to year over year revenue improvement.
Dws revenue was also up 4% sequentially.
Our emphasis within C&I on cloud work for our targeted sectors is also yielding positive results demonstrated by revenue growth for the segment up 10% year over year and 1% sequentially.
Within C&I cloud revenue was a key driver of growth up 28% year over year in the quarter.
As Peter noted the segment, formerly referred to as clear path forward has been renamed Enterprise computing solutions or ECS.
Note that clear path forward product name is unchanged, but what we referred to the license revenue from these and other solutions as ECS license revenue.
ECS segment revenue grew significantly year over year up 40% and showed a 1% sequential increase the.
The growth was driven in part by higher license revenue than anticipated based on higher volumes and projected in the quarter. Additionally.
Additionally, ECS services revenue grew 2% year over year.
The second quarter represents the strongest year over year revenue growth that we anticipate for 2021 as we've previously noted we expect ECS license revenue to be split, 55% and 45% between the first and second half of the year with the third quarter are assumed to be the lightest of the year as.
As a reminder, the prior year first half second half split was 40% and 60% with 40% of the full year segment revenue coming in the fourth quarter.
This year's renewal schedule is much more evenly distributed with significantly less reliance on fourth quarter signings.
Total company backlog was $3.3 billion as of the end of the second quarter relative to $3.4 billion as of the end of the prior quarter.
The $3.3 billion, we anticipate $375 million will convert into revenue in the third quarter.
The sequential decline in backlog was attributable to a delay in a signing of a large dws contract that we expected in the second quarter and ultimately was signed in July.
Our plan calls for go to market strategic initiatives that Peter highlighted to begin expanding the pipeline and improving our backlog over the coming quarters. As we indicated in January we expect our year end backlog to show positive growth year over year.
The seasonality trends I referenced regarding revenue have been anticipated and overall, we're on plan for revenue for the full year 2021. As a result, we are reaffirming our full year guidance range of zero to 2% year over year revenue growth.
Moving to profitability the operating efficiency enhancements that we've undertaken as well as our shift to higher value solutions drove significant year over year improvement to non-GAAP operating profit margin in the second quarter.
This metric was up 950 basis points year over year to 9.7% supported by year over year improvements to gross margin in each of the segments.
Dws gross margin increased 840 basis points year over year to 15, 2%. This.
This was helped by higher margins earned on some of the newer proactive experience solutions and increased automation.
Our operational efficiency improvements such as reducing our real estate footprint and refining our work force management strategy as well as post Covid revenue recovery also contributed to margin increases.
Dws gross margin was also up 210 basis points sequentially.
C&I gross margin improved 730 basis points year over year to 12, 5% and was up 280 basis points sequentially helped by higher cloud revenue and the same real estate and workforce management cost efficiencies that I noted for dws.
ECS gross margin increased 1430 basis points year over year to 61, 3% helped by flow through of strong ECS license revenue driven by the renewables and volume increases that I noted earlier against the relatively fixed cost base.
ECS gross margin was roughly flat sequentially with both periods over 61%.
As I've noted our margins were aided by the cost efficiencies and automation that we've been implementing <unk>.
I've highlighted in previous discussions that pre reinvestment, we were targeting $130 million to $160 million of run rate savings exiting 2021 and as of the end of the second quarter I'm happy to report that we've completed all the actions necessary to achieve this target and our expected run rate savings exiting 2021.
1 is at the high end of that range.
Approximately $35 million of the annualized actual savings was included in the second quarter results and we believe the full amount of savings will be realized by the end of next year.
As Peter noted our workforce management initiatives have been very effective and helped drive the total cost of labor as a percent of revenue to continue to decline.
The metric was down 80 basis points sequentially in the quarter, even factoring in retention focused salary increases that we implemented during the period.
During the second quarter. We also successfully achieved our goal of moving $1.2 billion and gross pension liabilities from the balance sheet.
In conjunction with the final actions to achieve this we recognized a noncash settlement charges of approximately $211 million or $2.3.7 per diluted share, which was the only reason that our net loss from continuing operations was $140.8 million or $2.10 per diluted share.
The improvements to non-GAAP operating profit also flow through to adjusted EBITDA, which increased 125% year over year to $94.4 million.
Adjusted EBITDA margin increased 860 basis points year over year to 18, 2% and non-GAAP diluted EPS increased significantly to 68 cents from a loss of 15 cents in the prior year period.
Capex for the second quarter was $23 million down 35% year over year, reflecting the continuation of our capital light strategy and our focus on integrating best of breed solutions to enhance our client offerings and help optimize software development costs.
The margin expansion and Capex reductions also contributed to significant year over year improvements in cash flow, resulting in us being free cash flow and adjusted free cash flow positive for the quarter.
Cash from operations improved $56 million year over year and was positive at 42 million for.
Free cash flow include improved $69 million year over year to a positive $19 million and adjusted free cash flow improved $92 million to a positive $55 million.
These metrics were all up significantly on a sequential basis relative to negative cash flow for each metric during the first quarter.
As we look to the rest of the year, we're projecting our third quarter non-GAAP operating profit margin to be roughly in line with the prior year period.
Fourth quarter non-GAAP operating profit margin is anticipated to be the strongest of the year the lower year over year in part due to the ECS license renewal timing I mentioned earlier.
As with revenue the seasonality trends and profitability were expected and were on plan overall for the year with respect to non-GAAP operating profit margin and adjusted EBITDA margin.
As a result, and in addition to affirming revenue guidance. We're also reaffirming our guidance ranges for these 2 metrics at 9% to 10% and 17 in the quarter to 18 in a quarter percent respectively.
We're also forecasting our capex spend for the year to be lower than initially anticipated and now is expected to be approximately $115 million.
Other full year cash flow expectations are the following we anticipate cash taxes to be approximately $45 million to $55 million and we expect restructuring payments to be approximately $65 million to $70 million.
Additionally, as we noted in January working capital is currently at a run rate use of approximately $20 million to $30 million, which we still believe will improve over time.
As a result of all this we are projecting to be free cash flow positive for the full year 2021.
To wrap up I'd like to Echo Peter's enthusiasm about the progress we're making in just 2 quarters into our refreshed strategy, which we've been able to implement as a result of our improved balance sheet. We're appreciative of the hard work that our associates have been putting in to help drive this transformation and we look forward to continue with successful execution over the remainder of the year.
<unk>.
With that I'd like to turn the call back over to the operator to open up for questions operator.
Thank you and we will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then 2.
Our first question today will come from Joseph <unk> with Canaccord. Please go ahead.
Good morning, and great results here are really kind of a breakout quarter I think for unisys. So.
At a high level.
We could discuss.
There was a lot of good strong new deal activity. If you could maybe parse what that may be kind of as a result of post COVID-19 reopening versus maturity and the products that no. Other a couple of follow ups. Thanks.
Yes, Joe this is Peter.
Thanks, very much for being on the call and for the question.
When we laid out our plan in early January to the Investor Group.
Including you and thank you for attending debt.
We really laid out the year in kind of 2 sections. We knew that we had just reorganize the company on January 1st effectively.
We also knew that as part of that.
We were bringing in a number of executives that would help us in specific business units and then take the lead.
Several of the business units actually.
And so that all took place with that change we thought that the momentum around new sales and new opportunities would really begin to pick up in the third and the fourth quarter and so what youre seeing in terms of the pipeline beginning to grow in July what you see.
Being in terms of the <unk>.
Beginning to grow in the second quarter.
Is really kind of momentum going into the back half of the year and we've already had strong momentum in terms of our cloud business and you can see once again, the cloud portion of powder and infrastructure grew 28% in the quarter for.
For us year over year, which we think is a very strong number for us.
But importantly, we think that the digital workplace services business.
Is going to get increasing momentum in the second half of this year and going forward in next year and the year. After so I think what Youre seeing is we're being invited to more deals to larger deals.
The strategy of the capabilities, we've laid out and dws are being appreciated in the marketplace with third party advisers as I've mentioned.
And also with existing clients and with prospective clients. So we're really kind of getting momentum for the second half and for next year with respect to sales as you know it will take a while for sales to translate into revenue.
That's always been our plan and that's what we laid out in January.
Yes, Joe and if I could just add 1 element to that as I noted in my remarks as well.
A very significant new logo dws client was signed in July right. So we talked about the backlog slightly down sequentially, but again, we were expecting to sign that particular contract, but it is a great proof point.
The momentum that Peter was talking about and a pretty big significant new logo from our perspective that we're really excited about so.
As we talked about last quarter, we were spending a lot of Q2 with our go to market messaging and again to reiterate Peter's point around the dialogues that we've had with industry analysts and the like in regard to that go to market messaging, it's really seems to be resonating from our perspective in and we're seeing that sequential increase in the pipe.
Your line as well.
That's great and then.
1 on C&I.
I know you mentioned a couple of times, the 28% growth in the cloud piece.
Clearly if that kind of pace continues.
While it's been up.
Accelerate the whole segment I was wondering you know.
How big potentially that piece of C&I is now just to get a feel for.
Cloud continues a strong uptake.
Hum.
Overall segment acceleration.
Yes, so Joe.
Correct me, if I'm wrong, Mike, but I think that piece is 31% of total C&I revenue at this point is that right.
Its correct Peter.
Yes.
Got it and then just 1 final 1.
On a per.
Right.
<unk> segment.
We're really strong and it seems like we've had more pull forward on renewals.
Delays in renewals over the last couple of years wondering if you could kind of just give us a feel in the segment.
What really strong clearly probably a lot of that with renewables, but.
Ex renewals how much was there kind of just kind of core growth.
Excluding the cash.
Clear path renewals and other pieces.
Sure.
Thanks, a lot.
Yeah. So so thank you Joe So let me let me take the beginning of that Mike. If you take the end of that and so again as we put the performance of ECS into context of what we were expecting and what we received.
The expectation continues to be during the course of the year and for the next couple of years that the growth we're going to see out of ECS will be largely from the services side of that ledger.
With with the licensing side predominantly.
Predominantly renewals that's if you noted in my remarks.
I said, that's the near term plan.
I think that with the changes we've had with the ECS team.
With some leadership really reviewing the art of the possible in ECS.
In the mid to longer term, we're looking at what are the opportunities we have to grow whether it's a SaaS pricing or a straight licensing.
More of the technology piece of that business.
We don't see that in the near term and it's still under development for the mid to long term.
So more to come on that still very much for work in progress. We do expect the momentum we saw in the quarter, which was a 2% increase in services to increase overtime and as I said and in the near term, that's where we expect the majority of the increases to come from Mike.
Yeah look I certainly would echo that that's part of the strategy here I think we mentioned in Investor day, Joe that we only had about 13% penetration on the services side of the coin. So we do see.
Some real upside and potential in regards to that continued services growth.
As you know other renewal schedule is lumpy right and last year was really very heavy in the fourth quarter not.
Not necessarily that they were delayed or accelerated its just thats when the renewal schedules.
Kind of indicated that those contracts would be signed in this case the second quarter was a strong renewal schedule quarter from our perspective, we've got good line of sight into that so we obviously know when those things are going to anticipate and the lumpiness is really.
Whether something slips a week or a month or gets accelerated a week or a month and how that impacts any given quarter, but overall.
Our retention rate on those clients is at 95 plus percent and we're really happy with that we've done a lot of work as you know to get that particular license.
Cloud enabled and we think that that's going to drive additional volume as well so.
Right on plan as we'd expect it to be and as Peter noted really focused on the services side of that segment for growth.
That's great. Thanks, guys terrific. Thank you Joe.
No.
And our next question will come from Jon <unk> with CJS Securities. Please go ahead.
Hey, good morning, guys very nice quarter. My first 1 just on the dws contract that pushed out into Q3 can you disclose how big that was.
We don't disclose the general size of those contracts.
I'll say it was about 50 and below a $100 million in T V.
Okay fair enough and just to clarify on the pest services, where you saw the growth what was that from new customers or is that existing customers that have expanded their agreements with you.
Yes, that's it.
I'm sorry, Peter.
Oh go ahead.
I was going to say John are focused in the services are largely based on our existing client base and Thats, where we have an opportunity for penetration and Thats, where we think we got.
Obviously long standing client relationships, where we are on average just under 20 years relationships with those particular clients and Thats, our primary target market for that services growth.
Okay got it.
Yes.
About a month ago, 1 of your large competitors that Sigma weaknesses in 1 of our segments. I was wondering is that something that has any read through to you either negative or positive it seems like your.
Tracking to channel expectation, so I'm wondering if there is any.
Correlation or impact on your business at all.
Yeah, No John I don't see a direct correlation again.
We are.
We like it when our industry does well.
And so we don't celebrate when any of our competitors has a bad quarter or misses any EBIT numbers, because we think the health of the industry is good for us.
I will tell you that and you know for my strategy in January that we've reiterated on these quarterly calls it is our focus to really double down in some of the areas that not all of our competitors are focusing on or that our competitors are focusing less on than they did in the.
So we have a whole segment on digital workplace services.
And that's a very significant part of our of our company.
Did the Ws is now 28% of revenue and we expect that to increase over time.
In the cloud and infrastructure space.
We are really doubling down on the public sector of cloud.
So I think over time you might see.
For us, making advances in our areas of focus that are greater than increases in market growth and it is certainly our intent in those areas of focus to grow faster than market and effectively take market share away. So that's our plan.
Okay, great and thank you for that.
Last 1 from me I appreciate the color on the operating margin by quarter going ahead I was wondering though if you could.
If it was possible for second half operating margin when our adjusted basis to be greater than the first half.
Even with ECS.
Being a little bit heavier in the first quarter and first half excuse me.
Okay.
Yeah, Peter I'll take that if that's okay, John I think.
Really a tough compare especially as I mentioned, we had 40% of ECS license revenue for the full year coming in the fourth quarter and that's at 60% margins. So that's a really tough.
Item to deal with but as I also mentioned, we will see the benefit of that continued execution against the.
The savings initiatives that we put in place we saw about $35 million of that come through in the quarter and we will continue to see that compounding through the rest of the year. So again I think we will be right on plan in regards to that hence the reaffirmation.
Formation of that guidance.
I think thats, a pretty consistent view from us.
Okay, great, Thanks, and great quarter again, guys.
Thank you John Thank you John.
And our next question will come from Rod bourgeois with deep debt equity research. Please go ahead.
Great Hey, I want to talk about the work force management, given all of the supply challenges occurring in the industry. It was good to hear here your metrics and your progress on the workforce front.
So I wanted to ask if you can talk a bit more about the investments and the leadership that you're applying to the work force management and if you have an outlook for.
Metrics like attrition will be going in the next in the next several months given some of the supply and talent crunch, that's happening around the industry. Thanks.
Yeah Rod this is Peter I'll, probably start on that and thanks for the question.
I think it's fair to say work force management is taking up a very significant part of our leaderships attention.
From our president and COO.
Eric Hutto.
Katie Ebrahimi, our chief HR officer, really up and down the entire leadership training in it and what I mean leadership I mean, everyone, who manages more than 3 people. Because this is all about how do we.
And how do we retain our.
Folks some of the data that I gave on my remarks, and I'll repeat and elaborate on some of it.
Our last 12 months, a voluntary attrition for the quarter was 12.9 that was an increase from 10 for for.
For the last 12 months for the quarter before but but that's somewhat seasonal you pay bonuses in the first quarter than you historically have a higher second quarter of attrition. So that's not related to COVID-19 and it's not necessarily related to the book, but as cold in the industry of the war on talent.
That $12.9 number for us.
Is lower than the level it has been in either 2020 or.
Much lower than 2019, which was the pre pandemic number. So the bottom line is we think we are managing.
To the slightly higher sequentially a.
Numbers.
But it's not we don't expect this to be an easy ride.
We expect to have to do more and more to.
To retain and attract talent and that's actually the right long term.
Mechanics for the company, we think it's the right long term mechanics for the industry.
I mean, it services as an industry is expected to have I think for $3 million.
Filled vacancies by 2030.
So while some of the current focus might be.
People are moving around more and there's an increase in demand because of Covid. That's that's not the big driver of long term Big driver long term 2030 is this is a growth market we.
We expect to be a growth company, our competitors expect to be growth companies and although we expect what we call non linear growth, which is we don't expect to be hiring people in the same proportion as revenue going up we are still very very dependent on bringing in great people. So whether that is a focus on day.
I issues, whether that's a focus on ESG issues with our people care about whether it's about career development, which we are massively increasing our view to let associates understand what kind of careers. There can expect what they have to do from a training and certification standpoint to make their careers actually.
And making sure they've got an understanding of where they are and where we believe as a leadership team. Their development is this is really an all hands on deck focus to create a people environment.
That is attractive and that people want to work for so far I think we have been successful with.
With the focus on so far.
But this is this is gonna be it effort every single day and I think it's going to be an effort for the entire industry. Every single day I'm just glad the wake up call occurred now.
And not in 2030 by the time, we have $4 million on fill jobs.
Great. Thanks, Thank you and you're clearly making progress in your 3 major focus markets at the same time you have this subsegment of public APAC and Latin America, where your growth right now is relatively weak.
I wanted to ask if you're positioning for improved growth in those segments and what the opportunity set is there too.
I didn't get the growth in those areas.
Up to up to par.
Yes.
So, let's just take those geographies 1 other time.
U S and Canada is clearly the strongest geography, we have a I.
I would say for the year, you had a stronger growth in EMEA this quarter, but that was largely because of ECS wins.
I think we're making great progress in U S and Canada that has been if you will almost a testbed for some of our new solutions and we think that Testbed is working out well. We also have as you know a really good tax position rod in the U S and Canada.
And that makes it more advantageous for us to kind of focus first there.
When we look at the other regions. Obviously, we had a lot of success in EMEA. This.
For for this.
Quarter and.
And really for the year, we expect some good progress in EMEA, although not obviously at the rate of this quarter, but we expect good progress in EMEA over the course of the year APAC and.
In Latin America are a little different.
And we really kind of have to look into those areas.
For APAC.
We expect this to be a slight down year.
But but that is mostly because of some ECS licensing issues. We had a very large a clear path forward license renewed in 2020. So that is that really is causing unfavorable compares in Asia Pacific, We expect Asia Pacific to be flat.
Or down very very slightly without that compare.
In Latin America, we expect revenue to be up this year and revenue to be up pretty significantly. So again, we expect some success in Latin America. So that's that's kind of how we think of geographies.
With our with our focus right now where per.
Primary P&L is based off those solutions, whether it's dws or whether it's C&I or whether its Acs what we're really doing is allowing those teams to run as a business and allowing those teams to focus in the geographies with day believe they will be most successful and then supporting them in those geographies.
Fees.
It is heartening to see that as they have done that.
They have really found a key.
Trees and areas in each of the regions, where they think we have advantages and we think that our global growth.
Will be better because of that but it's not it's not random.
It's really targeted growth that is targeted based off each of those solutions in each of those regions.
Mike further on that please.
Look I think you hit basically all the points Peter the only thing Rod that I would add is we've seen some some good post COVID-19 recovery, specifically in Asia Pac and actually was up.
Roughly 10% in the quarter. So so our solutions are.
I'll say regionally agnostic right. So they apply across the board and can be applied to global companies. So I don't think it's.
Directly attributable to.
Which region, we're approaching I think Peter hit at.
Target here in public sector, specifically in U S M C.
He's just really advantaged from our tax positioning so it makes sense to attack that market first get that proof point, and then and then roll that out for some of these other markets. So I don't it's certainly not a strategic.
Viewpoint to say, we're not addressing these other markets at the same time and and so again, we have a little heavier I'll call. It bps presence in Asia Pac and that's still slightly impacted from from the Covid perspective, but other than that.
Everything else that Peter gave you I think that's spot on.
Perfect. Thanks, guys.
Thank you rod Thanks Rod.
Okay.
And our next question will come from Ana <unk> with Bank of America. Please go ahead.
Hi, Thanks, very much so first of all I have a couple of questions on the cost side. So it's.
It's good to hear that you're.
Having achieved the high end of the other cost save target.
Could you talk about though are areas for reinvestment and kind of the magnitude of reinvestment of those savings.
And then secondly.
You've given the operating margin outlook for for the.
The second half so I guess that third quarter right in line with second fourth quarter down year over year, but.
It sounds like that segment related.
How could you talk about if you're seeing or feeling any inflationary impacts.
And then what areas and to the degree that you may be shielded this year from a kind of a con call.
Contract.
If any of that might creep into next year.
Our per the forecast that you've got right now yeah.
NSO. Thank you for those questions.
Mike Let me just take a couple quickly upfront and then I think you've got most of it.
For the first of your questions, which I think was about reinvestment.
As we said in January and we very very consistent with this.
We think we will be reinvesting about 30% of the savings.
For the efficiencies.
From that program into the business and that 30% number that can go up or down based off opportunities, but we think that number is still largely correct.
With respect to the operating profit numbers.
All of our numbers.
What we're what you're hearing from US on this call is us reaffirming our full year numbers.
So there certainly has been uncertainty in the year, but we believe that we are within the ranges that we laid out in the beginning of the year.
And then finally with respect to.
Efficiencies and kind of non linear growth.
We are expecting that.
Really in each of the business units. So we're really asking each of those segments.
To make sure that we are going to be able to increase margins and that comes in part from non linear I mentioned earlier in my call that you know when we think of.
Of Dws, we should.
I'm hopeful that you hear Intel of Sir.
Which is our platform for driving dws offerings that <unk> has some of our intellectual property. It has more of our intellectual property. After the acquisition of unified square, which are which we are incorporating some of the great.
Great capabilities into the Intel as their platform, but it also has third party.
Intellectual property that we are integrating into our platform same thing for cloud for day in the cloud World and in fact, the same thing has been true for a long time for a clear path forward, which although the majority of it is our IP contains third party IP as well. So we are focused on making sure.
Debt, we have if you will non linear growth and with respect to.
You know the numbers.
That comes across.
Labor as a percentage of revenue.
We had the lowest percentage of labor.
Versus revenue this quarter at least through 2016 and I'm not sure that we have we even kept that statistic before 2016, and we expect to drive that percentage down in each of the next several years.
So I hope I know that was a quick oversee about some of what you asked.
And then Mike overdue.
Sure. Thanks, Peter and Thanks, Anna for the question just a couple of other things I think Peter gave you a good synopsis on kind of our build partner buy and where that investment is coming or going to the.
The other elements that I would I would note to you is theres investments beyond that in the go to market resources. As an example to support growth, we talked a little bit about the investment in our associates getting them certified and trained allowed us to ultimately fill.
Still 39% of Rx internally, because we're investing in those people so.
All of that plus 1 of my remarks was about the.
The fact that part of the protection of the resource base that we have.
We've increased some salaries in certain regions to.
Again support the organization and really invest in the people. So it's not just.
Capital investments in the context of IP in software and in development of things. It's also about the resources scaling of those resources, which is also protecting our associate base from poaching and other things. So so that's pretty pretty helpful. You've got it right and on the margin.
Syed Q3 being in line with Q3 of the prior year in Q4 actually being.
Our growth quarter from our perspective against.
The sequential growth, but not necessarily against the prior year due to the license renewal structure that I mentioned earlier I don't think we're going to see a whole lot of impact from our perspective from an inflation point of view, which I think was the last part of your question. Our contracts are usually 3 to 7 years. So.
There is somewhat protected in regards to inflation and frankly I think what we're seeing from our pipeline is a willingness now to to get out and spend and I think people are really reinvesting into their infrastructure clearly with a hybrid work force.
Our primary focus obviously cyber being our primary focus in digitization being a focus so.
We feel pretty good about where we're positioned and don't expect to see inflation really cause any oscillation in our in our projections for next year.
Okay, Great Lucky you I wish I had that.
[laughter] contracts on that cost base.
I just had a second question.
Just on the M&A.
Environment could you just characterize what's that like for you right now with regard to I preach entity is an activity for.
Additional tuck ins and in particular with that positive free cash flow outlook and the low interest rate environment is that further emboldened are enabled on the M&A front.
Yeah, No. That's a great question I think I would categorize the M&A environment as <unk>.
Spencer for buyers.
And.
And of course, we are a buyer in this market.
But we also acknowledge that this is an expensive market for buyers.
So we're being very careful.
We would always be careful in an M&A environment, but I think this current pricing environment makes everybody or at least makes us look 2 or 3 times and make sure. We have the right acquisition Unifies square is a great example of that.
It was an expensive acquisition and the term of purchase price, but it fits our strategy perfectly.
The capabilities that it brings to our digital workplace services team.
Our immediate and apparent.
That's coming through in terms of the pipeline that's coming through in terms of new clients, we only share 1 significant client.
The cross selling opportunities are also immediate and the team there is a team that is.
Is working really well with our existing team and certainly is bringing additional skills.
Beyond unify square as I mentioned on the last earnings call. We have reviewed over 200 other opportunities.
I can tell you that.
We have several opportunities that we're looking at.
There are you know in that tuck in.
You know up in the tuck in size and they are largely currently and the digital workplace services space and in the cloud space.
Those are the 2 areas that we're really looking at those include capabilities. Those include consultants and advisory assistance in.
In those spaces.
We.
We feel good about the opportunity to find some of those but they are really needles in the Hague stack and so when we find them is.
It is very much.
Kind of we'll find them when we find them and if we can agree on the right terms and conditions, but we're actively looking in the market. There are things in our strategy. We can build but we think that it would behoove us to buy some of those capabilities instead.
But we're not going to do it unless we find that the prices range.
Right.
Yes look I think you hit all the pertinent points Peter.
You talked about the financing.
Aspect of that yes. The rates are good now and certainly if the right opportunity presents itself.
We think we're in a strong financial position, both cash wise and certainly.
From a credit rating agency and our ability to borrow theres no barriers on that front from from getting the acquisition that we want it just needs to be the right fit from our perspective and as Peter noted we are actively working that pipeline.
Okay. Okay, great. Thank you so much that's very helpful. Thanks.
Thanks, Peter Thanks Ana.
And our next question will come from Frank Jarman with Goldman Sachs. Please go ahead.
Yes, Hi, this is C N on for Frank Congrats on the results and thank you for taking my question I just had 1 on the pension liability you achieved your target of a $1.2 billion gross liability reduction this quarter, but the recent rate move now how should we be thinking about the size and the funded status of your plans today. Thank you.
Sure Peter I'll take that 1 if you don't mind.
Look I don't think from a.
Funded status perspective.
We're in really good shape, we're not anticipating to make.
Any contributions to the U S defined benefit pension plan as we've noted.
And as obviously why we undertook what we did.
That does not mean, we're not going to continue to look at opportunities as it pertains to removal of pension liability.
Certainly with the way rates are moving there can be some rate arbitrage we are.
In a fiscally very sound position to take advantage of that.
We are also in a defensive position in the sense that we're protecting our return on assets because thats, obviously funding future contribution so.
We're really just in AG and a really good spot. The funded status has improved we have seen a decline in the overall deficit.
Obviously, a sequential decline and a pretty significant decline year over year, and we will continue to look for opportunities to remove gross liability similar to what we did over the course of the last year and a half with day $1.2 billion of Av.
A reduction there we think there will be some opportunities specifically on the U S plans.
In 'twenty, 1 and certainly in 'twenty, 2 and we think theres some opportunities perhaps in 'twenty 2 for some of the foreign plan. So again from our perspective.
Cash contributions is no longer a concern and it's really just being on the front foot and taken advantage of any radar arbitrage to continue to de risk by removing that liability and continuing to invest wisely in regards to the return on assets. So those are the 2.
Aspects that will continue to focus on.
Great. Thank you.
Thank you Shannon and thanks very much for your for your question greatly appreciate it.
And this will conclude our question and answer session I would like to turn the conference back over to Peter for any closing remarks.
Thanks, very much operator, and I want to thank Mike for.
For.
Really.
At extraordinarily positive force in our company.
And I think that shows in these calls.
But that's that's also true of our leadership team our leadership team I mentioned, Eric Hutto earlier in this call Theresa program. Paul is responsible for leading the marketing and communications function, you'll see a lot more from us.
Around our marketing efforts as we really kind of make sure that the buying elements of our clients and prospects are aware of what we have and appreciate I think the strength of our capabilities and solutions. So last quarter for instance, you saw.
On this call me ask everybody to pay some attention to our new Investor Relations website, which as of last quarter was brand new.
We have followed that up by creating.
Creating an entirely new corporate website. This quarter. It went live for about 2 weeks ago.
And it is new from the ground up and we've got a new engine behind it.
Which will provide us added flexibility going into the future.
But it is a different look and feel it is a different way for clients to interact with us.
It is very much our storefront that doesn't mean that everyone, who buy services from US we'll do it digitally over the web although we do have a digital.
Purchase.
Engine that is spooling up but it does mean, we think almost everybody from a client or prospect standpoint will interact with us by looking at our capabilities through.
Through some of those web.
Descriptions and tools and assets.
And so boxes.
So we really would hope that everybody on this call spend a little time on that new website any questions about it or comments, please feel free to send them to me.
Send them to Mike or send them to coordinate Holden.
And you can rest assured that we're going to pay attention to it because 1 of the audience is we think that is looking at that broader web site, just our investor website.
For the people on this call.
So we thank you for doing that with that we look forward to.
Our next call and in the meantime, as you know from our client our Investor Relations team and for all of the team at Unisys, We stand ready to have a continuing dialogue with each of you. So thank you very much.
Okay.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
Okay.
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