Q3 2021 Unisys Corp Earnings Call
Good morning, and welcome to the Unisys Corporation third quarter 2021.
Earnings call, all participants will be in a listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Courtney Holben Vice President of Investor Relations. 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 third quarter 2021 financial results.
I'm joined this morning to discuss those results by Peter <unk>, our chairman and CEO and Mike Thomson our CFO.
Before we begin I'd like to cover a few details.
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 and we will be using this morning to guide our discussion as well as other information relating to our third quarter performance on our Investor website, which we encourage you to visit.
Third today's presentation, which is complementary 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 operations and that can make its profitability and liquidity results difficult to compare to prior periods anticipated future periods or to its competitors' results. These items consistent post retire.
Man that exchange and extinguishment and cost reduction and other expense manner.
Management believes each of these items can distort the visibility of trends associated with the Companys 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 <unk> 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-GAAP operating profit non-GAAP diluted earnings per share free cash flow and adjusted free cash flow EBITDA and adjusted EBITDA and constant currency for.
For more information regarding these metrics unrelated 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 factors are discussed more fully in the earnings release and in the company's SEC filings.
Copies of those SEC reports are available from the SEC and along with the other materials I mentioned earlier on the Unisys Investor website and.
And now I'd like to turn the call over to Peter.
Good morning, everyone and thank you for joining us to discuss our third quarter results.
During the third quarter, where we made continued progress executing on our strategy for sustained revenue growth and margin improvement by expanding our solution portfolio and enhancing our go to market efforts, while managing our workforce to successfully attract and retain talent in a competitive labor market.
We also increased gross profit and free cash flow year over year.
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 to a higher growth and higher margin business by enhancing and expanding our solution portfolio with a focus on proactive experience leveraging our recognized leadership position in the market and our Intel or serve empower.
<unk> platforms.
In the third quarter, we made progress toward these strategic goals, while exiting some contracts the warrant core to how we plan to grow this business.
With respect to the billed portion of our build partner or buy strategy. We have developed our experienced model office solution or X M. O. This offering analyzes data from multiple sources, including device experience tools, such as our power suite solutions, our cloud contact center platform.
And other satisfaction and sentiment tools Choi.
Two identify and remediate pain points and improve user experience.
This will help clients achieve business goals, such as maximizing productivity and improving employee engagement and will also streamline our support model by reducing a reactive service needs.
Additionally, we defined as began incorporating our second generation experienced level of agreement or X L. A framework into contracts, providing a more advanced persona based way for clients to assess the impact of our solutions are having on user experience. We believe we are.
Leading the market and advancing our second generation <unk> and our clients are responding positively.
We also filled several key leadership and architect wells during the quarter.
With respect to partnerships and dws, we have broadened our relationships with some leading device experience management partners to become channel partners. In addition to solution partners.
And our integration of unified square is progressing as we continue to actively assess additional opportunities to enhance our solution portfolio through acquisitions.
In the quarter, we signed the dws contracts with a global commercial real estate services firm.
Element of case management system, which will help the client moved to a centralized global model for this process and technology.
Also in the quarter Unifies square sign contracts with nearly 20, new logo clients, including consulting contracts in power suite software subscriptions focused on migrating to or managing zoom and microprose, Microsoft teams Ucas environments.
Moving to cloud and infrastructure solutions, where C&I, we continue to execute on our strategy of growing cloud in our targeted markets by leveraging our established credentials.
Forte and embedded security solutions to help clients transform their traditional I T O environments to effective hybrid and multi cloud solutions.
Revenue growth continued during the third quarter in C&I with cloud revenue, specifically growing 26% year over year.
As we noted on our last call in July we completed a new release of our cloud Fortunately program.
Since July we have continued to enhance the artificial intelligence embedded in house Forte with a specific focus on cloud spend optimization.
We're also utilizing predictive analytics to help clients avoid incidents and automated root cause analysis to remediate and prevent future issues.
Additionally, increased migration automation and our solution allows us to move significantly more workloads to the cloud more quickly at increased levels of reliability.
We are on schedule for a new release of the cloud for the platform with additional functionality in the fourth quarter.
We're also expanding our partnering with cloud forte, including enhanced integration with Google cloud, increasing our ability to deliver outcome based end to end cloud services to clients using Google cloud.
To help them optimize their workforce environment.
We have broadened our work with AWS and Microsoft Azure, increasing automation to enable a more seamless experience for clients with improved functionality, while also enhancing cost efficiencies.
We are assessing potential C&I acquisition candidates with a focus on enhancing specific capabilities and increasing geographic coverage.
And during the quarter, we signed a contract with a leading Mexican insurance company to design, a hybrid environment integrating public and private clouds and to perform related migration work.
Turning to enterprise computing solutions for ECS, our goal is to grow revenue through expanding the ECS ecosystem, while maintaining license revenue stability.
We are enhancing our existing services and platforms and developing new solutions to help clients manage their clear path forward environments.
We are incorporating advanced AI and automation into our application lifecycle management platforms and workflow oriented design indoor application development solutions.
We're also expanding the interoperability of our clear path forward systems, which are already able to be deployed in the public cloud via a clear path forward for sure to enable us in a hybrid and multi cloud environments.
Our IP led industry focused solutions, such as airport and elevate represent an additional opportunity for growth in ECS, we're partnering with software and platform developers to modernize their application development and to enhance our lifecycle management of these solutions and we were working with channel partners to them.
These industry applications into their solutions to increase our client reach.
We're also evaluating opportunities to acquire smaller companies that support a clear path forward.
We recently signed a contract with New Zealand's <unk>.
N V transport agency to extend our engagement to manage it infrastructure on a clear path toward platform that supports system is processing.
<unk> 25 million drivers license and 60 million motor vehicle transactions per year.
Turning to our broader go to market efforts, our total company T. C V was up 13% year over year in the third quarter and total HCV was up 30% year over year.
As we price contracts, we're aiming to offset our anticipated cost increases leading to the competitive market.
For labor.
Total company pipeline was also up 5% sequentially supported by growth in our proactive experience dws solutions and cloud solutions pipelines, which increase sequentially. Both on a dollar basis and as a percent of total pipeline.
We're increasing awareness and our new dws and cloud capabilities.
Eating frequently with industry analysts such as Gartner IDC Everest ISG and Hff's.
We have been recognized for our leadership in a number of areas.
We were recently named a leader in advisory firm I S trees provider lens study on the future of work in both managed employee experience services and managed digital workplace services in the U S. The U.
K and Brazil. In addition to other regional leadership recognition.
We were also named a leader in the next Gen private and hybrid cloud managed services by ISG in the U S. The U K and Brazil.
And were recognized by IDC as a major player in worldwide managed multi cloud services.
We have evolved significantly as a company and we're launching a global advertising campaign to help ensure that the market knows who unisys is today for.
We're undertaking a similar initiative aimed at attracting talent in key recruiting geographies.
We're also expanding the depth and breadth of content on our website and implementing a cross selling initiative to highlight our full portfolio of solutions across segments to clients.
The market for talent remains highly competitive, but our workforce management efforts, including compensation retention adjustments and increased associate initiatives, such as talent development internal mobility and focus on workplace flexibility have helped us to continue to attract and retain key resources.
<unk> needed to execute on our strategy.
Our last 12 months voluntary attrition was 15, 3%.
Which is significantly below the pre pandemic level of 17% in the third.
Third quarter of 2019.
Demand for open roles filled internally as a percent of total increased six points.
For the year to date versus 2020.
36%, reflecting the effectiveness of our internal development mobility programs and upscaling.
And referrals represent over 20% of total hiring on a year to year basis.
Our commitment to a D I as a bedrock of our people strategy.
<unk> was named a champion of board diversity for the seventh consecutive year by the form of executive women and.
And women representation as a percent of the leadership of the company has increased by three points from 32% as of 2020% to 35% on a year to date basis.
In conclusion I'd like to thank our associates for their ongoing efforts and supporting our strategy and progressing towards achieving the goals, we set out at the beginning of the year.
With that I'll turn over the call 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 during the third quarter, we continue executing on our strategy for sustained revenue growth and margin improvement by expanding our solution portfolio.
<unk>, our go to market efforts, while proactively managing the workforce and increasing gross profit and free cash flow year over year.
Overall, our year to date performance is in line with our internal expectations and we are reaffirming all full year 2021 guidance metrics as a result.
During the third quarter, we grew revenue in two of our three segments with.
With continued year over year revenue growth in both C&I and ECS.
Our ongoing enhancements to our cloud capabilities and efforts to increase awareness with industry analysts and clients continued to yield results with C&I revenue growth of one 7% year over year to $118 9 million in the third quarter.
This was supported by cloud revenue growth within this segment of 26% year over year.
One item to keep in mind going into the fourth quarter is that we expect our C&I revenue to be down year over year due to a timing issue associated with revenue recognition from a public sector client that benefited us in the fourth quarter of 2020 as well as some run off of traditional infrastructure work, that's not part of how we're.
Turning to grow this business.
We still expect C&I to be the fastest growing segment overall for the full year 2021.
The enhanced functionality associated with our ECS solutions, including clear path forward for sure and our focus on growing ECS services continues to provide benefits to the ECS segment.
ECS revenue grew one 8% year over year.
This growth was helped by higher license revenue than expected in part due to a contract being renewed for a longer duration than initially anticipated.
I think the fact that clients are signing eight new agreements for clear path forward operating system is a testament to the strength of the solution and the modernization roadmap that supports this offering.
ECS services revenue grew 1% year over year.
As we've previously noted we had expected the third quarter to be the lightest of the year in terms of license revenue, which we still expect to be split approximately 55%, 45% between the first and second half of the year.
The software renewal cadence is as expected and actually de risks the fourth quarter of ECS license revenue was more evenly distributed throughout the year with a lot less reliance on fourth quarter signings.
As a reminder, the prior year first half second half split was 40%, 60% with 40% of the full year segment revenue coming in the fourth quarter.
We expect overall 2021, ECS revenue to be roughly flat year over year.
With respect to Dws, we're moving into the next phase of our transformation of this segment with a heavy emphasis on our go to market implementation, enabling us to bring our enhanced experienced solutions to new and existing clients. We are transitioning away from some heritage contracts that were not core to how we're planning to grow this business.
We also saw some impacts related to supply chain shortages and both of these items impacted revenue, which was down four 7% year over year to $141 3 million.
As a result of all of this the total company revenue was down one 5% year over year in the third quarter to $488 million.
As I noted, though this does not change our expectations for revenue for the full year as this quarterly cadence was anticipated and was embedded in our guidance as was our expectation for year over year decline in the fourth quarter revenue due to the timing issues I mentioned, which is why we're reaffirming that guidance at zero to 2% year over year revenue growth.
Yeah.
The company backlog was impacted by the continued shift of our mix of business towards higher growth and higher margin solutions.
And the exiting of some non strategic contracts.
Additionally, during 2021, and we have seen the duration of contracts in backlog shortening as it did in 2020 and 2019.
As a result total company backlog with $3 billion as of the end of the third quarter relative to $3 3 billion as of the end of the prior quarter.
Type of solutions that we're shifting our mix towards our less capital intensive and have a shorter implementation timeframe, which we expect will lead this backlog to convert to revenue more quickly than it has in the past.
This is supported by year over year increase in ACD that Peter noted.
Of the $3 billion in backlog, we expect approximately $380 million will convert into revenue in the fourth quarter.
Moving to profitability third quarter total company gross profit was up year over year and gross profit margin was up year over year as well.
These results were supported by year over year improvements in C&I in ECS growth margins.
C&I gross profit increased 116, 3% year over year to $9 3 million and gross margin improved 410 basis points to seven 8% driven by the improvements to margin in both cloud and traditional infrastructure work.
ECS gross profit increased 28, 8% year over year to $97 million and gross margin improved 1360 basis points to 65% helped by the higher revenue I mentioned earlier.
Dws gross profit was $16 8 million relative to $21 6 million in the prior year period, largely driven by the flow through impact of lower revenue.
Dws growth margin was 11, 9% relative to 14, 6% in the prior year period.
As with revenue our year to date non-GAAP operating profit margin results are roughly in line with internal expectations and accordingly, we are reaffirming our full year 2021 guidance for this metric at 9% to 10%.
SG&A expense increased year over year in the quarter largely due to increased investments in our go to market efforts, primarily related to direct sales support and increases in non cash based compensation.
As a result total company non-GAAP operating profit margin was five 7% relative to eight 6% in the prior year period.
We anticipated additional investments in our go to market efforts over the next few quarters to support our growth strategy increased awareness of our enhanced solution portfolio and within the context of a highly competitive labor market across the it services industry increased compensation to retain and attract top talent we need to.
Our growth strategy.
Based on this we expect to be towards the lower end of the non-GAAP operating profit margin guidance I just mentioned.
Consistent with our discussions over the last couple of quarters I am pleased to report that we've concluded our cost optimization program and it is now fully underpinned the annualized savings associated with this program are at the high end of the targeted range, we provided which was $130 million to $160 million.
As I mentioned already the reinvestment of a portion of these savings has begun and will continue through the first half of 2022.
Our net loss from continuing operations was $18 7 million or 28 cents per diluted share versus $13 3 million or 21 per diluted share in the prior year period.
Non-GAAP net income was $6 9 million versus $36 8 million in the prior year period.
And non-GAAP diluted EPS was <unk> 10 versus 51 in the prior year period.
These GAAP and non-GAAP net income and EPS results are reflective of lower operating profit that I mentioned as well as higher taxes. This year due to the geographies in which the income was on.
As with revenue and non-GAAP operating profit margin our year to date adjusted EBITDA results are generally in line with our expectations and so we are reaffirming full year 2021 guidance for this metric at <unk> 17 in the quarter to 18.25%.
Adjusted EBITDA in the quarter was $74 6 million relative to $82 3 million in the prior year period, and adjusted EBITDA margin in the quarter was 15, 3% versus 16, 6% in the prior year period based on similar drivers as non-GAAP operating profit and margin.
Likewise as with operating profit, we expect to be toward the lower end of the guidance range in light of these investments in our team to support growth in a competitive labor market.
We continue our capital light strategy and our focus on integrating best in class offerings to enhance our solutions and optimize our development costs.
Our capital expenditures decline year over year again in the third quarter down 18, 4% to $26 1 million.
We now expect capex to be between 101 hundred $10 million for the full year 2021, which is lower than our previous expectation.
Free cash flow and adjusted free cash flow also continued to improve with free cash flow up 14, 9% year over year to $39 4 million and adjusted free cash flow up 36, 3% to $69 9 million.
These cash flow metrics were also up significantly on a sequential basis and we continue to expect to be free cash flow positive for the full year 2021.
We are continuing our efforts to further derisk our balance sheet, we completed a transfer of additional gross pension liabilities in October through a $235 million of annuity contract.
We expect a onetime noncash pretax settlement charge in the fourth quarter associated with this liability transfer of approximately $130 million or $1 94 per share.
Another positive balance sheet item to note is last week Moody's has resolved the positive outlook associated with our debt by providing an upgrade of our corporate family rating to be one with a stable outlook and our senior secured notes were upgraded to <unk> as well.
To wrap up our third quarter was consistent with our expectations and represents continued progress on our refreshed strategy and the achievement of both our short and long term financial goals and we look forward to continuing this progress in the fourth quarter with that I'll turn the call back over to Peter Peter.
Thank you Mike before opening the call for questions I would like to highlight some upcoming leadership changes that we noted in our earnings press release.
Mike will be taking on the role of President and Chief operating officer effective upon the hiring of a new CFO.
As you know Mike has played a central role in the significant financial transformation of the company since becoming CFO in 2019, including the substantial strengthening of the company's balance sheet Mike.
Mike has also played an important operational role in the company and he currently oversees our corporate development efforts and our strategy function.
I would also like to thank Eric Hutto, our current President and Chief operating Officer, who is leaving the company after six and a half years of service to pursue other interests. Eric has been instrumental in improving the financial performance of the company over the last few years.
And in the implementation of our new strategy and operating model as well as other elements of the company's business. During his tenure Eric will be leaving his current role on November 30.
We have begun a search for a new CFO and Mike will continue to fill that role until we have appointed a new CFO at that point, he will transition to president and Chief operating officer.
We'll assume eric's responsibilities on an interim basis until the CFO transition is complete.
As a reminder, I also served as president from January of 2015 until March of 2020.
We wish Eric success in his future endeavors, and look forward to Mike's contributions in his new role.
With that operator can we please open the call for questions.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone if.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Rod bourgeois from deep dive equity research. Please go ahead.
Hey, guys, Hey, guys. Good morning, and Hey, So first question about top line trends, particularly with with bookings.
So the the backlog I guess I'm wondering is there additional intentional.
Intentional backlog churn that should occur as you continue to shift your mix to these more attractive segments I guess I'm just wondering there seems like there's a lot of mix shift happening.
And impacting the backlog you exited some contracts this quarter is there more of that activity to come or is the bulk of that completed at this point.
Yeah Rod this is Peter thanks for the question.
There is a little more of that to come so when when there are a couple of things happening on the backlog number and Mike pointed out.
Several of them.
The first is there is.
Just there is some additional if you will field services revenue that is low margin.
That we are continuing to work with clients on.
And we're looking for a path to get to higher margin contracts with them really moving them into next generation.
If we do that's great. If it continues to be basically from us.
Not a successful endeavor.
Then we expect there'll be some more of that attrition of the lower margin work.
Not a material amount, but some.
Second thing that's happening around the backlog number as Mike also pointed out.
Is really a mix change in what we're signing up.
As well as a mix change in our pipeline.
So from a backlog standpoint, when we look at the types of work we're signing.
A bigger percentage of that is higher margin a bigger percentage that is the next generation work in our dws business and the cloud work and our cloud and infrastructure business. That's what we want that is the strategy of the company, but but those types of business tend to be shorter duration contracts.
At least initially.
And so you see our a C V or annual contract value, which is what we.
Measure as the.
Revenue in the first 12 months of signing a contract ACB is going up 30% while T. C V. The total contract value is going up 13%.
Good numbers, we like 13% up with like 30% up but you can see the balance is different and that's because.
The contracts at least to date or shorter term as we move into that new world. So that's why you know you have a little more effect on backlog.
That's helpful. Yeah, No that's very helpful and clear and I assume you should we assume that contract duration will continue to come down.
And given that the lower duration is not only.
This is continuing in your existing pipeline.
I think I think to a modest degree I mean as I'm looking at the average contract size that we have now I think that it's it's very close to where it will eventually stabilize so I think there's a little bit of that rod, but I don't think there's much left I think we're close to the average contract duration, we expect to get.
Okay, Great and then just on the operating margin outlook.
It seems that as you called out in your commentary your you've increased your go to market investments.
And I. It was interesting to me a lot of the other it services firms are just seeing a general increase in talent costs.
Wage inflation attrition and so on and it seems like that effect within Unisys is less pronounced perhaps in what's happening at other firms is that an accurate assessment, where your margin challenge. This year is more to do with go to market investments rather than a general increase.
And talent across across the board is that the right way to look at your your margin challenge this year.
So that's a really good question and it's one that we've actually done a lot of work on TD Ibrahimi, who leads our HR team.
Mike and others as well as myself, so really kind of.
Wanting to understand first of all we're on track.
So we're very specific about the guidance, we give we're reaffirming guidance that's on a revenue standpoint, that's on an earnings standpoint, as you know as as well as.
As an EBITDA standpoint, and so we're on track with our numbers.
And we're on track with the process. We expected. This year. So there are a couple of things going on for us beyond.
What I would consider the two surprises in the two surprises are increased labor rates and supply chain hindrance. If you want to talk about that so let me get back to the two surprises after I kind of set out the framework. So we always knew this year was going to have really two parts first half in the <unk>.
Second half, which is the way you should have a year. So we always thought two parts, but specifically in the first half of the year.
That was you know, bringing in and enhancing our leadership team.
Now that we have changed our organizational model as of January six of this year and in the first six months, we brought in six significant executives and they have brought in are members of their.
Our teams as well so leadership team started.
And the second thing that happened in the first.
Half of the year was really building out the functionality and the capability of what we expected to sell in next generation Dws and a next generation cloud the second half of the year. It was really devoted to building out our go to market efforts.
And those are underway and so youre seeing us spend more money around around sales resources youre seeing us spend more money as we put together.
Our new branding and advertising, which for Unisys is very important that's part of what we have to do as we move into the next stage. So so we are on track, but it has been a year full of change, which we expect it.
Now with respect to margins again, we're on track on our margins, but we have had two surprises and labor the cost of labor is higher.
Than we expected and that's true really on a global basis you know.
One of the things that has happened.
In a COVID-19 and post Covid World is.
Is the availability of people is actually higher.
Because you can now hire people to work remotely pretty much anywhere, but that's a good thing and the bad thing is that means they can work for anybody so.
The demand on resources is higher so we are seeing an increase in labor costs are we think we're handling that pretty well.
Our our turnover our last 12 months turnover is lower than it was in 19, which we think is the right compare.
We think that the increase in our turnover has been modest compared to some other firms in our industry.
But it's still getting getting to that point is still required if.
If you will a surprise upside to our cost structure.
And we're not.
And although we are making changes in pricing and we do believe that we have the ability to increase prices.
That's on new work on renewals as well as through cost of living adjustments in our existing price contracts.
Not immediate and it's not necessarily a complete one for one in a quarter or even in two quarters, but we think that we have pricing power. We have a handle on that the other change that has been a surprise is supply chain.
So we we are having issues getting all of the third party equipment and parts necessary.
To kind of fill our expected funnel and so that means some less revenue for us in the quarter.
In terms of getting third party product through our system, but more than the third party product revenue. It means our people are not as busy.
We think that's temporary.
And so we are.
If you will staffing.
To a slightly higher rate of supply chain than we currently have to deliver.
That's because we do believe the supply chain issues are temporary.
In the meantime that has increased our cost somewhat long winded answer, but I hope that helps right. That's super helpful and congratulations on the on the attrition.
Accomplishment there so.
I'll hand, it over thank you.
Yeah.
Nick.
Pardon me again, if you have a question. Please press Star then one.
Our next question comes from Joseph <unk> from Canaccord. Please go ahead.
Hey, guys good morning, and my congrats on the upcoming promotion well deserved.
Maybe.
Maybe a little early but here we are we're in November and I know, you're not providing guidance yet but.
How do you look into next year, when you look out there around the demand environment relative to this year the products are maturing.
And.
Just a few thoughts there on on the.
The setup I guess looking into 2022, and then I'll have a quick follow up.
Well Joe Thanks, Let me take the first part of that and then really let Mike take the second one of the functions as a company that has reported to Mike.
Is if you will our strategy and planning functions. So we just completed our what we call a long term plan, which is ours.
Well our strategy.
Both from an operation standpoint, as well as from a financial standpoint for the next three years. So Mike Mike will give you a little more color on that and as I said, he's he's been in charge of that now for a couple of years at the company with respect to the first part of the question about how do we how do we think about demand.
In part we feel that the demand in general in the marketplace is good and we think Thats a positioning that we are doing is better so as I mentioned to rods question. When we look at our.
At our not only at our sales and we see you know what we're selling when we look forward at our pipeline, we find a 5% increase in our pipeline and even more significantly when we look at the at the comp position of that pipeline.
We find mix shifting in the pipeline so our higher margin next generation and user experience piece of the dws pie. If you will is expanding as a percentage and an absolute dollars inside the pipeline.
The cloud versus cloud and infrastructure piece is expanding.
<unk> percentage and an absolute dollars in the pipeline.
And so that's really what our strategy is about.
In terms of growth at.
And in terms of getting to higher margin. So we think we think the demand based off our pipeline and what we're seeing in the market is there we think our opportunity again, the second half of the year has been about building out that go to market function. We think the opportunity for us to take advantage of that is there.
And then in in ECS, we're seeing increases in our services revenue, which has been a piece of ECS.
That we think is readily accessible.
And so we're pleased with that although we think that can increase.
More quickly as we move on for that so Mike over to you for the rest.
Sure Thanks, Joe and thanks for the compliment and in the intro here really appreciate your continued support.
Look I think it's certainly not by a mistake that I made a comment around both our short and long term results Youre right. Its a little early and we will obviously give our guidance when.
When we when we conclude the year and do next quarter, but look I.
From our perspective, we're feeling really good about where we're at right where we're entering this next phase in the construct.
Our go to market strategy, we're really doubling down on our efforts there as far as the communication of that strategy. The awareness of that strategy. The feedback that we've gotten from industry analysts and clients and what the pipeline looks like.
It gives us gives us some some real.
Uplift in where we think we're going so we feel pretty good about what we told you in January.
Yes, there are some general economic headwinds in the construct of the things that Peter mentioned workforce and supply chain et cetera, but the same things that everyone is dealing with in the industry I think for that things that we can control.
We feel really good about what we're seeing we feel really good about the solutions to continued expansion of those solutions and their acceptance in the marketplace. So I.
Don't think Joe that Youll see from us any wavering on the commitments that we that we had discussed in January of this year and again, we feel pretty good about where we're going here and we feel like we got it right and so we will continue to get through the remainder of this year continue.
To wrap up in the early half of next year with all of those.
Go to market efforts and.
Again, just really stay on track for the commitments that we've made.
That's great. Thanks, and then just one quick follow up but just kind of noticed rewinding. The clock here last couple of years.
You know a lot of the larger new wins.
Mentioned.
Historically were there was there was a pretty big mix and so state and local deals I know this quarter. You know you mentioned more on the enterprise side and it sounds like also the go to market.
Being broader like that is really more geared to enterprise versus.
State and local market I was wondering.
If youre seeing a potential expansion to your.
And as a result of this or how do you think about the new go to market versus previous.
You know.
You know your targeted verticals. Thanks a lot.
Yes, Joe that's a great question and you're right, so and I think part of that change is.
Is is due to the branding approach that we're taking.
And part of it is due to the enhanced go to market efforts. So there's no question that one of the things that Unisys has is a very very solid reputation.
And governments around the world, including in the U S State and local were not currently in the U S and federal.
Due to the sale of that team to SAIC, but where we're not taking that for granted.
But we're but we are expanding what we call our commercial sales.
Sales efforts, so efforts outside working for governments and as you can see from our numbers for the quarter the.
<unk> sector for us as a percentage of revenue actually grew significantly.
So you know as we are you know we're starting from strength, if you will with the government sector and that government reputation, but as we move out.
So you know the newer solutions, we're fine we're finding a lot of interest and support in the commercial sector. So that's an accurate observation Joe.
And the answer to that is we're embracing it.
We think that's terrific.
And Joe maybe one quick follow up for me on that as well. So we did have Wisconsin that came on recently.
Which are the state and we are seeing expansion in the state and local areas that we currently support and there is lots of work to be done there clearly I think there's been some I won't call it delay, but with all of the budget discussions and where things are going from that perspective, we do.
Do expect that we will see continued growth in that area and reminder, too that we always think about that public sector.
It is highly regulated complex environment, so not limited to state and local but we do feel like we've got some some really strong.
Support in that particular arena and.
I've always viewed that as a little bit of a tailwind for for that C&I business.
That's great. Thanks, guys.
Joe.
Again, if you have a question. Please press Star then one.
Our next question comes from Matthew Clinker from Maxim Group. Please go ahead.
Hey, good morning, Thanks for taking my question I think the only back to the supply chain challenges. Peter you mentioned, you're sort of still putting dollars behind it sounds like your confidence that.
But those are temporary and then maybe you see an end in sight and optical words in your mouth, but but what gives you the confidence what are you seeing or hearing in the market that.
Do you think we'll see some resolution to that some of those delays are going to abate.
Yeah. So that's a great question, Matt again, I think there's two elements for us.
In particular, one is that in.
Mike referenced both of them in his comments.
One reference one was with respect to if you will the winding down of some of the least profitable field services contracts. There is some stranded costs that you have there that that is not in.
You know a light switch and so what you saw this quarter, particularly in the dws profitability.
It was the result, not only of the revenue going away, but but a bigger percentage of profit loss.
If you will because of the wind down costs of some of those contracts, that's really independent of the supply chain issues.
So that's there as well that on the supply chain, we work very closely with our suppliers.
And you know I think it's fair to say, there's a scramble to make sure that those supply chain lines are.
Our solid we work we believe.
With the absolute best.
Players and partners in the industry, we've got very close relationships with those suppliers.
And so we do think that.
That's a temporary issue.
How long that takes whether it goes through the end of the first quarter of next year I think that's probably.
Accurate. So I think you can expect you know the fourth quarter and the first quarter to continue to have some supply chain constraints, but at least for us.
We think that by the end of the first quarter.
We should not see any significant supply chain constraints, we'll see I mean, it's a work in progress, but that's kind of the way we're modeling it.
And we are.
Making sure that our labor team is responsive to that environment, but we also think it's a little bit short term.
Got it alright, that's helpful and then maybe on the on the M&A front.
Cant remember, maybe I missed it but.
You did talk about possibly making acquisitions in the ECS service provider space.
Remember our commentary around that in the past, but but.
That's always part of the plan.
That you sort of a three year plan or.
Long term strategy that you set out recently or is that in that evolution of of how you're seeing the market.
It's always part of the plan, Matt you're exactly right I don't think we mentioned it before it's not a significant part of the plant. So I think we put it in the comments really for two.
To be holistic.
When we think about our our.
Our inorganic activities there the vast majority of those in our inorganic activities are earmarked at dws and at cloud.
We've only made one acquisition this year that unifies square that acquisition is progressing.
But when I looked at the pipeline of acquisitions that we might complete let's say in the next 12 months.
They continue to be focused on dws and cloud.
One of the things we have looked at and it was originally part of the plan was whether there are smaller shops.
Shops that are servicing our house Forte, a clear path forward.
Clients are and whether it makes sense at some point to roll up some of those smaller shops, because those shops are focused holistically on services for not only clear path forward, but the clear path toward family of applications and the applications that clients have that sit on top of clear paths forward.
That's always been part of the plan, it's never been a significant part of the plan because it is smaller roll ups. We havent closed any of those but you know for completeness. We wanted to mention that just so everybody knew that that could happen, but we don't expect that to be material at all.
Got it that's helpful. Thank you.
You're welcome Mike.
Our next question comes from John Chan, One tank from C. J S Securities. Please go ahead.
Hey, good morning, everyone. Thanks for taking my questions and congrats again on the promotion.
Just a quick question again on the supply chain stuff I was wondering if you quantified how much revenue you missed in the quarter.
I guess due to the shortages or delays in availability and do you expect to catch up to those.
So that pushed out back on by year end or so.
Yeah, John Thanks for the question I'll take the beginning of that.
And let Mike take the second part of that which is the catch up and when we would expect to have that catch up the first part of the question is actually not so easy.
That's clear.
You know about the third party.
Supply chain issues from where we can quantify.
What we were not able to take delivery of what we were not able to install.
We were not able to process.
But the bigger issue for us is not that.
That revenue per se, but the services revenue of our team and.
And kind of the lost opportunity to not do that so I can tell you that I do think it's a significant part of the of the relatively minor revenue shortfall this quarter.
Compared to what consensus provided so I think it's a it's a significant part of that it's just difficult to quantify because some of that is is lost services opportunities not just adding up the hardware and the software.
And so there you go Mike on ketchup.
Yes sure John.
I think Peter touched on it but I do believe that the catch up aspect of the direct component of the supply chain I E. Our field service technician getting the parts they need to fix.
<unk> an issue of our clients right. So that piece of it will come back.
And again, it's really just the longevity of how long it takes to get those particular parts in Peter did mention I think as well we have a pretty strong relationship with most of the part providers and equipment providers that we use in fact in a lot of cases, we're kind of going to market together. So I think we're pretty.
High on that list on on getting that equipment and or <unk>.
It's in place so that we can.
<unk> to service so that's the shorter piece on the comeback.
And I would expect that to be maybe a quarter or two in regards to the recovery there the other piece and I think Peter's right as well.
The catch up on the indirect piece is actually the one that is harder to quantify right. We don't know what decisions are being deferred from our clients because they can't get.
Certain equipment in order to transform their infrastructure et cetera.
Although I do think it will spark some additional reasons to continue with cloud transformation and cloud migrations right because when you look at that the on Prem ton of infrastructure component. It's certainly much more difficult to run so I think it plays in well too.
Our longer term strategy, but I definitely think that youll see at least a quarter or two of slowness in regards to the recovery of both the direct and indirect components of the supply chain.
Yeah, and just picking up from what Mike said, 100% agree and I think he made a really good point well, while we tend to think of the most direct impact of this being field services.
Dws business, there's also a direct impact in our cloud and infrastructure services business and.
And that is our supply chain constrictions.
Typically on the infrastructure side.
And I do agree with Mike as well that that that constriction.
Is likely to put more pressure on enhancing our cloud business, which is a good thing for us.
The cloud business and demand in general.
And that assumes that the cloud providers.
Can can spool up to meet existing demand.
Yeah.
Okay, great. Thanks, guys I appreciate that color and then the second question is I was just wondering you mentioned that the technology and the like.
<unk> was better than you expected.
Because of your extended our contract with more than I guess you had initially thought you were what was the magnitude of that increase in kind of.
Just to clarify you don't expect to change in your Q4 renewals as a result, but.
Yeah, I'll take that if you don't mind, Peter So Jon I'll talk about it in the construct of term right. So the initial expectation for that particular client was a five year contract renewal and they ultimately re upped for eight years. So again I think as I mentioned in the comments.
It's from our perspective, a really good indication.
The longevity of the clear path forward operating system and the confidence that the clients that use that operating system have in it and a testament I think to the roadmap for that particular solution. As you know we've done quite a bit to it over the course of the last three to five years and modernizing it.
Having it ready to run on Microsoft Azure or X 86 machines third party open software sourcing et cetera, So so really.
Really strengthened that that product.
It is not a pull forward right, it's not like we're stealing from Q4 two.
The increase Q3 in that regard that was.
An individual contract that we expected to sign in Q3, and it just signed for a longer duration than anticipated.
Okay, great. Thanks for that color and then my final one Peter you mentioned your dealers are seeing some opportunities in the C&I.
Segment in terms of acquisition can you just give us a little more color as to what capabilities, you're looking for and I guess, what what actually is available in the multiples that are out there.
Yeah, So happy to.
We continue to look at both the detailed U S. In the C&I space again, it is more a capabilities play for us that are specific revenue play at this point.
We really like what we're seeing in unified square in terms of filling out those capabilities at dws, We think that was an excellent acquisition.
We are looking at a couple of more capability plays in Dws, and then with respect to cloud.
You know, it's it's an interesting view there are we are.
Looking at specific capability plays we believe that going forward for it services companies like us they'll.
They will continue to be expansion on the infrastructure side of of cloud if you will.
The managing migrations the managing the data moving data from from one.
Cloud to the other optimizing the cost for our companies on the cloud. We also see really an expanded opportunity around application not only application modernization, but new application development for cloud optimized applications.
And so as you think about our acquisition framework.
One of the things that I think you can expect to see is really filling out and enhancing that application modernization and application development capability. We have some of that in house, because we think about the future we think about where the demand in cloud will be.
Not just now but over the next two to three years.
You can see us focus on building up that application side of the cloud pretty significantly.
And John maybe I'll, just add one thing there as well.
Peter covered the capability side, but Theres also some geography play in regards to that as well strengthening certain presence in a certain region.
And then getting some scale through doing that.
As well from a resource perspective, whether that's advisory or to Peter's point, the skill sets around apps development modernization migration et cetera. So.
So again.
Good.
<unk> targets out there you asked a little bit about the multiples.
Okay.
But we're not acting just for the sake of back to kind of think I hope, we've made that clear to everybody.
On this call and I think our actions are pretty clear.
Our next question comes from Anja Soderstrom from Sidoti. Please go ahead.
Hi, and thank you for taking my question I figure a lot of good questions asked already but I'm. Just curious well then you were talking about that and.
You'd see a little bit more about that but the average contract value was higher and you alluded to sort of contracts there how sticky are those contracts for yeah.
That's a great question.
In part that's we'll see how sticky those contracts are you know looking at the deals we have signed and that it is to be expected because again when you're dealing with next generation cloud work and you're dealing with next generation.
<unk> work.
Youre also doing things for clients that haven't been done before.
So this isn't just a you know a new source of increased margin and revenue for us, it's new value to the client.
We do expect over time that those will result in a longer term more T. C V focused contracts because we think that the value of those contracts is gonna be obvious. So we actually feel very good over time about our expanding if you will the relative race.
Seo with T C V to E C V in that business itself.
But it's going to take a little while to do that Mike thoughts on that.
Yeah, No I think that's right Peter.
Clearly on if some of these contracts have option years on the back end, we typically don't count them in the construct of what we're discussing here and a lot of these are moving more and more into SaaS based contracting models. So hence the shortening of the duration there quicker.
Quicker implementation based on the solutions that we're actually offering bringing that to revenue sooner in the lifecycle less capex to bring it on all of those I think are favorable things but.
I think Peter hit the most important thing here the whole solution is geared towards profitability of our clients and if we're making them more successful and more profitable. We expect that that's going to be a very sticky scenario in regards to just extending the life of those contracts and from our perspective hopefully.
Spinning the door for us to have multiple contracts and expand the relationship even further.
Okay. Thank you that was all for me.
Oh, thanks very much.
This concludes our question and answer session I would like to turn the conference back over to Peter <unk> for any closing remarks. Thanks.
Thanks very much.
No we have gone a little long on this call. So I won't belabor closing remarks other than to thank you everybody.
For the really really strong questions.
To remind everyone that we have more information than ever on our Investor Relations website.
And that we remain available to you for follow up questions. So with that thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].
[music].
[music].
[music].