Q1 2022 Unisys Corp Earnings Call
[music].
Good morning, everyone and welcome to the United States.
Corporation first quarter 2022 earnings conference call.
All participants will be in a listen only mode should you need assistance at least to know a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question at that time, you May Press Star and then one using a touchtone telephone to withdraw your question you May press Star two.
Please also note today's event is being recorded.
At this time I'd like to turn the conference call over to Courtney Holben, Vice President of Investor Relations.
Please go ahead.
Thank you operator.
Everyone. This is Courtney Holben, Vice President of Investor Relations. Thank you for joining us.
Yesterday afternoon, if that's released its first quarter 2022 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 that we will be using this morning to guide our discussion as well as other information relating to our first quarter performance on our Investor website, which we encourage you to do that.
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 operation.
And that can make its profitability and liquidity results difficult to compare to prior periods anticipated future periods or to its competitors' yourself.
These items consist of close to retirement 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.
With prior or future period results.
The following measures are often provided and utilized by the company's management analysts and investors.
Comparability of year over year result, as well as to compare results to other companies in our industry non-GAAP operating profit non-GAAP net income and 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 that 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.
Unisys 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 expectation. These.
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 other materials I mentioned earlier on the Unisys Investor website.
And now I'd like to turn the call over to Peter.
Good morning, everyone and thank you for joining us to discuss our first quarter results. Our strategy is gaining traction with clients and prospects are responding positively to our expanded and enhanced solution portfolio demonstrated by increased ACB and pipeline year over year.
First quarter financial results were impacted by anticipated ECS renewal timing and the exiting of nonstrategic dws contracts in 2021, but were largely in line with our expectations.
Road market knowledge of our higher value offerings is growing and we expect our marketing and sales efforts to further increase awareness and differentiation.
While there is still work to be done to achieve our goals for the year. We are encouraged by the significant increase in new business signed in the first quarter.
And are excited by the prospects for the business, Mike will provide detail on our financial performance, but first I'll give some insight into the business.
Starting with digital workplace solutions or dws, we expanded and enhanced this business significantly in 2021 to offer higher growth and higher margin user experience based solutions.
We are winning contracts with new clients looking to transform their digital workplace with dws ECB growing 65% year over year in the quarter.
While our financial results in the quarter were impacted by non strategic contracts exited in 2021, given the robust industry demand for Gws. We believe there is significant opportunity with new clients.
During the quarter, we continue to upgrade our solutions to better meet client needs. We matured our experience muddle office or X M O offering and now have multiple clients under management with several others in implementation stages.
We are also integrating increased automation into our offerings, including within experience as a service and tower suites.
For instance, in our power Sweet collaboration security and governance tool, we are automating and user complaints to eliminate the need for interaction with our it support this will improve user productivity, while ensuring compliance with changing global governance needs and unique regional requirements.
We have also enhanced our analytics solution, which helps clients assess their user experience progress and helps us improve our productivity and ultimately on margin.
As I mentioned broad market knowledge of our higher value offerings is growing.
Industry analysts such as Gartner IDC Everest I S G and H F. S are recognizing our digital workplace solutions transformation.
And we were recently named as an innovator by Amazon and their multi sourcing service integration.
During the first quarter. We were also nominated as finalists in six service Desk Institute Award categories, and we were the winner in two in both cases, the most of any provider.
Additionally, our global service desk was recently certified to the help desk institutes.
Support Center, a certification program, which validates the maturity of our advanced capabilities.
Client activity to our dws portfolio has been highlighted by multiple recent contracts for our full suite of solutions, which include modern device management proactive experience seamless collaboration intelligent workplace services and workplace as a service for example during the <unk>.
First quarter, we signed an expansive new logo gws contract with a global technology company that engineers consumer products and goods.
As an example of success with cross selling during the quarter, we signed a contract with a major Latin American financial institution that was already in ECS client to provide a wide range of secure digital workplace solutions as well as cloud and infrastructure solutions.
And that client win is a good segue to discussing our clouded infrastructure solutions business in which we drove year over year revenue growth during the first quarter.
C&I revenues grew 7% year over year and cloud revenue, specifically grew 43% year over year.
C&I ACB also grew significantly in the quarter and was up 75% year over year as with Dws. We believe that there is significantly more opportunity to grow our cloud and infrastructure business.
During 2022, we are focusing our capability development efforts in this segment on enhanced cloud native application development cloud security and artificial intelligence machine learning operations. During the first quarter, we refined our Dev ops framework aligning the applications.
Lifecycle capabilities across Unisys and also aligning with Hyperscale are based micro services.
We also now have our service ops automation development engine in place as well as our service intelligence platform.
And we are leveraging data analysis to help our clients detected analyze problems in their it environments.
As an example during the quarter, we signed a contract with a global marketing and communications company to migrate the client's largest European data center to the public cloud supporting that client strategy of increasing operational efficiency security and agility.
Turning to enterprise computing solutions or E. C. S. Our goal has been to grow revenues through expanding the ECS ecosystem, while maintaining license revenue stability during.
During the quarter, we took steps to help clients modernize their clear path forward operating systems by releasing a new version of our agile business suite development environment with increased platform interoperability.
We also are expanding some of our key industry solutions to address the diverse workflow centric needs of our clients.
For instance, in travel and transportation, we launched the development of expanded data analytics capabilities within our cargo solutions that we referenced on our last call.
During the first quarter, we signed a renewed and expanded contract with a provider of information technology services to the air travel and tourism industry in Asia.
We also signed a new scope contract was one of the Uk's largest financial services organizations to deploy new servers, which doubled their infrastructure and strengthen their digital resiliency.
As we look across the company our client wins indicate that the transformation of our solution portfolio and go to market approach undertaken during 2021 is gaining traction and leading revenue indicators grew significantly during the first quarter.
Total company ACB grew 43% year over year supported by the growth I noted, an ACB for dws and C&I.
Total company <unk> was also up 5% year over year in the quarter, although given clients increasing preference for shorter duration contracts, we are providing more detail on ACD.
Total company pipeline grew 31% year over year and was up 24% sequentially.
Dws pipeline increased 14% year over year, and 29% sequentially within that the pipeline of targeted and user experience solutions more than doubled sequentially and year over year.
C&I pipeline grew 40% year over year and 28% sequentially.
Within that cloud specific pipeline more than doubled year over year and increased 43% since year end.
We are pricing new contracts to offset anticipated cost increases related to the competitive labor market and the weighted average expected gross margin associated with contracts signed in the first quarter was higher than the prior year period.
We see more upside for our go to market activities broad market awareness of our expanded and enhanced solution portfolio is growing.
We are increasing our third party adviser and industry analysts team to help generate advocacy and increase the quality and size of our pipeline.
We're also expanding our direct and indirect sales teams to generate new clients accelerate our market penetration and growth pipeline and ACB.
We are deploying and account based marketing strategy to target our highest value prospects with a focus on closing contracts with new logo clients.
We evacuated targeted cross selling campaigns across our existing client base to increase revenue from this group.
We're also driving increased awareness through our digital advertising campaign focused on our dws and C&I business that launched in the fourth quarter of last year.
Further to this and our new branding strategy effort is underway. Once this is rolled out which is expected to be in the second half of this year. It will differentiate unisys in the market and increase brand awareness.
Turning to workforce management as we all know the market for talent is highly competitive.
Our voluntary attrition in the first quarter on a last 12 month basis was 18, 6%.
Slight increase from corresponding pre pandemic levels of 17, 2%.
Our talent attraction and retention initiatives are helping address the competitive nature of the market and we expect voluntary attrition to stabilize over 2022.
Our focus on creating opportunities for our associates through internal mobility and Upskilling programs resulted in a 30% internal fill rate for the first quarter above our goal of 28% for the year.
We are also leveraging referral based hiring which increased to 22% in the first quarter continuing the positive trend of increasing every year since 2019.
With respect to wage inflation, we continue actively reviewing our workforce and focusing compensation adjustments on the capabilities and rules that have been identified as critical in achieving our short and long term strategic goals.
Turning to ESG, our increased focus began to be recognized in 2020, when I S. S upgraded us to prime status.
During the first quarter of this year, we received an upgrade from MSCI to an a rating and this month, we were upgraded to a gold rating by eco basis, putting us in the 94th percentile of companies ranked.
We also met and exceeded our 2026 objective for a 75% reduction in greenhouse gas emissions achieving this objective five years early with an 80% reduction.
We are now turning to our net zero goal on which we will provide more color next quarter.
In conclusion, we are seeing positive receptivity to our solutions, we have more work to do to increase awareness and we believe our marketing and sales initiatives will be important in accomplishing this objective.
With that I will turn the call over to Mike to discuss our financial results. Although first I would like to take this opportunity to thank him for all of his contributions to the company in his role as CFO as this will be his final earnings call in that position.
As we previously announced we have now hired a new CFO effective may 2nd and Mike will transition to his new role as President and C.
I am confident that the leadership deep company expertise commitment to excellence and collaborative spirit, Mike has demonstrated as CFO will position him for success as he takes on his new role and I look forward to working with him in this new capacity.
We are also excited to welcome Deborah Mccahon as Chief Financial Officer to succeed Mike that will join US next week from Dun and Bradstreet, where she most recently served as treasurer and senior Vice President of Investor Relations and corporate SG&A.
That brings significant experience and providing financial guidance to complex public and global multibillion dollar organizations across a variety of industries, including technology services data and telecommunications I know she is looking forward to working closely with our investor community as we continue to advance our comp.
With that over to you Mike.
Thank you Peter and good morning, everyone. 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 our strategy for 2022 is beginning to gain traction we were encouraged by the significant year over year increase in new business signings in the quarter and we expect momentum to accelerate in the second half of the year as a result of our marketing and selling initiatives that are designed to increase awareness and differentiation of our expanded.
And enhanced solution portfolio.
We expect our focus on our go to market efforts to translate into improved revenue growth and profitability over the course of 2022 and into 2023.
Our reported financial results were generally in line with our expectations for the quarter and we believe that the excitement felt internally and externally about our solutions and our strategy is beginning to manifest themselves into positive momentum.
This momentum is not necessarily reflected in the year over year compares as revenue and profitability in the quarter were impacted by a few known headwinds specifically the anticipated clear path forward contract renewal timing and the dws private label field service contracts that we exited in 2021.
Neither of these elements impacts our long term strategic objectives.
That being said I'll highlight the impact as I walk through our financial results.
Starting with revenue, which we had indicated on our last quarterly call was expected to be down low double digits year over year and ended up being down 12, 4% year over year roughly in line with this expectation.
On a constant currency basis revenue declined 10, 3% year over year, which was better than consensus estimates, which do not explicitly account for currency.
ECS revenue was slightly better than internal expectations for the quarter at $121 million due to a contract that was signed for a longer duration than originally expected.
As a reminder.
<unk> revenue was lower year over year due to fewer contracts being scheduled for renewal in the first quarter as opposed to renewal rates themselves, which remain over 95%.
The renewal schedule for the rest of the year is expected to result in revenue for Q2 through Q4 being down approximately $10 million in the aggregate year over year.
With respect to dws now that our base portfolio of integrated experience offerings is established we are moving into the next phase of our transformation with an emphasis on increasing market awareness to grow our market share through new business signings and increasing wallet share by expanding solutions, we bring to our existing.
Clients.
In addition, we will continue enriching our solutions as well as the delivery of insight to enhance our clients' productivity.
Throughout the remainder of this year. We will also continue to feel the impact of the roll off of the non strategic contracts that we exited in 2021, which had an impact on revenue of $26 million in the first quarter and will impact the remainder of the year by $56 million $24 million of which we expect in the second quarter.
New business has begun growing but that growth did not yet offset the full impact of the fully mature field service work exiting.
The resulting dws revenue in the quarter was $125 million, which was down $18 million year over year and was one of the key drivers of the total company revenue decline.
Excluding the impact of these field service contracts Dws revenue grew 7% year over year.
We are encouraged that we recently signed multiple new logo contracts, which include a full suite of dws solutions, indicating that our portfolio is aligned to the market demand and that prospective clients are seeing us as a full service end to end provider.
This also serves as a proof point of our strategy and our ability to move up the value chain and start to shift our topline mix to higher growth and higher margin offerings.
While we are encouraged at this early stage of our transformation, we remind you that the core of this business is based on longer term contracts that relate to our heritage field service business.
So the opportunity to convert the existing base is directionally tied to renewal schedules that occur over the next several years.
Excluding both the dws contracts, we exited and the ECS impact. The total company revenue grew 3% year over year and was driven by continued momentum in our cloud business.
Similar to Dws, we continued to enhance our cloud capabilities and expand our efforts to increase awareness and differentiation with industry analysts and third party advisers as to those capabilities.
We're beginning to see expanded opportunities to compete and grow our pipeline.
Year over year revenue growth for our C&I segment was 7%.
The segment revenue was $129 million in the quarter, which now represents more than one quarter of the total company revenue.
The growth in C&I was driven by cloud revenue growth within this segment of 43% year over year, highlighting the demand for our solutions. We believe will continue to penetrate this highly competitive market.
As we look to the rest of 2022, we expect to see improving revenue trends as we move beyond the headwinds of the exited contracts and the new business begins to benefit more significantly from the go to market initiatives currently in progress.
As highlighted on our last call, we expect full year ECS revenue to be down high single digits or low double digits year over year due to the anticipated renewal schedule.
Our first half second half ECS license revenue split is still expected to be approximately 35% and 65% in the front half and back half of 2022 and approximately 15% of full year ECS segment revenue is expected to be earned in the second quarter.
Supporting these overall revenue expectations are the ACB in pipeline detailed Peter provided as well as our backlog.
The total company backlog as of March 31 was down slightly at $2 9 billion versus $3 billion at year end.
As we've noted clients continue to prefer shorter term contracts and this impacted the aggregate amount of the backlog.
The contract duration be consistent year over year backlog would have been flat versus our year end level.
We're also expecting backlog to increase over the course of 2022 for the same reasons that I noted with respect to revenue.
In addition, the type of solutions that were shifting towards our less capital intensive and have shorter implementation time frames, which we believe will lead to quicker conversion of backlog to revenue than we've seen in the past.
Of the $2 9 billion in backlog, we expect approximately $370 million will convert to revenue in the second quarter of 2022.
Factoring all of this in we expect slight year over year decline in the second quarter of total company revenue likely in the low single digits with accelerated revenue growth in the second half of the year.
While this inherently means that theres more work to be done to achieve our full year goals, we're still expecting to be at the low end of our 2022 revenue guidance of 5% to 7% year over year growth.
Moving to profitability.
ECS and Dws revenue results I'd, just highlight also flowed through to profitability in the quarter with ECS being the primary driver.
First quarter ECS gross margins decreased 940 basis points year over year, and dws gross margins decreased 60 basis points year over year.
As a reminder, ECS cost are relatively fixed both year to year and throughout the year given that the key components of cost or labor to support the platform and the amortization of software development costs. So the timing of license renewals can have a significant impact on profitability, which was the case in the first quarter.
Looking forward, we expect similar ECS cost of revenue in 2022 as in 2021, and we expect this to be relatively evenly split across the remaining quarters in 2022, each of which are expected to be approximately $10 million higher than in Q1.
In C&I, we took charges associated with three contracts in the quarter that are expected to be onetime in nature and resulted in gross margin for this segment being down 280 basis points year over year.
Excluding the impact of these C&I gross margins increased 240 basis points year over year.
We expect C&I margin to increase in the second quarter and in subsequent quarters in 2022, as we move beyond the impact of the charges taken in the quarter and we are starting to recognize the benefit of some of the optimization work that we began last year.
As a reminder, our optimization work is ongoing and primarily focused on increasing standardization and adding automation across our solutions, which is expected to improve efficiency and scalability overtime.
Segment gross profit margins flow through to total company non-GAAP operating profit margin, which was negative three 2% and two adjusted EBITDA margin, which was seven 7%.
While the C&I charges arose during the quarter. We had noted on the last earnings call that in addition to the ECS license impact we're anticipating an overall drag on operating profit as we continue investing in our go to market initiatives required to support our strategy as well as investing to retain and attract top talent within the <unk>.
Text of a highly competitive labor market.
We have recently had some successes in engaging with clients to revisit pricing in cases, where labor and other macro factors are contributing to pricing pressure and we're seeing increased receptivity of clients acknowledging those macroeconomic conditions and working with us to offset those internal cost increases.
We're expecting profitability to improve in dws and C&I in the coming quarters of the year.
Given the ECS renewal schedule, we expected this to translate to total company non-GAAP operating profit margin and adjusted EBITDA margin being down approximately 450 to 550 basis points year over year in the second quarter.
We then expect these two metrics to be up year over year in the third and fourth quarter.
Based on these expectations, we're reaffirming our full year non-GAAP operating profit margin guidance of nine five to 10, 5% and adjusted EBITDA margin guidance of 18% to 19% and as with revenue. We currently expect to be toward the low end of these ranges.
As our net loss of $57 3 million or <unk> 85 per diluted share improved versus a net loss of $157 8 million or $2 45 per diluted share in the prior year period as a result of significantly lower pension expense this year.
The revenue and profitability items, we've discussed resulted in non-GAAP net loss of $27 3 million or <unk> 41 per diluted share versus non-GAAP net income of $29 8 million or <unk> 46 per diluted share in the prior year period.
We continued to execute on our capital light strategy and our focus on integrating best in class offerings to enhance our solutions and optimize development cost.
Capex in the quarter was $19 million, which was $9 million or 32% lower year over year.
The lower Capex benefited cash flow, we continued to improve with free cash flow this quarter being 19 million better year over year.
As a reminder, we expected approximately $10 million to $15 million in remaining cash payments associated with actions taken in the optimization program, we completed in 2021.
$4 million of this fell into the first quarter and the remaining amounts are expected to fall roughly evenly over the remaining quarters of this year.
Our net leverage remains low and we have a healthy cash balance.
Excluding the deficit for our U S qualified defined benefit pension plans for which we do not expect to make additional contributions our net leverage is <unk> nine times and our cash balances of $491 million as of the end of the quarter approximately double our working capital needs.
Stepping back while many of our year over year comparisons on financial reporting metrics were challenging this quarter. We don't believe that this tells the full picture of the progress, we're making with our expanded and enhanced solutions portfolio.
We're excited about the traction we've already seen in relation to our strategy and we're highly focused on converting the momentum we're seeing in to improved revenue and profitability over the remainder of the year.
Before I turn the call back over to Peter I'd, just like to thank all of our investors and stakeholders for their engagement over the last several years I've enjoyed our discussions and look forward to remaining connected for my new role with that I'll turn the call back over to Peter Peter.
Thank you Mike with that operator can we please open the call for questions.
Ladies and gentlemen at this time, we'll begin the question and answer session to.
To ask a question you May press Star and then one using a touch tone telephone.
To withdraw your question you May press Star two.
If you are using a speaker phone, we do ask that you. Please pick up the <unk>.
Handset before pressing the numbers to ensure the best sound quality. Once again that is star and then one to join the question queue.
Momentarily to assemble the roster.
And our first question today comes from Rod bourgeois from deep dive equity research. Please go ahead with your question.
Great. Thank you Hey, So you had previously conveyed that Youre clear path forward license renewals would be soft and they were in.
And that definitely weighed on revenues and margins, but but not not really a surprise there.
<unk> going into the report knowing those timing factors. We were most interested in hearing about your sales and marketing progress and your bookings results. So.
So I don't want to read too much into the bookings HCV growth of 43%, but I also don't want to Miss what's underneath that year over year bookings growth and also what drove the big jump in your sales pipeline and just seemingly over the last three months.
No.
Can you can you characterize the composition of the increased HCV and also of the recently increased pipeline.
Specifically it would be helpful to know if there were an abnormal amount of large deals that drove the ACD in pipeline increases or if.
Your.
You improve revenue.
And bookings pattern is a function of.
A pretty diverse set of deals can you just characterize what's happening in the composition there.
Yes, Rob this is Peter Thanks for the question I guess, let me, let me try to take them in order.
With respect to the revenue you're exactly right. So the revenue number was not.
I'm not actually a surprise.
If we actually look at what we had forecasted.
Which was kind of low teens in terms of year on year decline, we came in at $12 four.
And when you look at the currency situation that the currency went against US our revenue actually beat.
Expectations of our analysts as a whole. So we really think is on the revenue side, we came in kind of as expected.
And that's true by the way with respect to the clear path forward portion of revenue. So clarify portion of revenue on a clear path forward drove the year on year declines in revenue.
It was actually slightly higher.
And then with what we anticipated so whereas there were no surprises what is higher by much but that's why we really don't have a surprise on the revenue side.
With respect to the sales side, I guess I'll kind of a profit now you didn't raise it.
We did have.
Some surprises on the profit side and those were negative surprises those were largely driven by three contracts in our cloud and infrastructure space.
Where we had a software development glitches.
Two of those three were dependent pretty much solely on sub contractors.
And we're taking the one time write offs now.
I'll deal with those subcontractors lately.
One of those.
<unk> was frankly, not a subcontract.
It was a house, but it was one specific contract.
It shouldnt be a surprise to anybody on this call that we devoted substantial resources in the fourth quarter of last year to acquire Coffey.
Acquisition of <unk>.
What was meant to do a lot of things.
Significantly increase the application capabilities of our cloud applications cloud infrastructure team, which is doing that also in the future to decrease the reliance on subcontractors and application development.
We think thats the things the three contracts that bit us in the first quarter.
Obviously, when you take out when you take a write off like we did that is intended to be the entirety of our expected losses on those contracts.
The acquisition of the coffee gain was was to kind of put us in a materially different position going forward on those software development type efforts with them.
The specific question Rod U S.
About what is the insight behind the 43% increase in HCV.
A 5% increase in TCE.
And how does that really look when we get into the pipeline for dws as C&I. Let me review some of what I mentioned in my opening comments and then provide some more color.
So let's look at Dws first.
Dws.
On the <unk> versus <unk>.
As we were giving a lot more detail in pay TV, we actually have been mentioning that for a while that's not a change on this call. We think the ACB number essentially.
Or useful again.
ACB.
43% for the year, the GCB went up 5% for the year, but just to give you. An example, the ACB as a percentage of <unk> for the <unk> for the quarter was 65%.
And we are expecting for the year about 50% so so.
Average.
Length of contracts in our industry is going down.
That's true for us as well as becoming more if you will of SaaS type of world, although not necessarily in the SaaS contracts that you would see in a license situation.
And as that happens the ACB numbers of the TCE numbers begin to converge.
And so we are giving a lot of detail on HCV, but thats the reason why.
When we look at dws.
The the ACD increase year on year with 65%.
That's really good.
And when we look at the pipeline.
We see that the year on year increase of the pipeline for Dws was 14% increase in the qualified pipeline all of the numbers I'm, giving you our qualified pipeline numbers and the sequential increase was 29%.
Now when we look under Neath that number rod to the experience or if you will.
Higher margin.
Newer offerings.
Our pipeline has increased year on year and sequentially more than 100%. So that's exactly what we want.
Will it take a little while to get.
The majority of our revenues into the next generation of <unk>.
Dws, yes, it will we have a pretty large built in base of older Dws work. It we simply just.
We're not we're not embarrassed about that we're not afraid of it we're trying as hard as we converted to the new stuff.
But I will tell you interestingly.
What we're learning is we're having a better.
A better time of selling the newer next generation.
Experience services to new clients and existing clients that is not what we expected.
<unk> the existing clients to convert more seamlessly and some of those existing clients with us honestly because of the pricing.
They do not want to change from that bare bones price.
That's not typical of the market is kind of typical of that client base. So we're having much more success in the market.
That means that the sales and revenue growth is growing a little more slowly than we want it and that challenges sales and revenue growth for the year, but we think that all of the indications are we're moving in the right direction. So that's the dws side of that.
On the C&I side of it again for the quarter HCV increased 75% and then let's look at the qualified pipeline for that the qualified pipeline. We have now in C&I is a 40% increase year on year.
28% increase sequentially and once again, if you will the next generation of that team, which is the cloud piece of cloud and infrastructure that pipeline both year on year and sequentially is more than 100% larger.
And again, it's the same dynamics.
We still have a substantial portion of that cloud and infrastructure business in traditional infrastructure.
And we are we are.
Evolving that team.
To be more cloud base that evolution was helped by the acquisition of Coffey game.
That is helpful.
More new signings, which are heavily weighted in the cloud space. So it's a journey.
And it's a journey that we're on and I think we're excited about that Sir.
Hey, Ron its Mike.
And Peter just gave a pretty detailed answer there and I think you've probably got most pieces of your question I would like to just address specifically what other elements.
No real abnormal deals in the mix I think the size of the deals are as expected and consistent with what we thought Peter gave you a good rundown on the mix and I guess the point I would call out is similar to his and that is in the things that we are really looking forward to.
We're seeing the experience play we're seeing clients take the full suite of our offerings in the gws side, it's in the application development world within C&I. So.
We're certainly encouraged by that we have a lot of work left to do were still in some of the early stages in regards to the work with third party advisors and industry analysts and growing that pipeline. So we're certainly not saying that we're on the downhill slide on all of this there is a lot of work left to be done.
Don there, but certainly encouraged by both the number of deals the size of the deals and the type of work that we're doing solidifying the strategy and the mix shift that we've been looking for so hopefully that gives you a good sense.
No. That's really helpful. Thanks for that that color and can I just.
As a quick follow up.
Are you.
Are you pursuing and winning sole source deals or are most of these deals in your pipeline competitive bids.
Right so.
It depends on the size for us I would say that of pretty large proportion of our signings right now.
<unk>.
Expansion extensions.
And in that world they tend to be sole source. When you look at the new logos smaller new logo deals can be sole source. When you look at larger deals. The majority of the larger deals are competitively bid.
Got it got it and then and then just a final clarification, then I'm getting questions on.
Given so I wanted to just to clarify the revenue tracking to the lower end of the guidance range for the year is that due to dws traditional client softness or.
Due to the weaker than expected license renewals early in the year or both.
Yes look I think when we gave that guidance rod, we obviously knew about the dws exited contracts that we knew about the renewal schedule. So in my mind, its a little more indicative of the point Peter made around the existing client base and their conversion appetite drag because when you're converting.
Or youre, taking that client on that journey, it's a quicker transition the new logo and so the selling motion on the new logos a little longer we are still in some of the earlier stages on the marketing and selling campaign. So that's all that's taken a little longer than we expected and so you can't recover.
That aspect of new logo wins that you've been designed in Q1.
Q2, three and four I, just don't have enough time to convert it to in year revenue.
So it's good news bad news good news, obviously, we're seeing it in the pipeline the GCB the ACB so in the future.
Aligned to where we thought it would be the bad news is you have a little bit of that in year revenue impact because the duration of the transition time.
Yes, and Rob just to follow up on Mikes comments, which is exactly right.
Yes.
Well also driven just came out in the Washington post with with the contraction of the economy in the first quarter in the U S.
And.
I do want to look at our mix of business, obviously for us to thrive we have got to sign new revenue new logos new expansion ever.
Our business has to do that.
But when you looked at our revenue profile, which is slide nine of the deck that you guys have.
80% of our revenue is in recurring services our technology. So.
We're not we're not recession proof business nobody is.
But having 80% of our revenue and recurring services and technology is not a terrible thing.
When you have some questions asked of economies.
And ladies and gentlemen, our next question comes from John .
Ken <unk> from CJS Securities. Please go ahead with your question.
Hi, guys. Thanks for taking my questions. My first one is I was wanted to ask you how much of a.
The guidance I mean going towards the lower range of FX. Because you noted that it was a pretty big headwind in Q1. So what are your expectations for the rest of the year and how much of that is.
Showing up on the guidance.
Yes, John .
Good question look I as you know our guidance is annual guidance.
And the softness in Q1 as you also know was expected primarily due to the two elements. We noted on the headwinds so I think that.
Tamping down or the looking at the lower end of that guidance range is much more indicative of.
The selling cycle the selling motion.
Our continued traction in the fact that it's probably more low new logo driven than conversion of base and just takes a little longer to get that in year revenue.
You sign one of these contracts new logo in the back half of the year, you really get no new logo revenue in year for that contract or very little by the time, you get through transition and so I think again as Peter noted.
The change here and the reason for shooting at the lower end of that guidance range is really the mixed shift of how our new offerings are being digested and it seems like the the new logo aspect of that is a bigger portion than than we thought it would be and the conversion.
Aspect, we have to tie that into contract renewals as opposed to kind of mid contract conversion. So that's really where we're at.
Understood. Thanks, Mike.
Second just.
Turning to the backlog I know you have expectations for that to increase in the second half of the year should we continue to expect that to be pressured by shorter durations I think Peter you mentioned.
The transition to SaaS is probably the prime reason for that.
If that's the case does it make more sense to give a one year backlog number as opposed to the ATV or a total backlog.
Yes, John It's funny, you say that that's something we've been chatting about internally as well so.
It may have something along that line in subsequent quarter Youre exactly right in the construct of the length of the deal the duration of the deal certainly that causes pressure in both the TCE number in total as well as the backlog component, which is really why we.
Emphasized ACB and had been emphasizing ACB for a couple of quarters now we've kind of seen this trend and.
And interestingly enough the statistic that Peter just threw out about the 65% in the quarter and roughly 50% for the year. It starts to feel a lot more like a SaaS type business I mean, you take out the <unk>.
Technology component that is always a little bit lumpy, but the rest of it starts to feel a lot more like that the duration certainly is mimicking that that style. So so certainly something were considering John and maybe we can chat offline and get some more thoughts from you on that and bake that into our <unk>.
As well.
Okay got it and then the last one for me just any change in the competitive environment at all I know a lot of your competitors that eastern Europe operations, obviously, the macro maybe.
Seeing your people.
<unk>.
Become more aggressive just any thoughts on what youre seeing out there.
Yes, that's a great question John .
Yes.
It's not a simple question, so I'll try to divide it in a few places.
On.
On Eastern Europe .
We did not and obviously you do not have any associates in either Russia or Ukraine, we don't have any Russian based.
Clients, we don't have any premium based clients. So for us it was not really a question of leaving.
Leaving Russia, because we were never there in the first place.
That said.
We have a facility of scale in Budapest Hungary.
And that.
And I will tell you what are the things that we have geared up as a recruiting.
That Budapest facility.
As you May know there was something about 120000 it professionals.
Ukraine at the time of the beginning of the invasions. Some of them has saved some of them are leaving so we're.
We're looking at them from all for all sorts of reasons to bring them onboard and join our company that's probably the largest.
<unk> has had obviously our teams have been engaged in assisting the refugees.
Well with respect to kind of the broader market in Europe .
We're seeing that market kind of play out.
This has expected so I would not say that we are yet seeing any significant effect.
In Europe from the ambition.
And our next question comes from Matthew.
If I missed the back half of the question I apologize, but was there more to it at all.
Im happy to discuss anything you want other sundry.
Ladies and gentlemen, our next question comes from Matthew <unk> from Maxim Group. Please go ahead with your question.
Hello, Good morning, Thanks for taking my question.
I guess for the deal you referenced that went across I think it started with an ECS customer that took on C&I and dws.
Did the scope of that contract start off broad or was that something you were able to pick up along the way.
So the scope of that contract started that relationship as I mentioned has been at ACS relationship. It's a good relationship.
Part of what we have been doing as a company.
This really started in 2020, when we readjusted our balance sheet.
It was really to invest both organically and inorganically.
We consider kind of the next generation of digital workplace services or solutions and the next and for US The next generation of cloud solutions.
Again, starting in 2020 and picking up dramatically in 2021.
We have been doing what I would consider moving to the front end of the dws world and really catching up in the cloud world.
To be Frank and I think we're doing both of those are smartly. So I think we've kind of caught up in the cloud world, where we need to be.
I believe we're at the forefront of dws. So in both of those areas. We think we are very competitive and we think we bring a lot of value for our clients and one of the things. We're doing is taking those solutions to our existing clients. In this case that was an existing ECS client and so we said hey, we've got a.
Much more stuff.
And we were able to have good discussions about how those what.
Add value to that client and then we added the gws in the C&I to the existing ECS relationship. It's a great example, NSS.
Large scale Latin American financial institution.
A great example of kind of adding or we call it cross selling but really taking.
In ECS or gws in the C&I client and really bringing to them.
Sure.
The attunity as from the other parts of the company.
Thanks, that's helpful and I guess, a follow up to that cross selling topic.
Yeah.
Yes.
Is that.
Or as you think of the opportunity to take existing customers and sort of.
Extract more wallet value or bring more solutions.
You see that as the the lower hanging fruit.
Cross sell as opposed to bring existing.
Kind of legacy Gws clients.
Clients to higher value solutions.
Yes, I'll take that just for a minute and then let Mike follow through because it's kind of critical to Mike's new role which starts on Monday.
But at a big level, one of the things again.
We moved last year.
During Covid, we're also evolving the company pretty significantly right. So not only did we invest in these in these new solutions, but we also changed the operating dynamics of the company and one of the things. We did was to create a commercial organization that really had one face to the client.
So it was not as dws lead of the C&I lead in it.
Ics Liza one client executive and that one client executive was really charged with selling the entirety of what we have so we've talked about cross selling I use the term first but the reality is it's units are selling selling everything that we have.
And we do think that that is an important part of our future and it takes a little while to get done I will tell you.
It's not something that happens immediately when you explain it to our team, but I think we're making progress on it and I think in Mike's new role he's going to make more progress on it yes, and Matt. Thanks for the question.
I guess the short answer is.
It's clearly easier from a perspective of the door's ajar Youre already doing work in there we have wonderful NPS scores. So they already like what we're doing.
I don't want to come across catalyst right. It's not just cross selling is really just getting our head up and looking at opportunities to bring.
Richard.
Solutions to help our clients succeed and it happens to come from another business unit our segment embedded in our offerings. So it's certainly something that we're looking at and frankly.
The amount or penetration that we currently have in that vein is roughly about 30%. So 30% of our C&I clients have some level of dws component to it and vice versa, and that's pretty consistent across the board. So there is a pretty good opportunity to do that and then if you couple that Matt with the.
The acquisitions that we've done.
So you've got three acquisitions that we've completed well they all have client bases and if you recall they werent really duplicative of our client base. So it opens up opportunities in that regard as well and clearly the the ability to have that dialogue is a lot easier than it is on a new logo.
So hopefully that gives you a little more color.
And our next question comes from Joe <unk> from Canaccord Genuity. Please go ahead with your question.
Good morning. This is Danny on for Joe Thanks for taking our question here.
You mentioned that you were able to price deals to accommodate the deposit pressures.
Much room do you think you have there if these pressures intensify considerably as the year progresses. Thank you.
Yes, I think Thats a great question and I think that was the second half of Johns questions that I never got too. So thanks very much sure.
Thinking about it.
Our.
I think that.
<unk> was about nine and a half to 10, 5% for the year I think you heard Mike say, we were we were pointing more towards the lower part of that in the higher part of that and Thats really the reason so as we look at wage inflation as we look at the battle for talent.
I think we're doing a good job of limiting attrition you see our last 12 months attrition is out is at 18, 6%.
When you compare that to the industry based off the data I have that as kind of the.
The industry is actually kind of merging add somewhere around 19% to 21%. So we're a little below industry average there, but it's clearly it's a percent and a half higher than it was pre pandemic. So that's adding to cost to goods such as inflation is.
The training and the acquisition costs. So I think we're all being a little careful on the margins I think I think you're seeing that industry wide.
And kind of say that the increase in margins.
B a little at the lower end of expectations and I think that's one of the reasons youre seeing us and others do that so we still expect healthy margins. Those are good numbers for us. So there's good numbers for us historically.
But I think we're being a little cautious on the margin side I hope that helps.
Yes. Thank you.
Okay.
And ladies and gentlemen, with that we will be concluding today's question and answer session I'd like to turn the floor back over to management for any closing remarks.
So this is Peter again.
Like to thank everybody I know the whole ran a little longer than expected today and I want to thank everybody for say I'll end the call.
We obviously have a lot to tell.
That telling is that going to end with the end of this call. So we look forward to after on discussions with both analysts and shareholders or prospective shareholders. I think you'll continue to find us very very welcoming to discuss the company. We have a lot to talk about and we're proud of the progress. We have made I also want to say.
I did in my opening remarks by real appreciation for Mike in his role as CFO and my expectation of the job he's going to do can see Obama.
And then again to welcome them to the CFO position going forward with that thanks very much for staying on the call.
Ladies and gentlemen, with that we'll end today's conference call. We thank you for joining today's presentation. You may now disconnect your lines.