Q2 2022 Unisys Corp Earnings Call
[music].
Good day and welcome to the Unisys Corporation second quarter 2022.
This call.
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I would now like to turn the conference over to quote me called Daddy Vice President 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 second quarter 2022 National result.
I'm joined this morning to discuss those results by Peter <unk>, Our chair and CEO that Mccann, our CFO and Mike Thompson, who will participate in the Q&A session in his new role as 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 other information related to our second quarter performance.
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.
I'd also like to remind you that all forward looking statements made during this conference call, including any references to guidance or color regarding expected future financial performance 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 the Companys 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.
This does not assume any obligation to update the information presented on this call, except as Unisys deems necessary and then only in a manner that complies with regulation FD with that I'd like to turn the call over to Peter.
Thank you Courtney and good morning, everyone and thank you for joining us to discuss our second quarter results.
In addition to exceeding consensus on all key metrics in the second quarter.
<unk> grew revenue in constant currency and grew ACB and PCV signings and pipeline.
Perhaps most significantly we are showing momentum within our key focus areas modern workplace within digital workplace solutions and digital platforms and applications within cloud applications and infrastructure solutions I will explain all of those terms in a few minutes.
And then Deb will provide detail on our financial results as we welcome her to her first earnings call with Unisys, but first I'll give some insight into the business.
Starting with digital workplace solutions for dws.
Primary focus is in our higher growth higher margin solutions that help clients streamline and optimize collaboration.
To maximize employee productivity and engagement.
Which we refer to as modern workplace.
On these proactive experienced based elements.
<unk> differentiates us in the market.
Refer to Dws solutions not included and modern workplace.
Traditional workplace.
Our gws business is positioned to take market share.
As we shift our mix to modern workplace.
And we expect constant currency revenue and profitability for dws to improve year over year and sequentially in the second half of the.
During the quarter, we expanded our modern workplace offerings through our relationship with <unk>, a mobile device management software provider, which allows us to leverage their tachyon platform for experience based solutions and makes us a preferred consulting and managed services provider for one.
Our client Lenovo recently honored US with an award for excellence in Premier support in Asia Pacific.
And we were also named as a finalist in six categories at the Helpdesk Institute Awards of which we want to.
In the second quarter, we signed a new logo.
For Dws work with a large American beverage company.
That work includes our full suite of both modern workplace and traditional workplace solutions.
We also signed a new scope managed services contract with a large financial services institution also involving modern and traditional workplace as part of this contract we will help to transform the client's communications systems hybrid work Microsoft teams environment.
Leveraging power sweeps, our software for managing and securing collaboration and communications platforms within our modern workplace business.
Shifting to cloud applications and infrastructure solutions or C. A N.
Momentum continued in this segment during the quarter.
We have revised the name of this segment because the applications are an increasingly important part of our growth story.
We undertook a thorough search for the right acquisitions to bolster our applications capabilities and presence in the market and we acquired Coffey gain in December of last year.
Working to shift the mix of revenue and see an eye toward higher growth higher margin hybrid and multi cloud management cyber security application modernization cloud native application development and data analytics and insights.
We are now referring to as the digital platforms and applications piece of CA and <unk>.
The remaining part of this segment.
And the refinement of our digital platforms and applications and modern focus areas.
Really a part of the sharpening of our go to market approach for this business.
As we increase awareness of our capabilities in C&I, we expect constant currency revenue and profitability upside both year over year and sequentially.
For the second half.
As part of our improvements to our digital platforms and applications offering during the second quarter, We released a new version of our cloud platform with enhanced automation features including core visibility solutions incident prevention optimization and tickets and operations automatic.
Also within digital platforms and applications, we enhanced our customer.
Amortization capabilities database migration to AWS, and Azure, leveraging cloud native tools environment monitoring and assessment capabilities as well as our hybrid cloud security services.
We're being recognized in the industry for our solutions and during the quarter. We were named a leader in the U S in Brazil and in the U S public sector in ISG as 2022 provider lens.
Hybrid cloud and data center services and solutions.
I will now highlight three contracts within digital platforms and applications that we signed during the quarter.
First we signed a new logo contract with one of the largest public K 12 school systems in the United States to provide a cloud ready application to increase the effectiveness and efficiency of <unk>.
<unk> evaluating submitting and tracking claims needed for reimbursement of services rendered to students.
We also signed a new logo contract with a new South Wales Department of communities and Justice.
In Australia for a new biometric security system based on stealth identity.
Our system will improve the speed of processing inmates staff and visitors as they move within new South Wales Correctional centers.
This cyber security with supportive of one of our key growth areas within digital platforms and applications.
Finally, we signed a new scope contract with a large financial institution in the secondary mortgage market to support its transition from on Prem legacy applications to the public cloud.
Yeah.
Turning to enterprise computing solutions or ECS. This segment is ahead of expectations for the year as several clients renew clear path forward licenses earlier than anticipated.
Outside of clear paths forward licenses, we see opportunities for growth in ECS related services in specific proprietary financial services and travel and transportation industry applications.
And in next generation compute to advancing our capabilities related to quantum edge and surplus computing systems. Although these opportunities are in the early stages.
We released a new version of our clear path forward data exchange solution during the quarter, which enhanced azure capability increased automation improved processing speed and upgraded compliance capabilities.
Also in the quarter, we signed a new scope ECS services contract with a U S state unemployment insurance agents.
My Great legacy applications to modern software architecture, and deploy workloads to the cloud to streamline the agency's ability to make changes to its unemployment insurance applications.
Interface with its clear best forward environment.
As we turn to discuss specific metrics for the company and each of our segments, Kevin and I will also provide some metrics related to both the focus areas of modern workplace and digital platforms and applications.
And we expect to provide additional details on these focus areas in future calls.
As we look across the company the transformation of our solution portfolio and go to market approach is driving improvement in leading revenue indicators.
Total company ACB grew 25% year over year.
Dws ACB grew 15% year over year, and C&I ACD grew 63% year over year.
Given clients increasing preference for shorter duration contracts, we focus more on <unk> and PCB.
But second quarter PCB also grew 12% year over year.
The weighted average expected gross margin associated with those contracts signed in the quarter was again higher than in the prior year period.
While ACB grew it did not grow as much as anticipated as.
That is a number of contracts we were expecting to sign in the quarter have been delayed.
Total company pipeline grew 30% year over year, Dws pipeline increased 20% year over year and within that the modern workplace pipeline more than doubled year over year.
C&I pipeline grew 45% year over year and within that digital platforms and applications pipeline more than doubled year over year.
The pipeline for modern workplace and digital platforms and applications now amounts to approximately $1 billion of our total 6 billion pipeline.
Yeah.
The investments we have made in our sales and marketing initiatives contributed to these results and our upcoming brand transformation will amplify awareness for the company and our solutions on the sales front, we have invested in direct sales client management consulting and in our Pos.
Network.
With respect to marketing initiatives, we have increased the size of our industry analysts and third party advisor team and we hosted an industry analyst and advisor event in June .
100% of the advisors, who completed our post event survey said they would include Unisys in client discussions.
We have been making progress in marketing even before the brand launch we initiated a digital advertising campaign at the end of 2021 targeting clients and prospects to drive awareness and engagement and these groups are demonstrating increased interest in learning about unisys and our solutions.
We are seeing more than double the industry benchmark levels for engagement and web visitors are downloaded nearly twice as much content from our site as previously.
With respect to brand we are engaged in the most significant brand transformation since the formation of Unisys in $19 86.
While keeping the Unisys name, we have created a new brand platform, both visual and verbal that will launch in the fourth quarter of this year.
The campaign is designed to refresh everything from our brand differentiation to our employer value proposition.
The campaign will amplify awareness and.
That extend across all touch points.
Target audiences and content, including advertising units is dot com thought leadership publications marketing collateral demand generation public relations social media pitch decks sales materials and recruiting materials.
We're looking forward to the results of our rebranding and we think those results will include driving sales building a reputation engaging our associates recruiting new talent and enhancing our corporate culture.
We have also taken a targeted approach to this initiative aiming to maximize impact efficiency.
Sure.
Turning to workforce management, the cost of labor remains elevated across the industry in the first half of the year attrition.
Attrition the competitive talent market and inflation drove the cost of labor hire in parts of our business.
We're seeing signs of improved talent availability and expect attrition to level off in the second half of the year redo.
Redeployment of internal talent to fill open roles has been enabled by our career development programs.
These programs, which include new leadership and technical development opportunities have resulted in our people, earning 28 more certifications excuse me, earning 28% more certifications in the first half of 2022 that in the prior year period.
We're also improving the efficiency of our internal deployment process through automation that accelerates the movement of internal talent into open roles.
We expect the combination of market forces lower attrition and enhanced ability to deploy internal talents to stabilize the cost of labor in the second half of the year.
We are also expanding our focus on campus hiring globally.
As we transitioned our labor period pyramid to be weighted more heavily towards lower cost early career talent.
Our <unk> efforts are continuing to gain traction.
We were named in the top 20 of America's Best employers for women by Forbes and received a score of 100 on the 2022 disability equality index.
Turning to ESG, we recently announced a goal of net zero greenhouse gas emissions scope, one and two by 2030.
This aligns with science based targets initiative business ambition for one five degree centigrade and builds on the company's participation in the carbon disclosure project and the UN global compact.
At this time, we do not have much information to share, but we are aware of our recent apparent cyber attacks involving our software lab environment.
Our internal security team with the assistance of a leading cyber defense firm and actively taking steps related to this incident. We are also engaged with law enforcement authorities.
At this time, there are no service disruptions either for our operations or for our clients.
So in summary <unk>.
Demand drivers such as digital transformation hybrid work models and migration to cloud remain robust and our strategy is showing momentum in our focus areas.
Progress in signings has been slower than expected, though and foreign exchange rates have also deteriorated since our last call.
Because of this as well as increased labor costs, we are lowering our revenue and profitability guidance for the year.
We expect revenue and profitability, both as reported and in constant currency to grow year over year and sequentially in the second half.
With that I'll turn the call over to Deb to discuss our financial results.
Thank you Peter and good morning, everyone I'm excited to be here today for my first earnings call since joining unisys.
And I look forward to getting to know our investors and analysts better in the coming quarters.
In my discussion today, I will refer to both GAAP and non-GAAP results. As a reminder, reconciliations of these metrics are available in our earnings materials. Additionally, I will provide the total company revenue on an as reported basis as well as constant currency and we will provide segment level revenue on a constant currency basis.
As Peter highlighted our strategy continues to gain momentum we are encouraged by the year over year increase in <unk> and pipeline in the quarter and the fact that we grew revenue year over year in constant currency and beat consensus on all key metrics.
That said progress has been slower than expected in part due to delays in contract signing which has resulted in less opportunity for in your revenue growth and margin expansion related to mix shift as well as increased labor costs, which impacted profitability in parts of our business.
Foreign exchange created an additional revenue headwind.
None of these elements impact our long term strategy and we expect our contract signed to date this year and anticipated second half signings, including ECS licenses will drive year over year and sequential revenue and profitability improvements in the second half.
We also anticipate that our sales and marketing initiatives will further contribute to a year over year improvement in second half mining and we still expect year over year improvement to free cash flow for the full year 2000.
With that as a backdrop I'll provide more insight into our second quarter results.
Total company revenue beat consensus growing two 8% year over year in constant currency or flat as reported and our focus areas of modern workplace and digital platforms and applications for year over year.
Several clients renewed EPS licenses earlier than anticipated, resulting in 11, 3% year over year constant currency growth in that segment. We are now anticipating better for your ECS results than originally indicated the full year 'twenty two revenue expected to be down low single digits year over year in constant.
As a reminder, the majority of ETS revenue timing depends on the number and size of contracts up for renewal in a given quarter as opposed to renewal rates themselves, which remain over 95% we.
We believe there is future upside in this segment in ECS related services.
Proprietary industry applications and next generation.
Okay.
Moving to C&I, our momentum continued with revenue growth for the segment of eight 7% year over year in constant currency, driven by our higher growth higher margin digital platforms and applications, which increased to approximately 29%.
Revenue from approximately 20% in the prior year period, we see meaningful incremental opportunity within this segment.
Typically related to digital platforms and applications in which our acquisition the acquisition of Combi gain significantly enhanced our capability, we are increasing awareness of our offerings in this market and these efforts along with the 63% year over year increase in second quarter C&I ACD are expected to drive accelerated year.
Over year growth going forward.
Next let's discuss GW athletes is positioned with the right solutions and go to market tools.
Our experienced focused differentiation and modern workplace is being recognized in the industry and has helped drive a 15% year over year Gws ACB growth new business within Gws has been growing although slower than expected as a number of new contracts have been delayed.
And we are also continuing to feel the impact of the rollout of the traditional workplace contracts that we exited in 2021.
$24 million in the second quarter.
As a result, our gws revenue was lighter than expected in the quarter down 11, seven year over year in constant currency, excluding the impact of the exited contracts and currency Gws revenues grew five 7% year over year.
We expect the exited contracts will impact Q3 by $20 million in Q4 by $11 million. We are encouraged that we continue signing new logo contract for a modern workplace solutions as it highlights our ability to move up the value chain.
In workplace solutions revenue increased to approximately 14% of dws revenue in Q2 from approximately 4% in the prior year period with.
With respect to the company overall as we look to the second half of the year, we expect revenue in the third quarter to be up 50 to 150 basis points year over year in constant currency.
So down 375 to 475 basis points year over year as reported in part as a result of ECS renewal timing its more significant constant currency and reported revenue growth in the fourth quarter, leading second half revenue to be up year over year overall.
Accordingly revenue expectations are the ACD in pipeline detail, we provided as well as our backlog total company backlog as of June 30 declined from $2 9 billion at the end of the first quarter with $2 7 billion, primarily due to FX and the <unk>.
Total company revenue expected in the third quarter, approximately 75% is already in backlog.
Despite the positive momentum and encouraging leading indicators supporting a strong second half the delayed signings and FX deterioration our last earnings call and led us to lower our revenue growth guidance for the year from our original range of 5% to 7%.
Two and a half to four 5% on a constant currency basis.
Negative, 1% positive 1% as reported.
Approximately 350 basis points of the change versus our original range due to foreign exchange and approximately 250 basis points is due to contract signing delays.
In the past foreign exchange did not have a large impact on our revenue growth all at current rates and now has.
Approximately 350 basis point impact year over year, which is why going forward, we'll be providing revenue growth guidance in both constant currency and as reported.
Moving to profitability total company gross profit was $148 million up four 1% year over year.
Gross margin was 28, 8% up 130 basis.
ECS profit was up 16, 1% year over year, which led to gross margins from this segment to be up 460 basis points year over year.
As a reminder.
ECS costs are relatively fixed but year to year and throughout the year given that the key components of course are the labor to support the platform and the amortization of software development costs.
The timing of license renewals can also have a significant impact on profitability DWA.
Dws gross margin decreased 240 basis points year over year to 13% largely driven by higher cost of labor due to the competitive talent market and inflation, we expect productivity.
Productivity improvements and more efficient staffing model stabilizing cost of labor as well as mix shifts to drive year over year improvement in Gws gross margin in the second half of 'twenty two in future years.
Within C&I gross profit margin was 555% versus 11, 1% in the prior year period impacted by higher labor costs.
Leasing standardization and adding automation across our CA in isolation, which is expected to improve efficiency scalability and profitability in the second half of 2022 and future years.
Total company non-GAAP operating profit margin was 9% down 70 basis points year over year relative to our stated expectation of being down 450 to 500.
Adjusted EBITDA margin was 17, 6% down 60 basis points year over year relative to our stated expectation of being down 450 to 550 basis.
The year over year comparisons were impacted by the higher cost of labor in the parts of the business that I noted and increased investments in sales and marketing that contributed to the ATV PCB and pipeline growth Peter mentioned, it does impact partially offset by the level of ECS signings in the quarter.
In addition to the productivity improvements stabilizing cost of labor mix shift and increased automation I mentioned, the timing of ECS licenses is expected to contribute to profitability improving both year over year and sequentially in the second half.
However, due to the split of those ETF licenses between the third and fourth quarter, We expect total company.
non-GAAP operating profit and adjusted EBITDA margin to be down approximately 375 to 475 basis points year over year in the third quarter. We then expect these two metrics to be up meaningfully year over year in the fourth quarter as.
As we continue to refine our cost structure and real estate footprint, we expect $5 million to $10 million of associated charges in the third quarter.
Based on these expectations and primarily driven by inflationary impacts such as increased cost of labor and the delay in signing that is impact of a shift to higher margin margin solution.
Lowering our full year non-GAAP operating profit margin guidance.
The original range of 95% to 10, 5% to seven 5% to 9% and adjusted EBITDA margin guidance from our original range of 18% to 19%.
To 16% to 17, 5%.
Approximately 100 basis points of this was related to the increased cost of labor with the balance related to delayed signings.
Going forward, we expect to continue providing a similar similarly sized guidance range, given increased volatility and macroeconomic environment.
Teams.
Our net loss of $17 1 million or 25 cents per diluted share improved versus a net loss of $148 million or $2 <unk> per diluted share in the prior year period.
Due to the company, taking a settlement charge in the prior year period related to pension liability reduction.
Partially offset by a tax related benefit.
non-GAAP net income was $16 2 million or 24 per diluted share versus $46 million 68 per diluted share in the prior year period, largely driven by an increase in taxes year over year due to the jurisdictions in which income.
Moving to cash flow related items capex in the quarter was $25 million versus $23 million in the prior period.
Free cash flow was impacted by the timing of collections related to ECS licenses in both hearing.
As a result free cash flow was negative $59 million, which was down $78 million year over year.
We continue to see free cash flow expansion is important and expect year over year improvement in the metric for the full year 2020, although we do not give free cash flow guidance. We can give you a sense of where we expect to end 2022, which is a range of 35 million to $75 million up relative to $32 million.
'twenty one.
Our current expectation is for capex to be $90 million to a $115 million for the full year.
We had a healthy cash balance of $380 million as of the end of the quarter, which is above our working capital needs.
Overall, we are excited about the momentum we are seeing the business reflected in the improvement in go to market metrics. We have noted on some of the signings revenue and profitability progress, we anticipate making by this point in the year has been delayed we feel good about the underlying demand drivers in our areas of focus.
We have the right solutions to effectively address them and see the market recognizing that we look forward to the completion of our sales and marketing initiatives planned for the second half of the year and the additional momentum.
That we expect these to drive with that I'll turn the call back over to Peter Peter Thank you Deb.
With that I would note that for the Q&A session. In addition to that we are joined today by Mike Thompson and his new role as Chief operating officer, who will be happy to respond to any questions you may have.
Operator would you please open the call for questions.
Thank you we will now begin the question and my first question.
To ask a question related to Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset to focus on the key.
And final question looking at this and you would like to withdraw your question. Please.
Please go Star then two.
At this time legal costs momentarily to assemble our posture.
Our first question will come from Rod bourgeois with deep dive equity research. Please go ahead.
Okay, Hey, thanks, So hey, I would like to ask about pension.
Wondering if you can just give an update on your pension in light of the latest market conditions any kind of interim pension estimates would be helpful. As we've definitely received a round of pension questions of late.
Okay, great. Thanks Rod.
For calculations about the GAAP accounting deficit as well as the cash contributions for our U S qualified defined benefit pension plans. The only performance valuation analysis at the end of each year based on year end data.
International contributions are determined by Tri annual negotiation and are typically based on affordability and macroeconomic factors.
Given the current market trends, we believe our accounting deficit with U S International combined should improve from year end 'twenty, one because calculations mark to market liabilities using higher discount rate due to rising interest rates, which we expect will more than offset the deterioration in asset values. However, as you probably know with regard.
U S cash contribution a material deterioration in the value of our U S qualified defined benefit pension plan assets as well as any changes in pension legislation discount rate.
Economic or demographic trends could require us to make cash contributions to these plans in the future.
On our Q4 call.
Early next year once our valuation analysis is complete we will update our expectations.
But based on deterioration in both the equity and fixed income markets.
May be required to make additional cash contributions to our U S qualified defined benefit pension plans in the future.
Okay, Great that's helpful.
I wanted to I wanted to dig into the causes of the signings delays and I guess I wonder is it possible that some of the signings delays are due to unisys working.
Carefully on contractual terms and pricing.
And to what extent are macro changes contributing to the signings delays some more color on that would be really helpful.
Yes, rod thanks, very much for the questions.
It's actually pretty hard to dissect inside specific contract negotiations because they are all relatively unique we do a fair amount of our revenue is what we consider long term so 82%.
Of our revenue are long term contracts only about 18%.
<unk> works so on the macroeconomic side when you have people who are not sure we in a recession, we're not in a recession.
Outside the U S are still represents about 55% of our revenue.
And particularly in Europe , there are more questions. There. So I would say that some of the delays as I'm going through my head the contracts that had been delayed.
I think certainly.
Macro economics plays a pretty big role there.
I think that in terms of the pricing for those contracts I would actually turn it over to Mike who has been more involved in exactly how we're pricing.
Hey, Rod Thanks for the question.
I would I would really echo the comment that it's probably a lot more to do with the macroeconomic environment, we've done quite a bit of work in the analysis.
Contract signings as you know you really spent a lot of time, ensuring that we've got the right call. It causes and those types of things in our contracts, but I wouldn't.
Our contracting process is not really a long game or delaying those signings and backward we're trying to expedite those contracts signed by really breaking those contracts into various buckets right. So you've got the large extended contracts, which is clearly taking a lot more time and effort to get through but.
We also have plenty of these fast track contracts that might be things like professional services augmentation and things like that so I would definitely concur with Peter and that it's a lot more to do with the uncertainty in the environment and probably thoughts around duration of contract than it is.
As our processes.
The one item I would add to that rod, which isn't necessarily on your list.
But as we think about those deals that we have.
When we think when we go back to that.
So our pipeline.
Our pipeline has grown significantly in both dws.
But most significantly in the focus areas right. So the pipeline has doubled in the focus areas of <unk>.
Modern workplace and digital platforms.
So.
So.
Not to say that Thats new.
But as Doug talked about that's a fast those SaaS growing focus areas for us and so we are quickly making a name for ourselves in those areas.
I think it does take a little bit, especially when youre really moving into this higher growth areas.
Get all of that traction in a timely manner. So I would say, we're really happy with the CV growth in those areas. We're.
We're very happy with the pipeline growth I think some of that used to go a little more slowly than some of the traditional solutions.
Yes.
Thank you.
Our next question comes from John Kernan thing.
CG Securities. Please go ahead.
Hi, Good morning, it's actually lead you go to for Jamba.
Just starting I appreciating that a lot of the contract signings delays are related to the macro.
As you transition to higher growth higher margin type work.
Are you able to kind of give us some.
Some representative examples of some of the new stuff that you're signing the target margins on that stuff versus the target margins. You may have had one two or three years ago and then.
Whether the current labor situation in inflation situation is able to be built into those new contracts to get you to those target margins and then the last piece of my 19 part question here is.
Alright.
Are you, gaining losing or maintaining share as a result of the new way that you're going after work.
Alright, well, so I'll start and then I'll hand, it over to Mike for a little more detail on.
Some of the sub questions.
With respect to.
Target margins as I mentioned in my remarks.
The target margins for the deals we are signing.
In the first quarter and in the second quarter are higher than the target margins of the periods before.
And part of the reason Theyre higher is because we are selling a higher mix of higher margin work and both in dws modern workplace and in.
Cloud applications and infrastructure that digital platforms and software group are both higher margin. So as we sell more of those focus area items, we are going to get higher margins and we expect to get those higher margins going forward and I'll, let Mike talk specifically about the pricing because.
We are dealing with inflation in several different ways.
And it largely depends on what our client preferences are what we are covering ourselves from inflationary pressure.
Some of those are through Colo clauses in some of those are through expected adjustments in pricing over time, but I'll, let Mike doable yeah. Thanks.
Thanks Lee for the question.
Yes, I think Peter gave you the good highlights here and one of the things I would note is when you look at our weighted average expected gross margin associated with the contracts, we signed in the quarter, they're higher than the prior year period. So that tells us that we are getting the proper margin profile on a higher labor.
Cost base and the clients are obviously paying.
Paying the higher pricing that we're passing through in regards to the labor cost now we do have an increased labor costs.
Year over year, we're looking at it being approximately $20 million of increased labor cost to support those new contract work, but.
I think the important factor here and we noted a couple of times is when you look at the pipeline growth and the ACB growth.
More than doubled in both of our target focused areas and so I don't think <unk> seen actually the mixed shift yet for those new signings at the higher margin because some of it is still in the pipeline and some of it is new ACD and the labor costs have already hit us. So there is a bit of a timing mix between.
When the labor cost hits to when we see that pricing come through and Thats, a little bit of the pressure that youre seeing now the other thing I'd mention around pricing as we do a lot of public sector work roughly 34% of the work that we do is in public sector that is a little bit insulated from some of the macro economic conditions.
It's driven a little bit more by the budget and they don't necessarily changes the short term. So we have a little bit of prevention, there Peter mentioned.
Roughly 80% or more.
Our revenue is recurring.
And that is.
In backlog.
Seven 5% export revenues already in backlog. So we would expect over time to see that margin profile continued to improve based on the multiples that we're seeing in the new business improvement.
Let me just tie, though your question and rods question together.
And then and then make sure that Mike and IRB clear because I think of.
I want to be clear because otherwise we can lose some stuff in the schemes have all the answers.
So when I go back to the first quarter and when Mike and I were having a discussion on the first quarter.
Everybody was expecting and seeing early indications of inflationary environment, everybody was seeing indications of labor shortage.
Particularly in the ITC.
So I think our clients. We're also seeing that in our clients were I would say relatively receptive to the idea that we are putting in cola clauses, we were increasing prices because of inflation.
Out of it.
What's happened since then this may be where you and Robert coming from so I want to recognize it as it is happening what type of incentives.
Two things first I think we all believe that that labor market is loosen.
So it's still inflationary pressure not as much as it was back in April 11th happened between April and August so the inflationary pressure has decreased a bit.
Look going back to work.
Okay.
Okay.
All right.
More willing to work.
Potentially a risk.
Great.
Okay.
We have a potentially recessionary environment.
A little.
To.
Yeah.
For themselves.
Back to your question.
Sure.
Okay.
Yes.
Covered part of the answer do we think that all of that mix of inflation changes labor changes with certain changes currency changes and we think that is affecting the timing of contracts. Yes, that's what we set as part of that.
There is a bit of a delay in getting clients to agree to the pricing I think the answer to that is yes.
But again, it's very hard to attribute motives to our clients on a specific deal or anything but when you think about all of those things at once.
It is actually quite likely.
Our efforts to maintain pricing.
Is causing some of the delay we do not believe that thats, making us not competitive so we're not seeing that and a decrease of win rates, but we are seeing that in a longer period of contract signing.
Lee I don't know if that helps and rod I may have misunderstood. Your question. So I don't know if that helps you as well.
The next question.
Comes from Joseph <unk> with Canaccord. Please go ahead.
Hey, guys good morning.
Congrats on the new roles.
And Mike.
Maybe we'll just start off first I know I know.
So you added the eight to see a ni could you just kind of go into a little more detail on kind of how big applications is now kind of.
The.
Perhaps the growth rates there I know your cloud business is one of your faster growing pieces overall and how it may stack up there and then a quick follow up.
Yes so.
Thanks, very much for the question I want to start with saying that you are exactly right. It is a name change only.
The segment that was formerly <unk>.
Cloud and infrastructure is now called cloud applications and infrastructure, it's exactly the same stuff.
We added the word applications.
Although we have always had applications revenue in there.
With the acquisition of comp you gain in December and with the changes in the marketplace.
Frankly, we think that long term for.
Solutions providers like ourselves.
The infrastructure piece of the cloud will be large and we will grow but the applications side of the cloud will be larger and growing faster. So we really worked last year to make sure that we felt we had the right or enough scale on the application side and that led with the <unk>.
Position of coffee game. So what we have done is is to say, okay. So within the larger segment of what we're now calling.
Cloud applications and infrastructure.
Is the focus areas there.
And what we're doing there is we're not actually singling out.
Just applications right. We've now created a focus area of called digital platforms and applications to a digital platforms and applications is broader than just applications. Because it is what we really consider kind of the pure cloud infrastructure piece of that as well.
As well as and I went through the definition of my remarks.
Some very very higher growth elements of that of the overall space. So if we look at so the answer to the question is we're not breaking out applications alone.
We are breaking out the revenue for you.
DPA as of <unk>.
Focus area of.
C&I and going forward.
We gave you some information on these focus areas, but as I've said in my remarks, we're going to give more and more specifics because we really want.
All of you on the call to understand.
We intend to beat market growth rates.
But the market growth rates between modern workplace and traditional workplace are very different.
As a modern and the <unk>.
Growth rates in the market between D P&A and classic infrastructure are very different so what are the insights that that brought to the company was we really have to break this out for you guys. So because if you just aggregate all of dws and all of C&I.
We're kind of missing the story, which is to show that we believe we're going to grow faster on both elements with in those segments, but those elements are very different.
So Devin if we look at just the P. A.
As a portion of C&I and how that has grown I think you gave the percent of what it is this quarter compared to a year ago right right, Yes, that's true.
This year right now it's about this quarter 29%.
The revenue of the C&I business and this time last year it was 20%.
Definitely growing and we will continue that Peter mentioned in his script as time goes on we'll give you even more metrics.
And the market growth of that area versus traditional infrastructure is so different.
No.
We just need to break it out.
Sure.
Sure that's great.
Thanks for all that color. Thanks, and then just the capex for the year.
I know you are continuing to work to bring some of the capital intensity down.
Kind of.
Wanted to get some further thoughts on that topic. Thanks.
Right. So as I had mentioned Capex do you plan on being at that 90 million to $115 million.
Which does put us more in that 5% of revenue.
<unk>, which I think is more typical.
For our industry related to our peers. So I think in the past it was it was higher closer to 7% to 8%.
I think where we're moving more in the range.
Of where we should be and will most likely be going forward.
Great. Thanks, a lot guys.
Okay.
Our next question comes from Matt <unk> with Maxim Group. Please go ahead.
Hi, good morning, Thanks for taking my questions.
For the new deals that you are getting through.
Is there anything distinguishing about the customers the customer need or the mix of services that are getting them through versus the.
Start from the pipeline that is being delayed.
Sounds like bi.
From your view macro issues.
Hey, Matt, It's Mike I'll take that one good to hear from you.
I wouldn't say that there is a distinction in demographic data of the customer right.
The first thing I would say is that for the deals that are getting through and being signed.
They are elongated and the ones that we've signed actually started a little earlier in the process.
The interesting thing specifically when we talk about the elements in dws or modern workplace and I think Peter alluded to this in his prepared remarks. Therefore, the full stack right. We've signed several deals where they've taken both sides of the coin right. So you've got the traditional workplace as well as the <unk>.
Turn workplace and I think the demographic of the deals where we've had success were the ones, where we can continue to illustrate the experienced aspect of it and they've actually been much richer and deeper contracts and more inclusive of everything that we have to offer and I would say the ones that have been signed.
Also cross our segments right. So we have a.
And I component ended dws components. So I think strategically that's what we wanted and when we look at deals like that.
Seem to have a quicker turn.
Turnaround are more success rate on those particular deals and our real focus is getting invited to more right. It's not a matter of whether we can facilitated it's how many more we can get invited to bid.
Because our win rate has been pretty consistent in.
In those areas and we feel really good about the solutions the offerings and the quantity and quality of what's been.
Asked floor and what we're providing so so I think it's a little bit more mat tied into.
That full deal versus these one off components.
We are driving the success rate in the modern workplace.
Thanks.
That was a great answer and hit on everything so I appreciate that I guess my follow up is on the.
And ECS.
Pulling renewals a little earlier is that.
More from the second half of the year or is that pulling forward from.
Beyond 2022.
Yes, Matt.
<unk> led does get into the details on that the answer is a little above.
We don't control this.
And.
Depending on the needs of the clients.
It's pretty obvious.
We can be fooled.
And in this particular quarter.
We had some renewals and extensions.
That we were anticipating signing this year, we even had some that we were not anticipating signing this year at all and siding in the future that we're.
The client wanted to sign so.
We are.
We hope we're very client responses.
In all of our business when it comes to ECS, given the size of those contracts and the importance, we're especially client response.
And Thats what happened in this quarter.
Yes, no I think that's right here.
Not too much more to add but just as I mentioned in my remarks, just to reiterate.
Our expectation is for the full year.
ECS will be down low single digit year over year in constant currency as our expectation now I think before we gave you.
Bigger decline, but because of the factors Pierre mentioned.
That's where we stand right now.
The other thing I would point out is again.
As we are I think becoming a bit more sophisticated in the way we're looking at each of these segments.
As I mentioned in ECS.
It's not just about renewals a clear path forward anymore.
We've identified three.
Future. If you will revenue streams tied to specific offerings, we've talked in the past on these calls about what we call ECS services and those are the services that are associated with.
Whether it's clear path forward or other ECS.
Proprietary applications.
There is a big market for that.
And we would expect to take advantage of that and to serve customers in a more powerful way on the services side I think of the applications that our clients have that sit on top of a clear path forward. As an example, we're only doing a fraction of the modernization and maintenance of those applications. We think we can do more.
Our clients and then we've talked today about two more offerings and revenue streams.
One is what we call those industry specific applications that we've had those for a while things like cargo things like air traffic things like financial services applications, and we're really looking at invigorating some of those in the revenue and market share.
That is attached to those.
And then the third element of that is really around next generation compute.
There are few organizations that are as.
Capable as we're well positioned as ours to really help our clients on the journey.
To quantum.
Both offensive and defensive.
<unk> technologies.
Et cetera, and so again.
As we get further down the road here and start kind of isolating these growth areas.
That is kind of restructuring this for us you'll hear us talk about ECS a lot.
Broader ways and just talking to you about give us more renewals and thats going to be an important part of our future.
Okay.
Our next question comes from on your sort of John <unk> with Sidoti. Please go ahead.
Hi, Thank you for taking my questions most of them have been addressed already but I'm just curious.
You mentioned you added talent availability has improved.
Where do you see that talent coming from.
Well, so so I would say, it's really coming from almost all geographies. Some of it is I think macroeconomics and some of it is because it's tough reviewing so on the macroeconomic stuff I do think there is a realization in the marketplace that.
There are not.
The gap between the number of tech jobs that are available in the number of people who are qualified.
Shrinking.
And thats because as we also use the paper there are some organizations that are decreasing their hiring of people. So that's a macroeconomic event that is making life a little easier on us, it's not easy, but it's easier.
As we think about our own attrition.
Our attrition continue to tick up this quarter on a sequential basis, but it ticked up only a little bit 60 basis points.
That is the smallest tick up we've had on a sequential basis since the first quarter of 2021. So we really are seeing.
Kind of a leveling off of that and then the flip side of that it's not all about macroeconomics. Some of it is what we're doing so we issued a press release earlier in the quarter.
About a program that we've had for 14 years called the Unisys innovation program in India that used to be called units as 2020.
It's from a remarkable program, where we go out to students throughout India and.
And get them involved in innovative processes and projects.
And then we have winners and we give job offers.
It's not really so much about the job offers as it is about it's a very prestigious competition.
Well this year, we had an almost 13% increase in.
And the number of people.
Submitting entries into that program and so that's something we've had for a while but I would say, we're kind of putting that on steroids.
And similarly, when we talk about our campus programs and our other outreach programs I just think we're doing more internally as an organization to really be.
Up our game in terms of recruiting as well as retention.
33% of our job openings were filled by internal candidates this quarter.
The highest number I can remember.
And.
It goes to the efforts I mentioned that we're really working hard at retraining people and positioning them for next generation jobs as we get more clients doing that kind of work with.
We'd much rather retrain, our people that hire from the outside so its a combination of macroeconomics.
And I think what we're doing internally I hope that helps like any other thoughts on that the only other element I would add is just the brand again.
So your focus on attraction of talent and how were positioning ourselves in the marketplace. I think you covered every other element of it.
And on the branding piece good events to come.
We talked about that as really kind of all the work is done frankly, we know exactly what the revenue is going to look like we know that the statements. We know wherever they can sort of mutually b, we know it really setting up.
If you will the dominoes start that in the fourth quarter, but I would.
Following that what Mike said, just refer back to my remarks.
As much as I talked in my remarks about how we believe that campaign will really kind of show our clients and particularly our prospective clients what we do we.
We will also show perspective employees, what we do we don't see that brand new campaign only at prospective clients.
It's kind of equally weighted to perspective.
Our employees associated with that.
Very important part of what we're doing.
As Mike pointed out.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Peter All the best for any closing remarks.
Thank you so much operator.
Appreciate all the questions today.
Yes.
Thanks for joining us as Chief Financial Officer, I also want to thank Mike for using that opportunity to really.
Well as Chief operating officer.
Have a pretty awesome leadership team.
We will be available to our investors and shareholders on an ongoing basis, we always are.
And.
I would like you to think a little bit more about those focus areas. What it means for us how we're trying to show you the power of those focus areas and as as Devin and I. Both mentioned, we're going to give you more and more information about those in the future with that.
Want to thank everyone again for joining our call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.