Q3 2022 Unisys Corp Earnings Call
Welcome to the Unisys Corporation third quarter 2022 earnings Conference call.
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I would now like to turn the conference over to Ed Yuen Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and thank you for joining US yesterday afternoon, Unisys released its third quarter of 2022 financial results I'm joined this wanted to discuss those results by Peter <unk>, Our chairman and CEO , Jim Mccann, our CFO and Mike Thomson, our CFO , who will participate in the Q&A session.
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 presentation slides that we will be using this morning to guide our discussion as well as other information relating to our third quarter performance on our Investor Relations website, which we carriage you to visit third today's presentation, which is complementary to the.
Earnings Press release include some non-GAAP financial measures. The non-GAAP measures have been reconciled to the related GAAP measures and we have 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 actual results to differ materially from our expectations.
These factors are discussed more fully in the earnings release and 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.
You just just does not assume any obligation to update the information presented on this call, except as Unisys deems necessary and then only the matters that complies with regulation FD with that I'd like to turn the call over to Peter.
Thank you Ed good morning, everyone and thank you for joining us to discuss our third quarter results.
We continue to make progress in shifting our business to higher value solutions and the high demand focus areas of modern workplace and digital platforms and applications.
Clients are seeing the value of our solutions in these focus areas as evidenced by revenue growth approximately at or above in both of them.
Our focus area solutions are also higher margin indicator of increased profitability over time.
As we discussed last quarter, we are providing more visibility into our enterprise computing solutions segments E. C. S by differentiating our specialized services and next generation compute solutions from our licenses and support.
Which will allow us to highlight each of their unique strengths.
Our transformation is beginning to take hold it will soon be fortified by a new brand identity and marketing campaign designed to increase awareness for our company and our key solutions. We believe this platform will influence consideration in the market and be a catalyst for growth.
That will provide detail on our financial results at the total company and segment levels, but first I'll give some insights into our transformation.
Let's start with digital workplace solutions for Dws, our primary focus in gws is on higher growth higher margin solutions that help clients streamline.
Excuse me and optimized collaborations to maximize employee productivity and engagement and we referred to this as modern workplace.
We believe the modern workplace market isn't approximately $40 billion market growing at a three year compound annual growth rate Hager.
Approximately 12%.
We said last quarter that we plan to grow faster than the market and we did just that in the third quarter driving revenue growth in excess of 50% year over year.
We also accelerated our modern workplace momentum in the quarter by securing a year over year increase in total contract value or T. C V of signings of more than 50%.
And a year over year increase in annual contract value.
Excuse me get or E C V C.
Signings of more than 50%.
Yes.
Okay.
An example of success and modern workplace and the expansion of our work in the third quarter of a large financial institution that provides to provide digital workplace solutions.
Contracts will help improve communication and collaboration between teams regardless of location.
We also signed more than 20, new logos in modern workplace for specific scope of solutions, which in time can lead to full service relationships.
Wins like these are helping shift our business mix toward modern workplace, which we expect to represent approximately 15% of dws revenue in 2022 versus 7% for last year.
We expect approximately half of our gws revenues to be in modern workplace in 2025.
As we look to the future our pipeline for modern workplace is more than 400 million as at the end of the third quarter more than doubling year over year.
We expect the margin and modern workplace to be in the mid 20% range by 2025, the more we move our gws portfolio to modern workplace the more profitable we expect to become.
We earn significant recognition in modern workplace from a leading industry analysts in the third quarter.
ISG recognized unit. This is a global leader for every service quadrant in its 20 twenty-two future of work provider lens.
We also continue to build partnerships with key players in the modern workplace market. For example in the third quarter, we signed a new logo client through the partnership we recently announced with one E. We.
We feel very good about the prospects for this partnership.
In short our modern workplace strategy is working our solutions align to a fast growing and higher margin market and one in which we are positioned to take share.
Turning to cloud applications and infrastructure solutions or C. A N I, we continue to shift the mix of our C&I business toward solutions in hybrid and multi cloud management.
Cyber security application modernization cloud native application development and data analytics and insights.
Hertz is this focus area digital platforms and applications or D P and K.
This is a higher growth higher value piece of our C&I business.
We believe the D. P. In a market is approximately 230 billion.
Growing at a three year CAGR of approximately 19%.
In general we expect to grow this business as fast as the market over the next three years.
From a revenue perspective in the third quarter, we saw a year over year revenue growth for D PNA of 18%.
We expect D P and age and represent approximately 30% of C&I revenue in 2022 versus 20% for 2020 one.
We expect approximately 40% of our C&I revenue to be N V. P N a in 2025.
Clients are seeing the value of our deep DNA solutions was also evidenced by more than 100% year over year growth in signings.
For ACB and more than 50% year over year growth in T. C V signings, but this focus area in the third quarter.
Our G P. A M D P. At a pipeline is also growing it.
It was more than $800 million in the third quarter, a year over year increase of more than 50%.
As the third quarter example of success in this area, we signed a D. PNA contract with a current dws client that engineers consumer product goods. This contract enables units is to deliver and support secure access through Microsoft Azure to the clients' domain include.
<unk> enterprise applications, an excellent example of what we call cross selling.
Regarding profitability, we anticipate our D P and a margin to be in the mid 20% range in 2025.
Again as with modern workplace the more we move our C&I portfolio two D. P. A day the more profitable we expect to become.
The market continues to recognize our leadership and momentum in this area as well for example, during the quarter industry analyst firm Nelson Hall recognized us as a leader in its end to end cloud infrastructure management services 2020 to report.
Unisys was named as a leader in each of the reports five focus areas.
Microsoft Azure capabilities Clough.
Cloud orchestration services cloud management services, AWS capabilities and overall capabilities.
In addition, our C&I team has just achieved the AWS migration competency designation to earn this designation one must demonstrate deep AWS tactical experience and proven client success and specialized areas across industries use cases and workloads Hayden.
The U S validates candidates against a high bar to achieve this designation and we expect it will accelerate our momentum in D. P N a.
As we did with dws and see a and I last quarter, we are introducing a new focus area for E. C. S. This quarter in order to provide additional insight into our business.
We call it specialized services and next generation compute or S S and C.
This focus area covers managed application services managed services industry solutions and overall compute capabilities in each instance, where we have significant intellectual property.
One area. We are excited about within SSE is our air cargo industry solution.
We continue to provide comprehensive and robust air cargo management to our clients as we have for many years.
We expect to enhance value for existing clients and attract new clients does the deployment of richer data analytics capabilities to further improve efficiency in cargo operations.
S S and C is already a $200 million annual revenue business.
This represents approximately 30% of ECS revenue, but this percentage is more likely to fluctuate based on the size of the license and support business in any given quarter we.
We expect to grow the S S and C business between mid and high single digits annually through 2025.
Our margin in S. S. N C can also fluctuate depending on the mix of what we sell.
But we expect it to be typically in the low to mid 30% range.
The remaining portion of ECS is licenses and support or illness, which is a part of our business that consists of career paths forward.
And some other IP related licenses and support.
This is a portion of this segment.
That typically gets more attention in conversations with you because it's larger.
But given its dependence on the timing of renewable schedules it is more variable quarter to quarter and even year to year.
The market for our <unk> business is unchanged, we do not expect significant growth while it is possible that new capabilities and solutions could be classified and commercialized in a more traditional licensing model. We believe it is much more likely that we will drive growth any services or an ASIC.
Service model as part of S. S N C.
In the third quarter <unk> revenue was down 12, 7% due to the timing of license renewals.
Given the heavily weighted renewable schedule, we saw in 2020 and in 2021.
Coupled with some client driven early renewals in 2022 that were scheduled for 2023.
We expect 'twenty to 'twenty, three revenue will be down approximately 25% year over year base.
Based on the current renewable schedule, we expect 2024.
ROE in the low single digits with 2025 to grow low double digits.
With 'twenty 'twenty as its base, we expect a five year CAGR of approximately negative three 5%.
On the profit side the margin percentage for L. N S will fluctuate based on the volume because of our relatively fixed cost base. We expect margin in the mid 70%. This year approximately in the mid 60% in the next two years and then returning to the low <unk>.
70% by 2025.
It is clear that S. S N C and L. N S have unique strengths and we're pleased to be able to highlight them for you going forward both are important for our business.
Moving to our brand identity.
We expect the launch will occur in the fourth quarter of this year.
Brand is the last mile of our transformation and the new brand will bring our solutions to life in a meaningful compelling way.
We believe our new marketing campaign will increase market awareness, which in turn will help drive key sales metrics, such as leads pipeline wins and ultimately revenue and margin.
The new identity addresses how we help clients meet the changing needs of the market. While also serving as a key influential factor in our ability to retain attract and inspire talent.
This is the most significant brand transformation for the company since 1986.
We are very excited about it and we believe the market will be too.
The industry's transformation is taking hold at.
At the same time, we experienced some unexpected challenges since the last earnings call that have led us to lower our revenue and profitability guidance for the year, which Deb will provide color on in her remarks with that I'll turn the call over to Deb to discuss our financial results.
Good morning, everyone. 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'll provide total company revenue on an as reported basis as well as in constant currency and I'll provide segment level revenue on a constant currency basis.
I will now provide insight into our third quarter results I'll also highlight the changes in our guidance and provide an update on our defined on our defined benefit pension plans.
Across the company the transformation of our solution portfolio and go to market approach drove improvement leading revenue indicators in the third quarter.
Well aside pipeline is approximately $6 billion, representing growth of 25% year over year annual contract value or ACD in the quarter was up 20% year over year, primarily driven by new business ACB growth at 41%.
As we've mentioned before we believe E C D remains a more informative.
Sort of metric and chi seating for our business given the reduction in average length of contract and client preferences and SaaS based offerings that we have seen in our industry.
Total contract value in the quarter was up 31% year over year.
Backlog was down one 9% sequentially and up 2% excluding foreign exchange total.
Company revenue was 461 million in the quarter, which was down five 5% year over year and up 3% in constant currency.
Aaron Exchange had a five 8% negative impact on our revenue this quarter.
The constant currency growth was primarily driven by revenue and our focus areas of modern workplace and digital platforms and applications and power.
Actually offset by the impact of non strategic traditional workplace contracts exited in 'twenty, one and part of the transformation that Peter described.
The impact of these non strategic contract.
<unk> revenues grew four 7% in constant currency.
Now I'll move to our segments, starting with digital workplace solutions.
U S revenue declined 4%, primarily due to an approximately $20 million impact from non strategic contracts exiting in 2021, Excluding me E. W. Asked grew 12, 2%.
We exited contracts will impact the fourth quarter by approximately $12 million.
Revenue grew five 4% sequentially, which demonstrated continued progress in the gws business, we expect to see continued sequential growth in Q4.
We're encouraged that we continue signing new long term contracts for our modern workplace solution as it highlights our ability to shift to the higher growth higher aspect of the industry.
Yeah, you know I revenue in the third quarter grew eight 1% year over year driven by growth in D. Pan out we expect to see constant currency growth both year over year and sequentially from the fourth quarter.
For the third quarter with a light clear path for it license renewal quarter, which drove a 3% year over year decline as a reminder, a majority of ECS revenue timing depends on the number and size of contracts up for renewal each quarter as opposed to renewal rates themselves have to remain over 95%.
Q4 will realize more license renewals, resulting in positive year over year growth in that quarter, we still anticipate full year 2020 revenue to be down low single digits year over year for totally Fiat.
Now discuss the changes in our revenue guidance.
Despite seeing positive momentum and encouraging leading indicators in our key focus areas. This quarter. We also experienced some unexpected challenges since the last earnings call. A majority of these challenges from macroeconomic in nature.
Foreign exchange and existing client budget constraints and economic impact it caused them or minimal delays or in some cases reduction in scope.
Two of these challenges our clients specific one for the modification of scope for client project and another for an existing client that shifted its new scope expansion to a SaaS contract, which provides a more steady stream of revenue over time, but less upfront revenue in 2022 than we had anticipated.
A lot of the challenges in our existing client base, we are experiencing an impact in our revenue.
The nation related to new logo signed right.
These have led us to lower our revenue growth guidance for the year.
And at 1% to positive 1% growth on a constant currency basis or from negative 5.5% to negative three 5% as reported.
Moving to profitability total company gross profit margin was down 340 basis points year over year 22, 6% versus 26% in the prior year period, primarily because we had more clear path forward license renewal in the third quarter of last year versus this year.
Now moving to the segment level against starting with Gws, our efforts to drive productivity expanded gws's margin by 270 basis points year over year from 12, 4% to 15, 1%. This was an improvement of 210 basis points sequentially, we expect productivity improvements to continue and more efficient staffing model.
Stabilizing cost of labor and our ongoing mix shifts to drive improvement in dws margin, both year over year and sequentially in the fourth quarter.
Moving to C&I margin was five 6% versus five 9% in the prior year period as the increased awareness of our capabilities in C&I, we expect profitability upside both year over year and sequentially for the fourth quarter as we continue to execute labor and asset productivity improvement.
You see us margin was down 650 basis points year over year, primarily because we had more clear path, bringing all in Q3 last last year versus this year. As a reminder, ECS costs are relatively fixed both year here and throughout the year given that the key components of costs or labor to support the platform and the amortization.
Software development cost so the timing of license renewals has an impact on profitability.
Total company non-GAAP operating profit margin was three 1% down 260 basis points year over year, primarily because we had more clear path forward renewals in Q3 last year versus this year.
Adjusted EBITDA margin was 11, 4% down 390 basis points year over year.
non-GAAP operating profit and adjusted EBITDA margin to be up year over year in the fourth quarter, driven by automation and later labor productivity improvements and higher ECS license revenue.
Just on the revised guidance and ongoing economic pressures.
The revised revenue guidance I'm, sorry, an ongoing economic pressures, we are revising our full year non-GAAP operating profit margin guidance to 6% to 8% and adjusted EBITA margin guidance to 14, 5% to 16, 5%.
We reported a net loss of $40 1 million or <unk> 59 per diluted share versus a net loss of $18 7 million or 28 cents per diluted share in the prior year period, primarily driven by timing of clear path forward for any one time charges related to cost reduction activities and other nonrecurring expenses in part offset by a tax.
Benefit due to the partial reversal of valuation allowances.
non-GAAP net income was $3 1 million.
Our five cents per diluted share versus $6 9 million or 10 cents.
Per diluted share in the prior year period.
With regards to fourth quarter expectations, we plan to implement a cost reduction program to further improve our cost structure continue to right size, our real estate footprint to accommodate our hybrid working environment and write off certain assets for which we expect to take a pre tax charge between 50 and $60 million in the fourth quarter.
Turning to cash flow third quarter free cash flow was $23 $8 million down $15 6 million year over year impacted by lower adjusted EBITDA and changes in working capital.
Do you expect to be free cash flow positive. This year, we now anticipate a range of five 925 million for the full year.
Also we expect capital expenditures to be between 85 and $95 million.
For the fourth quarter free cash flow, that's highly dependent on the timing of ECS license renewals, which earned revenue and typically collect cash in the same quarter.
We had a cash balance of 351 million as of the end of the third quarter, which is above our working capital needs.
I will now turning to our defined benefit pension plan.
Each year and Unisys reports its estimated U S qualified defined benefit pension plan cash contributions based on expected asset returns and finding discount rates as of that year end, while noting that the future funding requirements are likely to change based on among other items market conditions and changes in discount rate we.
We reported during our full year 'twenty one earnings call that we did not anticipate required contributions to our qualified U S defined benefit pension plans for at least the next 10 years. However, given the material deterioration in the capital markets. Since December 31, 2021, we are providing you with an interim estimate based on the September 30th 2022 market.
That has become increasingly likely make contributions to the U S qualified defined benefit pension plans will be required during this 10 year period.
Our current estimates are based upon updated plan assets and estimated discount rates as of September 30th 2020 tail, but do not incorporate updates any of the actuarial assumptions such as expected return on assets projected future interest rates or mortality along with several other actuarial assumptions, which are updated only at year end.
I'll now contributions are expected in 2023 or 2024 to the U S qualified benefit pension plan.
Currently estimate cash contributions to these plans will be required beginning in 2025.
And markets can significantly change between now and 2025 when payments are expected to begin and continue through 2030 to the end of our estimate period. However for the U S qualified defined benefit plans, we estimate that starting in 2025 annual contribution for each of the subsequent eight years.
<unk> will average approximately $100 million for these plans.
Please note that these contributions are in addition to the other defined benefit plan funding requirement.
Which are still estimated to average approximately $30 million per year for each of the next 10 years.
As we always do we continue to work closely with our actuaries that pension liability reduction transaction opportunities now lets turn to GAAP defined benefit pension plan liability.
Rising interest rates result in lower GAAP defined benefit pension plan liability accordingly, the U S. GAAP estimate of defined benefit pension deficit. This year as he has narrowed as the increase in interest rates reduced our estimate.
The defined benefit pension liability to a greater degree than the decline in assets.
Estimated total GAAP deficit liability reduction of almost $100 million from the 750 million deficit reported at the end of 2021 at.
At the year end, we will provide an update all these estimates based on final asset values in actuarial estimates at that time, and we plan to return to our annual update cadence thereafter.
I also want to speak to the form <unk> 25 of illnesses filed yesterday and mentioned in our earnings press release, the audit and Finance Committee of our board is conducting an internal investigation regarding certain disclosure controls procedures matters, including but not limited to the dissemination and communication of information within certain parts of the organization.
<unk>.
Due to the ongoing investigation.
Disclosed in the filing may determine there are one or more material weaknesses and unisys.
Its internal control over financial reporting Unisys requires additional time to file our third quarter 10-Q, and as such filed for the 12 25.
Fortunately, we do not expect the investigation to result in any changes to the result.
The financial statements, we released yesterday or any previous financial statements.
We are working to complete these processes as soon as possible, but do not expect to be in a position to file a Form 10-Q within five calendar days of the prescribed due date.
As Peter noted upfront despite setbacks, primarily driven by macroeconomic conditions, we continue to make progress in shifting revenue through our higher value solutions and high demand focus areas and modern workplace and digital platforms and applications that we introduced last quarter clients are seeing the value of our solutions in these focus areas is evident.
By revenue growth approximately at or above market and each of them are focus area installations are higher margin and indicator of increased profitability over time with that I'll turn the call back over to Peter here. Thank you Dave.
Would note that for the Q&A session. In addition to Deb and myself, we're joined today by Chief operating offer an officer, Mike Thompson. The three of US will be pleased to respond to any questions. You may have Joe would you. Please open the call for questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question here will come from on your soda shrimp with Sidoti. Please go ahead.
Hi, and thank you for taking my questions well for some just curious about.
The slowdown in the revenue.
Are.
Are you seeing the customers delaying contracts or are there rather taking smaller contracts or what are you seeing there.
So I know that let me, let me answer that and obviously as Deb and Mike can join in it's a little bit of both we have seen some contracts we saw one contract.
Which we expected to sign in the.
In the third quarter, we now expect a decided in the fourth quarter. So that's a slippage we have seen some contracts that really I think because of the economic uncertainty out there.
Have come in a little smaller than we expected and we've actually seen the makeup of some contracts change. So for instance, Deb mentioned the contract, which actually we thought was going to be a license contract.
And instead of working with the clients and what the client really wanted to get out of that it has become.
More of a SaaS contract so that will be paid over time, and we'll recognize the revenue over time instead of recognizing the revenue upfront. So its a little bit about all of that I'd defer to Mike for a little more answer there you know Peter I think I think you've hit all of the pertinent points there I would say on your debt.
From from a market facing perspective, we've been very happy with the engagement of their client base and in and in General I think it's probably I would characterize it as more of a deferral than anything else. The pipeline remains strong the conversations continue.
As Peter mentioned with the exception of a couple of contracts where the scope was.
The scope slightly.
We've seen others that they actually increased their scope right. So I think there's a good mix out there and and I really think it's a lot more macroeconomic concern than it is anything to do with solutions.
And thank you for the question.
Okay.
How much of the guidance, where they can't get to the currency at birth.
Hum.
Yeah.
Yeah, so and thank.
Thank you for the question the the foreign exchange had about 100 basis point impact.
You know on the as reported revenue guidance.
Okay. Thank you and can you also talk to the vertical where do you see most challenges.
Are there any stand out there.
We have to close now holding up better than others.
I'm, sorry can you repeat.
The question I couldn't hear what you were asking.
Instead of saying, Okay cool.
Based on the breadth of calls yourselves.
And the room to be better than another.
Our verticals are you, saying, I'm, sorry, and Mark yet yeah right.
Right.
Yeah, what I would say there is you know.
None come to mind, as specifically either higher or lower than expectations.
Mike anything that yeah, no look I don't I don't see any differentiation frankly on you in the verticals I think you know the the demand and the margin profile that we've been able to maintain I actually and improve.
It has been pretty consistent so I wouldn't say any one stands out to be honest.
Okay. Thank you that will fall for me.
Thanks, David.
Our next question will come from Rod bourgeois with deep dive equity research. Please go ahead.
Hey, guys. So if it makes sense that macro is having impact on some of your deal activity.
And your pipeline commentary sounds good you you seem encouraged about what youre seeing in the pipe and also even in your recent signings, but I wanted to ask is in the pipeline has the pipeline become more more ripe in terms of the <unk>.
Deals that are immediately in front of you in the upcoming months or is the pipe, becoming more back loaded or any other noteworthy changes in the composition of the pipe as as you're wrestling with some of these macro things.
Hey, Ryan it's Mike I'll take that one thanks for the question no I would I would say rod the pipeline is actually more ripe. We're really encouraged as you mentioned about the increase in and T. C V and in backlog and pipeline in general.
Yeah.
Again, I think are in actually both of our focus areas, we had significant growth.
And so not only is it ripe in the sense of volume.
I think it's ripe in the sense of the types of deals that we want to pursue and and I think the client expectations of us which is great. We're having the dialogues we want to have which is about a modern workplace and about D. P. N. A so so not only ripe in volume, but I think rich in the quality of.
What's in there.
Okay. And then you you you mentioned a cost reduction plan for the fourth quarter and I guess I'm wondering is can you can you talk a little more about the the latest cost reduction plan is that plan overall more aggressive today than it would've been three months ago.
Due to the macro challenges that you're seeing or are there. Other factors that are that are causing you to sort of.
Update your cost reduction plan.
Yeah no. Thanks for the question I mean, as you know, we're always evaluating opportunities to further reduce our cost structure, but youre right in that you know that there is some impact from the macro as well.
He is looking at that and as far as the <unk>.
The impact you know about 35% about a third of it is related to real estate right sizing about 40%.
Asset retirement, and then the balance to workforce actions.
Okay got it and then just as a final one on the clarification side. It was helpful that you provided some some outlooks.
You know even even are interested some of the growth opportunities in the mix changes through 2025.
And your ECS business I think you mentioned, you're clear path forward licensing model and I just wanted to ask are there or there about any changes that you've considered to your license licensing model and any color on that would be very helpful.
Yeah. So rod this is Peter again, thanks for all the questions.
So as we have segmented those two areas for between S. S N C and L. N S. R. L. S is licensing and support so that licensing model is in the L. A N S.
As in the <unk> piece of that segment.
Historically.
Much of the clear path forward revenue does come from.
Licenses and support.
It's always possible and we're always open to clients moving to a more as a service model.
They moved to a more as us as a service model.
You could see revenue moving out of L. N S, which is a type of contract to assess and see which is where we have the as a service.
I don't think that's been true for years and years.
The nature of our clients as such you know you think about large banks think about governments.
They're they're sensitive to the time value of money.
Which means that they tend to have lower cost of capital than we do which means theyre not too interested in differing always in the way of commercial client.
Might be to get to more of a SaaS pricing model that doesn't mean it can't happen.
Government changes and in financial services change. So we're always open to that it's part of our offering set has been for a long time.
And so I guess, we'll have to see if they have much of that changes overtime.
Got it thank you.
Yes.
Our next question will come from Joseph <unk> with Canaccord. Please go ahead.
Hey, guys. Good morning, and thanks for the extra segment color just thought maybe.
Turning to your your your rebranding or you're a reinvigorated brand campaign or any thoughts there.
Perhaps delaying that given the macro or higher the macro play into the or.
Play into your decision here to keep moving forward that because obviously, there's a cost there too and then I'll have a follow up.
Yeah.
Joe really thanks very much for the question, it's a really interesting question.
I want to use your question to just make sure everybody understands what we're actually doing with this new branding and marketing campaign I mentioned that it is the most important one I believe we have done since 1986 in 1986.
Unisys name came into place that was a merger of the old boroughs and the old Sperry Rand.
We are not.
<unk> going to change the name of Unisys. So we're keeping the unisys name we have done a lot of research about the unisys team and that name has equity that.
That name has value.
What this campaign will really do will attach more meaning to the name.
And more.
More association with our specific modern solutions and the name.
Now with respect to your specific question about timing you know we have we have worked throughout really the less we bought this for I think 15 months.
And we have been working on when the right timing would be I mentioned in my remarks that we expect to launch in the fourth quarter that is still our expectation.
Whether we might change that or not.
Is up to us, but as we sit here, we're still expecting to launch in the fourth quarter, Mike any thoughts on that yeah, Hey, Joe. Thanks for the question I would I mean I'm in the camp of not delaying and it's not so much about the cost aspect of it Joe but as Peter mentioned this has been part of our strategy really are.
Or early 'twenty one.
And next into the selling the connection to the industry analysts the connection to the third party advisors all of that is intertwined here right. So we've been prepping. This for a long time. It is a catalyst for continued growth.
Granted that the macroeconomic conditions are what they are but the services that we provide actually provide benefits to our clients that we think will help in the macroeconomic scenario that we're in so.
To me, it's it's it's all hands forward here I think it is a real important aspect of our strategy and as Peter mentioned kind of the last mile to pull all this together and.
I know from an internal perspective, we're super excited about it and just just to add one more comment onto that if I could Joe.
You know I mentioned in my remarks, there are two elements to this.
What element is all of the stuff that Mike just covered.
Clients prospective clients third party advisors analysts industry experts are we think that this will appeal to them.
The other aspect of this is is people.
And by that I mean that people, who currently work at the company people, who would be attracted to work at the company. We really think that this will enhance the value of of Unisys as a place to work and that you know people who are considering whether to join the company will be more likely to and people are as a company will frankly.
It'd be more likely to stay so so there is a people element to this that we're also very excited about and as Mike said, we've been previewing this with some focus area groups.
Both both internally and externally.
And I got to tell you that the reaction has been incredibly positive. So we're looking forward to it.
Yeah, that's great I'm looking forward to seeing it myself and then maybe just one follow up I know you know you've exited some contracts that you deemed not profitable.
To continue last year.
Is there any risk that perhaps the macro kind of.
Our results in more of those types of contracts.
All being here or.
Popping their head up on some renewals as you look into next year, if the macro is.
Still a tough environment. Thanks, guys.
Sure Hey, Thanks, Joe look I, we obviously look very closely at our renewal schedule. There are only two contracts of that ilk coming up in the remainder of this year as far as renewal schedule is concerned both are extremely positive dialogues right now so we expect no.
No impact of of anything like that.
Looking out a year or two the entire renewal schedule for next year.
Nothing on the Horizon, Joe that gives us concern.
In regards to those contracts so pricing power has been steady and and we've been comfortable with the relationships that we've got in that area. So I would say at least for the next 12 to.
16 months, or so and that renewal cycle, we're not seeing anything that gives us concern.
Great. Thanks, Mike Thanks, everyone for taking my questions.
Thank you Joe.
Our next question will come from John ton, one tank with CJS Securities. Please go ahead.
Hi, Good morning. Thanks for taking my question I was wondering if you could talk about the headwinds to your growth expectations in gws in C&I, a little bit more how much of that I guess weaker uptake is slower than expected ramp on contracts that are already been signed.
You've obviously had strong HBV over the past couple of quarters I'm just wondering what the disconnect is there.
Yeah, John how are you doing it it's Mike I wouldn't say you.
You used the term uptake I don't I don't think it's really much to do with contracts already signed the volumes that we see for the contracts we're working.
He is really been no different in fact, we've seen some increases.
What we're seeing is kind of new logo contracts being delayed.
Pushed out to another quarter right. So I think it's more a deferral of decision, making or what we're seeing is even though on the renewal cycle instead of necessarily renewing for the for the full term of three or five years, you know maybe it's a one year extension on the backs of a contract we already have.
And in that case, perhaps even a little bit of de scoping, but I mean, if you think about our strategy in general.
We're actually bringing to market solutions that we're providing value to the client and so are our dialogue is about how they can actually.
I end up paying even a higher margin and saving money because of ultimately what we're doing from a productivity perspective through through the experience play specifically and in dws. So I wouldn't say, it's anything to do with uptake on the existing base.
And more and more a deferral of decision, making and again I think that's something we're seeing industry wide.
Okay understood and are the margins on the new signings, where you want them today.
Yes, we've been pleased that the margins, we're getting especially as we are moving more towards those higher value you know modern workplace and a N D. P N a.
Got it.
One last one just any thoughts on your long term targets and your ability to drive free cash flow and earnings just.
Especially with the new I guess, our preliminary expectations for the pension contribution you need to make.
Yeah. So that's a great question John This is Peter.
But what we're trying to do in these remarks was to really highlight kind of our growth expectations around those focus areas and now we have three right. We told you last quarter, we were going to add one from ECS and now we have so we've kind of highlighted our expectation through 2012 2012.
Five of those focus areas, we've tried to highlight what we expect.
In terms of.
Of margin as well as our revenue in those focus areas, we do expect.
In the first quarter of next year to have a full investor day and.
And so we do expect to go beyond just talking about those three focus areas and really giving.
Our view of the company as a whole.
Going out three years or so so you can you can put that on your calendar for sometime in the first quarter of 2023.
Okay, great. Thank you I'll jump back in queue.
Thanks, John .
Again, if you have a question. Please press Star then one to join the question queue.
Our next question here will come from Matthew Kalinka with Maxim Group. Please go ahead.
Hey, good morning, Thanks for taking my questions.
Let me start with you touched on the labor environment, but can.
Can you go a little bit more at the depth of how you see that.
Rolling into.
Your plans and expectations for 2023.
Yeah, Matt Thanks, very much for the question so our voluntary attrition.
Is down slightly in the third quarter.
So so our voluntary attrition in.
In the third quarter is 18, 9%.
That's down about 3% sequentially.
And that's down really across the board and geographies I don't think theres any geography that is significantly.
Moving up wallets, while the rest is going down so the geographies are a little different but they're all kind of moving slightly down.
Think it's a combination of a couple of things.
You know first you.
You know there has been an inflationary of development in our sector.
That has affected our margins.
But that does appear to be you know hitting a contrary.
Act right now.
And the Contrary act as you know our view of a recessionary environment, both in geographies in across industries, and particularly in the tech industry. So you know rather than earlier this year, where it was it was just kind of one force, which was inflation, there's kind of a push me pull you know.
And you kind of have two different forces going against each other and I think that that is a more.
And then and the result of that is.
We're seeing a decrease in attrition you're seeing a decrease in some of the wage pressure youre seeing an increased understanding about the value of actually staying with the company and so you know that we're seeing a modest decrease in attrition because of that.
Outside those macro environments, we have been very focused as a company.
Yes.
No.
Really increasing our sense of community and belonging we've really worked pretty hard not just this year, but I'd say over the past couple of years of really creating an identity of what it means to be part of Unisys Ah why you would want to join why you would want to stay.
You'll notice in the question about branding you know I was I was very quick to say this is not just about clients and prospective clients. Although it is and it is not just about third party administrators, where advisers at analyst. Although it is it's also about our people it's about making our people really feel part of something they're excited about it.
We think that the new branding and marketing will help that but again, that's not overnight that's been in the works for a long time. So we're working all angles of that I hope massive that's helpful. For you, it's certainly important to us.
Okay.
Yeah, Peter Thank you that was very helpful I.
I guess my follow up question would be I think you talked about one cross sell or sizable cross sell I think that when from dws.
To see a an eye but.
They can go back and maybe cover what the.
With the Genesis of the cross sell was how you identify opportunities.
But to cross sell and what the pipeline looks like for those sorts of deals.
Hey, Matt It's Mike I'll take that one thank you for the question.
Look I think in general if we talk about cross sell we're really talking about across B U embedded in its primarily between C&I and dws.
And if I look at the data set roughly about 30% of our business is already in a cross sell arena. So when we look at our client base and we look at white space opportunities clearly if I'm looking at the white space for a detail on an existing dws.
Client that cross sell opportunity is in C. N C. A N I, so and we and we specifically have.
I'll say early entry offerings in either of those scenarios right. So if you're an existing C&I client, we have early entry offerings and dws and vice versa. So the targeted approach is really generated at the client level through white space looking at what we're doing well and what the entry.
Hi, all.
I'll say offering is for the cross sell opportunity.
As you well know that that cross sell opportunity creates a better margin profile, a stickier client and are happier client right. So there's a there's a tremendous amount of opportunity embedded in our current client base to continue doing that considering we've only got 30% penetration that way today.
So we think that's a big part of our strategy going forward and what I would I would add to that is as you know.
We've been aware of that for a while we've obviously been attempting for a while to get clients to use more than one of our business units.
We do find in general at least the last time, we did this analysis that clients and it was a few years ago that we did at the clients that have more than one business unit tend to be more profitable and tend to be stickier. If you will.
But the work we have done this year.
It really has taken that to a new level.
And and you know.
Underneath what Mike is talking about and you saw him really rush to answer that question because he's been so involved in that.
So Mike do you want to give just a little more update on you know kind of exactly what we've done really this year, because you say it better than high about how we really are focusing on that white space. Yeah, Yeah, I definitely will matter I wanted to just give one other color 0.1st.
The white space analysis that we've been talking about here is in our existing base.
The interesting thing is the new logos that we've been signing throughout the year are coming in multi bu.
I would say at least in on top of mind, the last four or five significant ones have all had a piece of those to be use embedded in them and some even do a third b U. So it's really interesting too.
We're going to market and the connectivity between our solutions on the new logo side are almost naturally tied so you get a multi bu.
Relationship and then it's the deeper focus in a white space analysis for the existing base and as I mentioned I think you know if you look at something like a cyber security offering that is locating rogue asset that's an easy entry way into an existing dws client.
That we want to begin.
Begin to bring our C. A N I offering into right. So so there's a real strategy there it's tailored to the client and what they already have and also tailored to whatever their renewal schedule looks like and how we want our entry into that client to look like so.
So it's.
A big focus of our of our selling team. It's a big focus of our client executives in our client delivery executives and we've got all of those components aligned at this point right. So we're really excited about what that can bring for twenty-three. Thanks for the question.
Thank you.
And our next question is a follow up from John ton, one Tang with CGS Securities. Please go ahead.
Hi, guys I was just wondering about the ECS segment, you mentioned that you had.
License renewals are coming down over the next couple of years I was wondering how much pricing power you have there.
Just because it seems.
Essential to their businesses.
And the system just help me understand how you set the pricing every year for us.
Yes, just to be clear and I'm going to defer to to Deb on this.
I think we were expecting a lower O&M revenue next year.
But then slightly higher <unk> revenue in 'twenty, four and 'twenty five yeah, that's right and I think Doug gave you some specific numbers on that.
It really is tied to the expected license renewal cycle and I want to underline the word expected.
We don't always know how that's going to work.
There are as we've had this year some clients. So we thought we'd get a route new next year that are renewing this year. It is there are so many.
Variables that go into that we cannot understand all of those in advance, but it's the best we can do.
With respect to pricing power.
I think I'll defer that one to Mike.
I will say that it is complicated.
And we you know we think we know the clients pretty well, we think we know the value of what we're bringing to them pretty well and many of these clients have been our clients for a very long time.
And we want them to stay our clients for a very long time, and we really treat them.
You know like an extended relationship, but it's not a transactional relationship with Mike Yeah look and John I would say that the the pricing has held for sure.
In fact in some cases, we've been able to drive some of that pricing up, but but I think what Peter just close there with is this is not a let's gouge the client and go that route we're actually looking at the penetration to those clear path forward clients in another way so not only are we.
To maintain the pricing related to the licensing, but we're using that as an entry to talk about application modernization managed services of applications that are modernized managed services related to the clear path forward ecosystem right. So there's a lot of other opportunity.
That we can grow that relationship again make it stickier and not have to just deal with it from a perspective of we need to increase price every time. So I think we've been pretty consistent with the pricing model, we get our normal I'll say cost of living increase type of thing and and again, we're really looking at ancillary.
<unk> services as a means to continue to grow that base.
Got it that's helpful did you say what your expectations were that were for that on that application and services side just in terms of growth rate.
We did.
It was low single digits in 'twenty four and.
I think double digits in 'twenty, five and I think I think it was.
Go ahead do you expect the specific one yeah for for for Rabbit. We said, we expected it would be about 40% of revenue in 2025, I don't know if we gave a revenue run rate.
Good.
So yes, when we gave Q3.
Let me, let me pull that math because it was in my remarks, I just wanted to make sure they give it to you exactly.
It's okay, we can follow up.
Hum.
The margin of mid 20% range.
Hold on anybody.
Yes, we said the three year CAGR that was approximately 19% and we expect to grow as fast I'm, sorry, that's D P&A.
Let me ask you Matt just a quick clarification are you asking for the SSD part of ECS I thought that's what your question was the non licensed part.
Yes, Oh, Okay, I'm, sorry, I thought you said C&I.
And so for that.
Cause I'm pulling my.
Further out.
We said, we expected to grow mid and high single digits annually through 2025, there would go apologize.
Got it thank you.
Hum.
Not at all there's a lot of you know we gave a lot of numbers, we did an insight and again, we are hopeful that by by breaking this out and really giving some very specific information on the three focus areas that really gives you a good indication of where we are focusing on the company and how we're driving but it does mean, we've got a lot of them.
And so I apologize in advance for that but that is an effort to really provide more information to you.
No worries thank you.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Peter alphabet for any closing remarks.
I'd like to thank everyone for joining the call.
I'd like to thank particularly the folks who asked questions that I thought helped us.
Enlighten everybody about.
The business and how the business is evolving.
And I want to welcome everyone to the next call in advance.
And as always we have a bunch of information on our Investor Relations website and really on our website in general.
We put a lot of information on that website and I will tell you that as we launch the new branding.
Effort and campaign, you will see changes in that website and I think you'll be very inspired by the level of change in the way we are telling our story and some of the information we put out there. So I hope you pay some attention to that and you'll you'll know it when you see it.
Thanks again for joining us today.
Yeah.
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.