Q4 2022 Unisys Corp Earnings Call

Good morning, and welcome to the Unisys fourth quarter and full years 2022 financial results conference call.

All participants will be in listen only mode.

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After today's presentation there'll be an opportunity to ask questions.

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Please note this event is being recorded.

I'll now like to turn the conference over to Makena Water-ski, Vice President of Investor Relations. Please go ahead. Thank you operator. Good morning, everyone. This is Nick Hiller poor ski Vice President of Investor Relations. Thank you for joining US yesterday afternoon, Genesis released its fourth quarter and full year 2020 financial results I'm joined this morning.

To discuss those results by Peter alphabet, our chair and CEO Deb Mccann, our CFO and Mike Thomson, our CFO , who will participate in the Q&A session.

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 presentation slides that will be using this morning to guide our discussion as well as other information relating to our fourth quarter and full year performance on our investor really.

<unk> 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 would 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 to the extent that we provide any guidance or color regarding expected future performance such info.

Patient is effective only on the date given unisys does not assume any obligation to update this information or any other 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 Mikael.

Good morning, and thank you for joining us to discuss Unisys fourth quarter and full year 2022 results.

We had a solid finish to the year, allowing us to hold revenue flat on a constant currency basis during the year impacted by macroeconomic and geopolitical uncertainty.

And we close the year above the midpoint of the revenue and profit guidance ranges, we provided on our third quarter Cole.

We believe the fourth quarter is evidenced that our approach is working well.

Our higher growth and higher margin solutions are gaining momentum this is especially evident when viewing our performance excluding license and support.

S, which fluctuate based on the timing of license renewals to provide investors with increased transparency into the business. We will discuss ex <unk> revenue growth on a quarterly basis. This will be helpful. When looking ahead to our 2023 expense performance, which on the surface will show declines.

In total company revenue profit margin and EBITDA margin due to the light L. N S. Renewable schedule, we discussed last quarter overshadowing the underlying improvements we expect to achieve X L. N S solutions.

As we start 2023, we believe the new units. This brand is resonating with our clients prospects third party advisors and industry analysts and our pipeline and T. C V trends.

Our strengthening position.

Doug will provide detailed commentary on our financial results overall and by segment and an update on our U S qualified defined benefit plans and other global defined benefit plan, but first I will discuss our focus areas and provide an update on several important initiatives setting the stage for what we built.

<unk> will be future growth and margin improvement over the coming years.

I'll first discuss our key focus areas, including modern workplace.

Is it all platforms and applications or GP today.

Specialized services and compute.

S and C, which we have discussed previously.

Our key focus areas also include certain micro markets solutions, a subset of our business process solutions, which are highly specialized industry offerings.

Forward, we will refer to these areas, which are both higher growth and higher margin offerings.

Our next Gen solutions.

Although nextgen solutions are currently a small part of our business, we see an opportunity to generate sustainable growth and margin expansion and drive these solutions become a larger part of our business and focus of our global sales efforts.

The first Nextgen solution, where recovery is modern workplace.

<unk> of our proactive experience based solutions within our digital workplace solutions or Dws segment.

The digital workplace has only become more complex as hybrid work models have accelerated our modern workplace offerings transform technology support to solutions, such as hybrid virtual desktop advanced services employee experience communication and collaboration platform management and device subscription.

Modern workplace is delivered through the integration of managed services.

Jerry Unisys, IP and third party offerings, and Leverages advanced technology, such as artificial intelligence and machine learning.

We expanded our modern workplace solutions by enhancing our unified communications and unified endpoint management capabilities.

We now have an end to end portfolio of Nextgen experience based solutions, which we believe is a market leading portfolio.

In the fourth quarter modern workplace total contract value, where T C D and annual contract value or ACB, each more than doubled versus fourth quarter of 2021.

The second Nextgen solution will discuss his digital platforms and applications or D. PMA, which consists of our higher growth and higher margin.

Ian I solutions spanning modern application migration and development data analytics cloud management hybrid infrastructure and cyber security.

Clients are investing in these solutions to improve the efficiency and flexibility of their operations and significantly accelerate the pace of product and experience innovation. They are able to deliver to their customers, which is becoming table stakes to compete in the digital age.

In the fourth quarter D. P N a T C D and E C V each more than doubled versus fourth quarter of 2021.

The third Nextgen solution will discuss is specialized services and next gen compute or S. SMC.

Which includes highly specialized interesting solutions that help analyze and optimize workflows or diversified compute capacity with surplus edge and quantum computing capabilities.

Our S. S C industry solutions addressing opportunity to advance our industry specific innovations such as in cargo management, where we have deep expertise.

In the fourth quarter and.

And C. T C. D grew approximately 45% year over year, and ECB grew approximately 65% versus the prior year period.

Overall, our next Gen solutions are building momentum in the marketplace, creating pipeline opportunities with new clients and leading to successful cross selling with existing clients in the aggregate fourth quarter Nexgen solutions GCB grew more than 80% and ECB.

<unk> more than doubled year over year.

But before discussing the pipeline in more detail I want to take a moment to address the 2023 headwinds caused by the renewable schedule. We expect in L. N S, which we discussed last quarter, which Deb will provide more detail on in a few moments.

Changes in timing or term of renewables from client to client can lead to fluctuations in L. A N S revenue and consumption based pricing elements also play a role.

We expect to see that in 2023, however, our ECS business has certain attributes first our relationships in L. N S are very sticky.

Our technology provides mission critical capabilities for our clients as the operating a computing environment for some of the most vital transaction processing of numerous global financial travel transportation health care commercial and government clients.

The clients contributing more than 90% of <unk> revenue.

Retention is approximately 95% and these clients has typically had multi decade relationships with users.

Second we usually have good visibility into client renewal plants.

Placing our technology when that does happen often involves a highly complex multi year migration and utilizes support from our teams.

Third revenue from clients transitioning away again, where that happens typically declines over an extended period or may stabilize for an extended time at a lower level due to migration challenges cost over lunch was the need to maintain business continuity.

And may even reverse its decision if it finds it costs outweighed benefits.

Lastly, we continually make investments in our Illinois products and platforms to increase units. This is value through innovation.

In addition, we are investing in our S. S C industry and compute solutions, which we believe will further incentivize L. N S clients to partner with Unisys.

Turning to the progress we are seeing it ourselves efforts. Our total book to Bill ratio for 2022 calculated as trailing 12 month T. C V divided by revenue expanded to one one times up from <unk> eight times, a year ago, and our backlog increased by two.

$230 million sequentially to 2.92 billion from 2.69 billion in the third quarter.

Importantly, we signed contracts with three of our five largest dws clients in the fourth quarter Recommitting to their partnership with Unisys and turning to us to deliver at elevated experience for their employees.

We also expanded several C&I contracts during the quarter in one case, a large client who relies on Genesis for both dws and see a nice solutions significantly expanded the scope of the CA and ice solutions, we provide to them.

This client began their multiyear goodness this relationship as a traditional dws client many years ago and the win is a strong example of our opportunity to cross sell and up sell solutions that span it functions and consolidate it transformation for a global organization with tenants.

Thousands of employees.

From a pipeline perspective, we're entering 2023 from a better position than a year ago overall, our pipeline expanded during the fourth quarter on a year over year basis growing approximately 15% from prior year levels with single digit sequential decline due to our high sales conversion in the quarter.

Our next generation solutions grew its pipeline by more than 35%. Please note that when we discuss pipeline. We mean qualified pipeline, which are deals that have already been prospected and.

In summary, there is positive momentum in our leading indicators such as T. C D ACB book to Bill backlog and pipeline.

On the cost side workforce planning initiatives, we discussed in prior quarters have gained momentum.

Our focus on increasing our low cost footprint expanding the foundation of our labor pyramid and continuing to invest and associate development has driven improvement in our cost of workforce for the full year workforce costs as a percent of revenue decreased 50 basis points to 53, 7% from 50.

Four 2% in 2021.

In addition, our continued focus on building an open and inclusive environment resulted in an increase in associate engagement in 2022 as measured through our annual engagement survey.

Initiatives for increased diverse recruitment and overall retention had positive results at.

At year end, excluding field services at our Ips cell joint venture women accounted for more than 36% of our global associates, a slight uptick from 35% at the end of 2021.

Nearly 30% of our U S workforce again, excluding field services is from under represented ethnic groups up from 25% at the end of 2021.

In the coming year. In addition to continuing to mature our workforce transformation and DTI programs, we are increasing our focus on the associate experience by cultivating a winning culture to targeted initiatives that enable associates to contribute to the success of the company through innovation break.

Ignition and continued career development opportunities.

From a sales and marketing perspective, we've also implemented a number of strategic growth initiatives in 2022, some of which are already contributing to our improvement in leads pipeline win rates and to a growing list of industry recognition.

We introduced a new sales leadership structure in 2022, which has brought increased rigor and process around contract negotiation pricing and client relationship management.

Another key ingredient for growth is our partner ecosystem.

We expanded and strengthened during the year significant partnership activity occurred within Dws, where we made strides with Microsoft during the fourth quarter, obtaining the modern work adoption and change management specialization and with service now, where we became an elite partner and.

In addition, we are increasing our engagement with industry analysts in 2022, and example of which was the analyst and advisor day, we held in June bringing together leaders across our company to share our most exciting solution innovations and client case studies and.

Enlisting our industry thought leaders is increasing awareness of our transformation and we received recognition from our gws and C&I offerings throughout the year from prominent organizations such as Gartner in ISG.

Finally, we had a successful November launch of the new units. This Brent, which you can experience through our website and social channels as well as todays supplemental earnings materials. This is the most significant brand transformation for the company since 1986.

Our new brand is all about progress it's about units as being a catalyst that pushes people and organizations to breakthrough choose their next innovation.

Brand embodies our entrepreneurial spirit and the aspirations for what we know this company can achieve for itself and its clients.

We believe this platform will influence consideration in the market and be a catalyst for our own growth by influencing the key sales metrics I discussed earlier, such as leads pipeline wins and revenue growth through.

Through year end, we have already seen a 27% increase in visitors to our website and those who click on our ads are staying on site, 61% lower.

The new units. This brand is propelling our start to the year, which we expect to be a year of progress building upon our fourth quarter results.

Finally, we are encouraged by the positive trends in our T V and pipeline and the growth in our next Gen solutions with that I'll turn the call over to Deb to discuss our financial results in more detail.

Thank you Peter and 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 supplemental earnings materials posted on our Investor Relations site first I want to emphasize that Peter's discussion of Nextgen installations and act license and support.

Or L. A that performance has been introduced in an effort to I guess feedback we have received from our stakeholders should provide increased visibility into the business.

Going forward, Peter will continue to discuss our nextgen installations, given their areas of strategic and sales focus that we believe will drive future revenue growth and margin expansion.

Mostly provide leading indicators T C D. A C D and pipeline are these next gen insulation.

We're also providing excelling as revenue to allow investors to isolate the impact of license renewal, which tend to be lumpy and related support services and evaluate the progress we are making in the business outside of this area.

Terry will continue to focus primarily on our reportable segments digital workplace solutions cloud applications and infrastructure and enterprise computing solutions. Our segments are aligned with how we operate the business organize our teams and deliver our solutions as Peter discussed while 2022 was a challenging year. We were pleased with the year end performed.

And each of our segments, our go to market and labor efficiency initiatives are beginning to show in our results.

We are also exiting the year energized by the recent rebrand and a strong quarter S. T C D and E C D.

Full year 2022 company revenue totaled $1 nine 8 billion.

One increase on a constant currency basis in line with guidance, we provided last quarter and a three 6% decline on a reported basis.

Our strong performance in modern workplace and digital platforms and applications offset by lower license renewals and the contracts we exited in 2021.

Excluding Illinois revenue constant currency revenue growth for 2022 was <unk>, 6%.

In the fourth quarter revenue increased three 3% year over year and 7% on a constant currency basis, driven by strength in our acquired application development solutions as well as a strong license renewal quarter, but then you see ECS, particularly in the travel and financial sectors.

<unk> constant currency revenue growth in the quarter was three 1%.

Now for some segment detail. Please note that as I speak about the segments I will be discussing revenue in constant currency.

Digital workplace solutions or dws revenue in the fourth quarter declined 3% full year Dws revenue declined seven 3%.

In fact, it was impacted by our exiting several non strategic accounts in 2021, excluding these effects, which are now behind us revenue increased six 1% in the fourth quarter and eight 4% for the year.

Throughout the year, we continue to see strong demand for a modern workplace solutions demonstrated by the T. C D improvements Peter just Scott.

Our cloud applications and infrastructure solutions segment grew 11, 6% for the quarter and nine 4% for the full year driven by strong demand for our acquired application developed installation.

Enterprise Computing solutions, which includes license and support and has definitely see increased 16, 8% during the fourth quarter for the full year. The ECS segment revenue grew <unk> one.

1%.

Fourth quarter growth was driven by higher level of license and support renewal.

As Peter mentioned, we normally have good visibility of our anticipated license renewal schedule.

Nice quarterly revenue levels can be more difficult to predict this is due to factors such as client decision to renew early for budgeting reasons or did you revise payment or consumption terms or contract length during renewal negotiations.

<unk> revenue was $170 million in the fourth quarter and $468 million for the full year.

During the year several clear path forward clients, we had expected to renew in 2023 or 2024 chose to execute we're gonna malls in 2022 for varying reasons, such as the timing of government funding anticipation of geopolitical risks or appetite for long term budget certainty.

Early renewals are not uncommon that contributed approximately $60 million of Allen as revenue in 2022 that had been expected in either 23 or 'twenty four.

This timing dynamic as a driver of the 25% year over year decline me back in 2023.

Last quarter as Peter mentioned, we have a multiyear view into the majority of our revenue and in 2023, we expect it to be approximately $350 million split.

What 55% and 45% between the first and second half of the year with 30% to 35% of full year revenue expected in the first quarter.

As we said last quarter, we expect the cadence of low single digit growth in 2024, and low double digit growth in 2025. As a reminder, renewals are partially dependent on when clients choose to renew and these estimates should be viewed as approximate.

Moving to total contract value or T. C D growth and our book to Bill was driven by strong fourth quarter T. C D growth of 55% year over year, but the full year.

D C V grew 28%.

E C D with similarly strong growing 58% during the fourth quarter and 36% for the full year.

Strength across our T C D and the quality of opportunities in our pipeline support our full year 2023 revenue guidance of negative 3% to negative 7% looking at the first quarter, we expect high single digit growth year over year due to strong Alan S revenue compared to the prior year quarter.

Excluding the estimated 2023 elements revenue we provided the expected performance of our ex element solutions is in the range of a decline of 1% to growth of 4%.

Turning to our profitability, we saw strong sequential margin improvement in the fourth quarter.

Largely the result of higher license renewal level and improvements from our labor cost initiatives.

Fourth quarter gross margin expanded by 370 basis points year over year to 34, 1%. Our best quarterly result in 2022, and the first three quarters were impacted by lower renewal level, and Elena and nonrecurring charges in C&I.

Our full year gross margin was 26, 7%.

Peter discussed we are effectively managing labor costs across the company to drive incremental improvements on the margin. We also saw an easing of wage inflation in many markets during the back half of the year and successfully address challenge areas in specific geographies or skill sets your targeted marketing campaigns, yielding quality candidates and higher conversion rate.

Now looking at gross margin by segment.

Dws fourth quarter gross margin expanded 110 basis points year over year to 15.1% largely driven by labor cost savings from efforts to drive productivity, we achieved 14% dws gross margin for the full year and we anticipate productivity improvements to continue in 2023.

Yeah, and I'm margin in the fourth quarter was 19% driven.

Driven by improved delivery efficiency and a nonrecurring benefit from the sale of surplus IP addresses.

Full year C&I gross margin contracted by 60 basis points driven by charges on a small number of public sector accounts taken in the first three quarters. These charges were due primarily to contracts with third party application development work being performed.

Our acquired application development solutions, we have less reliance on third party contractors for this type of work. So these charges are substantially behind us.

And ECS gross margin was 73, 3% for the quarter and 64, 5% for the year driven by license renewal levels in each period.

For the total company fourth quarter non-GAAP operating margin was 22% and.

And 850 basis point expansion versus the prior year period, and fourth quarter adjusted EBITDA margin was 26, 7%.

For the full year, our non-GAAP operating margin was 8% and adjusted EBITDA margin was 16, 5%.

Full year margin compression was driven by an increase in marketing related to the new units this brand.

Exit of certain contracts and C&I contract charges.

We reported fourth quarter GAAP net income of $8 5 million, representing 12 cents in earnings per diluted share.

Excluding cost reduction and other expenses, which totaled $74 3 million net of taxes.

non-GAAP net income was $82 8 million in the fourth quarter, representing $1.22 of earnings per diluted share versus 51 cents in the fourth quarter 'twenty one.

For the full year, we reported a GAAP loss of $106 million or a loss of $1 57 per diluted share while.

non-GAAP net income totaled $74 8 million or $1 10 per diluted share.

In 2023, we expect a non-GAAP operating margin of 2% to 4% and adjusted EBITDA margin of nine and a half to 11, 5%.

The year over year margin compression due to lower <unk> revenue, partially offset by improvement in dws and C&I combined gross margins of approximately 250 basis points.

Driven by growth in next Gen solutions.

In delivery efficiency initiatives.

Slight strategy inside decreased capex demands due to contract delays in the first half of the year, we expect a similar amount of capital expenditures in 2023.

Cash taxes were approximately 49 million for the full year and are also expected to be approximately $50 million in 2023.

Free cash flow was negative 73 million for the year, primarily due to technology collections and Elena.

Slipped out of a year in working capital changes adjusted free cash flow, which excludes cash paid for post retirement funding and cost reduction in other payments with 27 million.

We expect capital expenditures interest tax and pension payments to be in line with 2022, and a benefit from technology payments that shifted from 2022 into 2023. This benefit will roughly offset the negative pre casual impact expected from lower Elena revenue.

While we don't see a formal free cashflow guidance, we expect 2023 free cashflow to be in line or slightly improved from the 2022 free cash flow.

We continue to maintain a strong balance sheet ending year with cash and cash equivalents of $392 million, we have ample liquidity unexpected and 2023 with global cash balances sufficient to support the business. Additionally.

Additionally, our net leverage ratio of including all defined benefit pension plan that deficits with 2.1 times as of your and.

I will now provide an update to are defined benefit pension plans. Despite challenging ask that returns during the year.

Our global got attention deficit improved over the full year by $210 million to $543 million. This improvement in large part due to higher discount rates, which reduce the present value of the liabilities the deficit related or U S qualify defined benefit pension plans improved by $143 million during 2022 and I'm a <unk>.

F as a physician of $366 million during each year Unisys reports, it's estimated tenure cash contributions to its global pension plans, including the U S qualify defined benefit pension plans. In addition to updating all actuarial assumptions at the end of each year contributions to the U S qualify defined benefit pension plans are subject to various.

Specific and complex I R S funding rules.

Despite the improvement in the gap deficits. These.

These funding rules have resulted in expected cash contributions of about $650 million for the U S qualified defined benefit pension plans over the next 10 years compared with $0 projected at the end of 2021. This is down approximately 20% from the interim projection provided with the Q3 earnings discussion primarily do.

To updated urine actuarial assumptions and positive asset returns during the fourth quarter.

Currently no cash contributions forties pension plans are expected for 2023 and 2024.

This increase of $650 million in cash contribution requirements are you as qualified defined benefit plans zero 2021 is primarily driven by two factors first the funding rules by which our contributions are determined use discount rates that are based on a 25 year average, causing our contribution requirements.

To be less sensitive to changes in market interest rates than our gap deficit. The second factor is the accelerated user prefunding balances Judah negative asset returns during 2022.

Prefunding balances were established for me contributed approximately $800 million into our U S defined benefit pension plans in 2020 after the sale of our federal visit when established in through the end of 2021. These balances were expected to be utilized to fund future minimum contribution requirements in Lou of cash contributions however, with the negative.

As it returns in 2022 these balances have been reduced and will not be adequate to fully fund all future minimum contribution requirements.

Please note that the future funding requirements are likely to change based on among other items market conditions and changes in discount rate.

Although some volatility will continue the volatility in our forecasts. The contributions is expected to be significantly lower going forward and twenty-five your average discount rate used for funding purposes are now similar to market base discount right.

Going forward if rates continue to rise contributions could move to a market rate base methodology and the liabilities for funding purposes will move in line with the gap liabilities. Alternatively in a declining rate environment, we may benefit from funding relief by continuing to use discount rates based on twenty-five your averages.

However, even if rates were declined levels from a year ago.

And at outlook for contributions will not revert zero since the accelerated use of the prefunding balances makes them no longer available to apply towards future minimum required contributions. Once again. It is important to remember that all of these expectations reflect a snapshot in time based on race expected asset returns and other assumptions as.

You're and.

Contributions to the other global plans are typically less volatile than those resulting from the U S qualified plan rules and are expected to remain between 30 and 40 million annually <unk>.

In conclusion, our next Gen solutions are expanding in the new Unisys brand is propelling us board, reflecting the transformation under way across the company. Although 2023 will be challenged from an <unk> perspective, you're optimistic that it will be a year of progress and with that I'll turn it back to Peter for some closing remarks.

Thank you deal with that or would note the fruit to an eye surgery. In addition to the we're joined today by Chief operating Officer <unk>.

Three of us will be pleased to respond to any questions you have.

<unk> would you please open the cole for Christmas.

We will now begin the question and answer session.

To ask a question about the starter one your telephone keypad.

If you're using a speaker phone please pick up your hundred foot before pushing the keys.

To withdraw your question please post dark I'm too.

At this time <unk>.

Our first question will come from Rod bourgeois deep darker equity research <unk>.

Okay, Great guys, Hey, I want to ask for some more color on your next generation solutions segments.

Be great to get your.

Sort of updated view on what's <unk> your <unk> your your strategy in each of those next generation segments.

And you've just been through a rebranding effort and you made a lot of go to market changes over the last year or so and I'd also like kind of an update on how you see benefits or even further challenges occurring in <unk> in light of the rebranding another go to market changes that you've put in place.

<unk>.

Yeah, well. Thanks for the question I think I'll start with a bit on the branding and then turn it over to my Thompson's to talk about the next generation solutions.

You know, it's it's relatively early days on the Brandy, we launch that just about I think a week after Thanksgiving of last year.

But I have to tell you we had been really encouraged by by the the response and some of that is data as you can see from my remarks, you know the the number of people coming to the site has increased the number.

<unk> people to spend on the site once they get engaged to this increase dramatically, but but anecdotally at this point, you're only gonna have anecdotal comment on on the bigger effect, you'll get new brand.

I've talked to clients or prospects are supposed to both prospective clients as well as perfect as perfect. A associates just people in the industry in general we've kind of spontaneously come up to me and said. This is this is really terrific stuff. So I do think that it is being well received and I think longterm, it's gonna have a <unk>.

<unk>, we don't think of marketing and communications as separate from the rest of the company. So when we talk about metrics, we're really talking about what happens to R. O T C V what happens <unk>.

It it really is just part of the you know through the company advancing.

Do think about branding and that in those efforts with some additional metrics such as we measure awareness about T. P. As we measure awareness of the marketplace. We measure the number of articles and pieces being written about us, but we're really encouraged <unk> started with respect to the next Gen solutions I'm Gonna turn it over.

Mike M C, a and asked them to tell Roderick.

Hey, Ron how are you thanks for the question.

I I guess I'll start with what we're planning to do an industry analyst J in June and we will give a much deeper explanation.

Thankfully I could fill the rest of the time slot you were talking about the strategy in all the connections. So I'll I'll start with just giving some highlights on kind of where we're at and where we're going and and again.

Or for the June meeting, where we'll get into real depth and each one of those areas.

I would say rod that right now, we're pleasantly surprised and pleased surprise, maybe not so so much the right word but pleased with the penetration that we're getting with the next Gen solutions. When you when you think about our our dws primary offering there and the experienced <unk>.

<unk> it is being very well received in the market for getting a tremendous amount of of commentary from clients prospective clients certainly industry analyst.

Think the Thai Union of data and experience is critical to our strategy. There right. So it's a combination of both you know health of the technical equipment.

Equipment as well as the inside of the people using the equipment and that's tied through both unified communications as as well as endpoint management and service desk in field services. So.

Combination that we're able to pull together from a data point of view experiencing all of those elements really gives us insight into our clients environment and that is really I think.

Starting to resonate from from a client perspective. So so all ahead full on that phone from dws and getting really really happy with the results we're seeing today.

C I, a and I just did to touch on that one for a minute or two is really about the application layer and and I guess to some degree I would say within ECS. It's about the application later to a <unk>, a very deep focus, especially post or acquisition of coffee game with the skills that we've at.

In the application development here in the apps transformation layer that is is you know a huge area of growth within N C. A N I and it's it's it's a level, where we were not necessarily cannibalizing our own work right away when you talk about infrastructure and you're moving infrastructure.

To the cloud there is some level of <unk> cannibalizing at work, that's not true and the absolutely right you can do that conversion and manage that application layer and really drive traffic to the cloud. So those are I would say the two primary areas within dws M. C. I N I that we're really emphasizing within.

Strategy and again the same holds true within ECS.

Application layer above the operating system, the transformation and modernization of that an application layer and then the managed service element of that so so I've been pretty consistent amongst all three of those segments in very specific from a strategic point of view, how we want to approach the market. So.

Hopefully rabbit gives you a little more color, but again, we'll get into some real specifics.

<unk>.

Mmm that's helpful and it just just a follow up related to that you've given us.

Helpful update on the <unk>.

Component of your E C S business, but I also just wanted to ask that.

There are other efforts going on in that ECS business and I'm wondering to what extent you see opportunities.

Maybe add new logo wins and the E. T F segment cause it kind of supplement what you're seeing on the on the ellena renewal side.

Yeah, let's look at another great question right. So we do see opportunity for new logo win in that space not all I mean really when we talk about S. S. N. C. It's are you know kind of next generation.

Element there right. So there's there's definitely opportunity for different types of confuse you mentioned some of those edge server latest quantum et cetera, certainly they those would come with new logo opportunities. So really we're looking at both expansion opportunities within S. As in C. Two.

To bring on new scope outside of the traditional Ellen S element of that we also or as you know trying to cross penetrate those clients with Oh Dws N C. I N I opportunities. So so there's real big expansion opportunities there and there are certainly logo opportunities.

In the construct of S. S N C. One of the things that's pretty interesting right now for us.

Peter mentioned in his prepared remarks as in the cargo space. We think we have some real expertise in that arena and some opportunities to really expand our footprint there.

Got it and then just just just a final in the last several quarters, we've talked a lot about labor cost talent availability attrition and so on I mean are you could you just give us an update on the trend that you're seeing particularly just on the overall labor cough side is it is there continuing to be.

Uhm.

Attenuation there on the on the labor front and in terms of the cough.

Yeah, well. So so you know when when it comes to labor <unk>. Thank you for the questions both to Mike and to me when it comes to the labor of there's really two elements to that one is the cost and what is the cost at a certain level of attrition. So it's a little bit of a of kind of you know a supply and demand equation. When we look at our <unk>.

<unk> attrition rate, we actually see as I mentioned attrition going down we went.

[noise] down 0.9% points.

So and it's now at 18%, which for our business remember that's a mix of not only people doing application development, but people doing support desk and people doing b P. O activities were attrition historically can be higher. So we think 18 per cent is very manageable and and is not unusual is.

I said, it's it's pretty much back to pre COVID-19 levels now at that rate. We are focused on you know specific areas, where there is still what I would call an imbalance between demand and supply Central Europe is one of those places where there was where there's continued to be an imbalance.

And in the rest of our sectors, we tend to see everything's coming down a little bit. It is very different from you know this quarter last year when it was really.

Very hot market, what we think that there are still significant demand for labor, but it is is it's cute moving back to ordinary course, it's not there yet, but it's moving back there.

<unk> I would I would say to you know we got about a 50 <unk> increase I'm, sorry decrease in our labor costs, which is favorable, especially given the market conditions that we're in and as you know we're gonna continue to work on our you know our workforce right, whether it's upscaling are increasing our low cost footprint.

And expanding the foundation of our pyramid.

And just frankly working smarter utilizing the experienced framework that we're using for clients right. So there is plenty to do still in regards to you know just shaping that that workforce and continuing to work to expand the margin on the traditional base as well as in the next Gen solution.

So you know we feel pretty good about our trajectory there.

Nice thank you guys.

Thanks for <unk>.

Our next question comes from Joseph that fee with Canaccord.

Go ahead.

Hey, guys. Good morning. Thank you for all the color as usual, maybe we talk a little bit about go to market, it's spelled sales and marketing investment and expenses and some of your.

Okay, Sir Peter that you mention versus maybe the non focus areas.

Maybe you know how <unk>, how you look at that to maintain perhaps the the non focus area, but you know obviously, we wanna grow the the focus service. After and then you could wrap in a little commentary on what you're seeing on the macro, especially perhaps on the non focus area business renewals.

And you know the potential to grow those over the next couple of years. Thanks.

Yeah, Joe Thanks, very much for the question, let me take a started it and then actually turn it over both to Mike and to Deb, when we think about investing in in marketing and communications in specific.

We talked about that brand lunch in November and and besides that that is basically just paying dividends.

It's kind of a different work I mean, you know we talked about you know the advent of the cloud in the habit of digital in particular, that's how that has decreased the startup costs for starting a new business well, which also decreased the cost of how do you really get brand awareness out there I mean.

It is it is the hour approaches almost completely digital depending on if you've been in some of the major airports you will see our advertisement whether that's digital or not it's on a screen. So I guess that it is until while we have talked about that and we think that is actually making a meaningful difference <unk>.

Not a huge expense now in my in my remarks, an indepth remarks, particularly around as she may cost debit talk about some marginal increase in <unk> that module increase is really associated primarily with the marketing communications and with some of the changes we've made to our.

Salesforce, a sales process, which I'm gonna ask Mike to talk about in a minute.

But it is marginal but we think that for the module fast it is actually very very beneficial for us My turn it over to you on the Samsung Yeah. Thanks, Joe look I I I think for US you know.

As Peter mentioned marketing and sales go hand in hand, and it goes deeper than just the advertising right. It's D communications to the industry analyst. It's the local connection to third party advisors or tomorrow.

Storytelling is the creation of all the pre sales material. So you know for for all of that you know we are really in a position of get tomorrow right. So we've talked for a year now around getting all that ready it's ready it's done we're out in the market with it the connection points are there.

We used to spend a lotta time on <unk> on vacation you know the the client portfolio to make sure we're really addressing both existing clients for for white space growth and for a new client sick increase our our our our ultimate market share there so real tight connection there very specific.

Two targeted clients and very specific to the types of solutions that we're trying to bring to market. So all of that I think is really paid off well in it and I think Peter's right. We're we're really isn't the the precipice of that as far as the you know we just launched a brand at the end of last year.

Talking to see some real traction there the the one thing I will add and you know Deb is our upset of cheaper. This we are very very focused on SG&A cost and so while our SG&A as we define it goes up a little bit primarily because of that marketing and because of the sales efforts every company defines S.

A different there's just no consistency. So you know we can compare against other companies, which are both higher and lower but it's not clear it's apples to apples. So we tend to compare against ourselves and I can tell you. The Deb is making sure that you know we are we are spending that money, where we get bang for the Buck tip anything further with it.

Yeah, No I think that.

Hey, Joe maybe just the second point you raised around the focus and you use the term non focus right. So we we we really don't use non focus in our in our vernacular remember those areas are gateways to our next gen solution.

And specifically if you look at C I and I as an example, there's an infrastructure component that would fall into your categorization of non focus but clearly that is in a segment that is still growing that is a segment that's growing for us and that is a segment that that ultimately is a is a pathway to next gen D.

PNA work right. So we don't look at those areas is heyward.

We're not we're not focusing on them. We clearly are we're still signing new contracts in those areas, because we see them as being a progression to where we ultimately wanted to take our client turns too and that's one of the reasons show you're seeing us in this call even externally change the nomenclature a bit so rather than refer to focus areas were referring to.

Next Gen solutions, because the the application is that those areas are not the other areas are not a focus as as Mike says <unk>.

We those other areas, whether it's field services, whether its infrastructure, whether you know it's traditional licensing none of those areas are are growing dramatically or are shrinking in the industry. You are in the market hour longterm plan on those in the aggregate is actually to.

To slightly increase the revenue so it it's not as if the and put the word is slightly we we do expect the majority of our revenue increase to come from where we're calling the next Gen solutions and that's why you see us focus on those are the <unk>.

For a couple of your normal culture is definitely better than mind guys. What about maybe just maybe the macro maybe some commentary of what you see on the macro front from clients on.

The pace of of of deals renewals et cetera. Thanks a lot.

Yeah. So so Joe I guess, two two elements I would comment on from a macro perspective. There. There is still this hesitancy I think in from a macroeconomic perspective, we've talked about clients either re upping for one year not doing full you know not doing full renewal.

Walls or taking on piecemeal work waiting for budgets et cetera, I would say it it's loosening slightly we're seeing more interest as we've alluded in our growth and our pipeline our backlog R. T. C V. A C D, especially in the next Gen solutions, so and those are.

He is I think it's it's a little more reverting to sense, a little sense of normalcy, but macro wise I think there's still a slight hesitancy a little delay on some of the contract signings, we're seeing things Bush a quarter in some cases the good news is they are signing in the good.

News is they are signing the next gen solution at the margin profile them that we want so we do have some pricing power in that regard is holding in the market, but there is in my mind, a little bit of a lag in the actual science.

Thanks, a lot for a color guard.

Thank you Jeff.

Our next question will come from Matthew Glinka with Maxim Group you.

You may not go ahead.

Good morning, Thank you for taking my question.

I think you touched on Alan S renewals and retention and I think you offered.

<unk> customers migrating away slowly maybe spelling project. Some returning so I guess I have two questions around that the first being.

Are you seeing any changes to that retention rate you know looking you know maybe trailing over the last year you know how how is that different today than it was <unk>.

Your ago, two years ago, and secondly is there anything you're doing on the engagement side or involving the platform side that is impacting in process migrations away.

Okay, well first of all both great questions that on the on the retention side around <unk> in particular, you know it. It's it's interesting because what we what we see historically and what we saw it again in 2022 is the renewal timing.

10, very right and some years you know clients in general accelerate and 70 years. The decelerate for US in 2022 is Deb mentioned, we had some renewals have existing relationships that are actually occurred before we expected them. So as we try to think about you know how we're doing.

<unk> on our retention rate standpoint, what we've kind of decided is the better data to give his what we call retention rather than renewal and so we're really <unk> who were those at all <unk> customers in the past and who are they now and that's why you saw a data point that I provided which is if you look at 90.

Per cent of that Elena as revenue, we have a 95 per cent plus retention rate in those customers and that they're still customers of ours. We think that's the most appropriate way I mean at the end of the day. What we're trying to say is I'll review is that that business is very sticky that doesn't mean that that business will not overtime.

Decrease in overall revenue it could increase from five to clients, but we think that it is very sticky and although we don't always have a good view of that from quarter to quarter and even sometimes from year to year. We do we think have a fairly good view overtime and we're obviously going to elaborate on that in the June inverse.

Today, So I guess, that's the way I would I would answer the first question is.

<unk> to the second question I guess I'll prefer over to fight.

Yes, so I'm sorry, <unk> what was the second part of that Peter I thought it was preferably renewal.

What was the second part of your question what are we doing to make sure that were that were Charles your element to all those shorts I think you've touched on that yeah. It is.

And I think also too.

Put a finer point on it no.

Measurable the the work that you're doing on that front retention or specifically on.

Dancing clear path forward part of this having measurable impact and improving pretension.

Of existing customers.

Yeah, So I I would say, yes. It is measurable we we spend so these first off these <unk>. These renewal cycles go in the context of years and we spend years at the arms and elbows of these clients right. So we know exactly what they're worth.

<unk> four and working on and we spend a lotta time with the roadmap. So when we talk about you know Peter mentioned the investment that we continue to do and I would ask that is modernizing the clear path fall or an ecosystem right that is.

Enabling it in the cloud through Microsoft is your that's everything in a roadmap for what our clients are asking for and we're usually two three years out with our clients as to where they're going with their business and what they need from our platform and that's where our investments are all.

<unk> put into so it's I I would say, it's work very and in a joint manner with our clients. So so the expectation is renewal.

Because we're actually building out the platform continuously to satisfy their specific needs.

Great. Thank you.

Thanks <unk>.

Again, if you have a question. Please press Star then one.

Mmm.

Alright, I will now turn it over to Makayla for additional questions.

John .

<unk>. The first question is do you expect.

To continue rolling in our margins and your background.

Yeah, So John I'll I'll take that and thanks for sending that N V via email here just at the short answer is yes, <unk> backlog continued to grow as we talked about on the call. Today, we saw a sequential increase in backlog has had about 230 million and the book to Bill.

Up from point, a to 1.1 and so our our expectations are that backlog will continue to grow in 2023, yeah. The only thing I would add and I'd I'd prefer also to Deb on this one I I agree with you compression dot.

One of the one of the interesting things about backlog is you know the duration for which that backlog exists. We continue to see a what I would call a slight but there is still a decrease in the average contract term of the deals were signing so that's why we we really focus on not only.

Giving the T. C V number but also the a C V number because over time, well not too <unk> too one conversion, which would apply in like one year term average. The average is still above that there is there is a decrease in the amount of of the average tenure and so again, so uhm a backlog.

Dollar today might have more of an impact on Frank annual revenues and a backlog dollars a few years ago do you have any thoughts on that.

Yeah.

So one other point I'll mentioned named John is talking about the margin profile in the backlog and and we are seeing you know as I mentioned earlier. The next Gen solutions, we are able to get the margin profile that we're looking for in those and then maybe just one follow on point to Peter's commentary.

When we talk about you know we were talking about the length of the contract shorting slightly remember we're also doing a lot more project work right and so if we're doing smaller bits of work.

And project related work it goes to revenue immediately and so the flow through backlog is just different so I I think some of the clients that we're targeting some of the work that we're doing and a slight decrease in contract terms may have impact on backlog in T. C D, but Conversely, we should see.

I see the strong and we should not have the impact on revenue because it's coming to revenue in a quicker fashion right and just to back that up.

A C V increase in the fourth quarter urine ear was 58% and for the full year was 36 per cent.

The second question.

Mmm.

Her leg.

Each segment in the guidance.

Yeah, So I think.

Get more details on that.

Yeah.

<unk>.

On the revenue side, yeah, our guidance.

Email that.

Yes.

Yeah.

Yeah.

Now I am transferring you get one positive for so it made plain about about 1.5%. So we do expect those areas take the ground total and then as I talked about on the margin side, you know, we expect <unk> margins.

No improvement of about 250 basis point. So you know underlying the guidance is you know that.

That should give you a good sense of.

D N S X Elena segment.

Alright.

Send it back to the operator.

Okay.

This concludes our question and answer session I would like to turn the comes back over to Peter Octopus for any closing remarks.

Thanks, operator, and I Wanna, Thank Uhm Makayla I Wanna, Thank Deb and my for working with me on on the questions, which were as always really insightful and we really appreciate the involvement of our Investor Analyst group. So thank you for asking the questions I do hope and I say this.

Almost every time that we have a lot of information on the website. In addition to what obviously, we just talked about it's true but but.

It's not just information now on the website that is that is added in modern if the website itself. So since the last call. The website has been completely redone in terms of the new look and feel for Unisys every slide of review and so we would love. It if you guys would spend some time on it.

As our clients and prospective clients or and just kind of you know <unk> and any feedback or any thoughts on that are always appreciate it. So is that I want to thank everyone for participating and look forward to continuing the dialogue with each of you. Thank you very much.

The conference is not concluded. Thank you for telling today's presentation you may not disconnect.