Q2 2023 Unisys Corporation Earnings Call
[music].
Okay.
Good day and welcome to the Unisys Corporation second quarter, Let me twice the earnings conference call.
All participants will be in a listen only mode.
This system, please signal covered specialists, but person to start to fall by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad.
John has a question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference call over to Mr. Mckenna, Parsky, Vice President of Investor Relations.
<unk> the floor is yours ma'am.
Okay.
Thank you operator.
Everyone. This is Nick Hiller, Wordscape, Vice President of Investor Relations. Thank you for joining US yesterday afternoon, Unisys released its second quarter financial results I'm joined this morning to discuss those results by Peter out the desk or a chair and CEO that Mccann our CFO .
And Mike Thomson, our president and CFO , who will participate in the Q&A session.
Certain statements in today's conference call contain estimates and other forward looking statements within the meaning of the securities laws, we wish to caution listeners of this call that the current expectations assumptions and beliefs, forming the basis for our forward. Looking statements include many factors that are beyond our ability to it can.
Troll or estimate precisely.
This could cause results to materially differ from our expectations.
These items can also be found in the forward looking statements section of today's earnings release furnished on form 8-K and in our most recent forms 10-K and 10-Q as filed with the SEC.
Do not by including this statement assume any obligation to review or revise any particular forward looking statements referenced herein in light of future events.
He will also be referring to certain non-GAAP financial measures such as non-GAAP operating profit or adjusted EBITDA that excludes certain items, such as post retirement expense and cost reduction activities and other expenses. The company believes are not indicative of its ongoing operations.
May be unusual or nonrecurring.
Believes these measures provide a more complete understanding of our financial performance. However, these non-GAAP measures are not intended to be a substitute for GAAP.
non-GAAP measures have been reconciled to the related GAAP measures.
We have provided these reconciliations within the presentation the.
Slides accompanying today's presentation are available on our website and were furnished on our form 8-K filed this morning 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 second quarter 2020 through results.
We had another quarter of better than expected revenue and profit positioning us well as we enter into the second half of the year.
Excluding our license and support solutions, which fluctuate based on renewal timing inside a year and between years, we experienced year over year revenue growth and margin expansion.
Revenue and pipeline continue to expand in our next generation solution, which includes modern workplace digital platforms and applications or D. P N a.
<unk> services, and Nextgen compute or S. S G.
Certain micro market solutions second quarter revenue in these higher growth in merchant solutions grew approximately 14% year over year.
Our next Gen pipeline is 55% larger than a year ago, providing a strong foundation for future growth.
We're seeing a growing number of opportunities and proof of concepts involving generative AI.
And enterprise software companies are continuing to release, new tools and technologies, which our teams are adopting to enhance our next generation AI solutions development.
Looking more closely at second quarter performance total company revenue was 477 million a decline of seven 4% as reported and six 3% in constant currency.
The decline, which was expected it was driven by lower revenue within our enterprise computing solutions or ECS segment due to the timing of clear, perhaps look forward license renewals.
This was partially offset by better than expected performance in the rest of the business, which we call our X L. N S solutions and includes our digital workplace solutions segment, where dws, our cloud application and infrastructure segment or see a di as well as the S. S and C portion of E C S and <unk>.
Our business process solutions.
Second quarter X O S revenue was 396 million a strong year over year increase of six 5% in constant currency, we achieved year over year constant currency revenue growth of 7.7% and dws and 2.6 per se in C&I.
With both segments benefiting from increased levels of project based work in the quarter.
Assistant she grew 14, 5% year over year in constant currency.
Since she's solutions or our next generation solutions within ECS and generate revenue streams from specialized services application expansion and modernization.
Contract signings in the first two months of the quarter, but much like a continuation of the first quarter.
Actual services clients remain cautious and commercial quiet slow to make decisions on new investments due to lingering concerns around inflation and macroeconomic conditions, which was a headwind to new logo signings.
However, general activity levels with clients picked up in June .
Our trailing 12 month E X L. It as book to Bill was 1.0 times unchanged from last quarter.
Excluding alhadeff second quarter total contract value or T. C. D. It was down 2% sequentially and declined by 4% year over year.
The year over year declines were due to lower signings with new logos and the fact that this quarter was a lighter renewal quarter due to timing.
Which was expected a significant portion of our anticipated teach be cause the remainder of the year is renewables.
New and expanded scopes within existing clients remained strong growing T. C V, 14% versus the second quarter of last year.
We had several sizable signings within C&I that incorporated new or expanded D P and Ace solutions.
We signed a four year cloud security innovation agreement.
California State University, the largest higher education system in the United States and a unit is quiet more than 15 years.
The contract includes a renewal of services for cloud transformation and cloud security modernization of their ERP system, which supports the institutions twenty-three campuses and Unisys will now undertake multiple additional projects to better protect students data enhanced cyber security and integrate data across C. S.
Yeah.
C. S use benefits from this new agreement will include operational and administrative efficiencies cloud savings reduce technology costs and the reduction of technical debt.
We also expanded our D. P N a footprint with a large financial services institution in the U S. After receiving their supplier of the year recognition for two years running.
Unisys will support additional aspects of the client's cloud migration and maintenance across their business lines.
In Dws, we expanded our work with a large Canadian Telecom company to support our communications technology integration for one of their financial services clients that recently acquired 530 regional bank branches as part of this project municipal sewer outage more than a dozen technology vendors.
Standardized technology services and upgrade devices.
In E C. S. We expanded our relationship with a leading global Telco company to include a cloud migration for our clients Voicemail services. We also signed several new managed services contracts, including work to support clear path forward technology, refreshes and strengthening relationships with important L. N S clients.
Including one of our largest financial services firms.
We also launched collaborative dws quiet innovation sessions in EMEA.
She has led to several modern workplace engagements and are expanding this initiatives to other geographies in the third quarter.
Alright.
Yes pipeline also accelerated as the quarter progressed growing 15% sequentially and 22% year over year.
Growth was strongest in the new logo pipeline up 47% sequentially and 97% versus a year ago.
We've added approximately $1 billion in net new logo opportunities.
We expect the new logo pipeline being built today to contribute to bookings in six to 12 months as those opportunities move through the funnel.
We're increasing the speed and agility of our review of a proposal process and our sales teams are aligned around point of sphere solutions targeting prospective clients, where we see long term growth opportunity.
This is the most evident through our Nextgen pipeline growth, which was 25% on a sequential basis and 55% versus the prior year period.
Next Gen New logo pipeline grew more than 50% sequentially and more than doubled year over year.
Modern workplace pipeline was driven by interest in our unified experience management solution, which we refer to as experience as a service this offering leverages our power suite software and is based on experience level agreements or <unk>.
We also added several sizable opportunities related to device subscription services or DSS and device asset management.
D. P N a pipeline saw a notable uptick in opportunities across a range of all claims including detection and response digital identity management security Advisory consulting and gift Checkups. We also saw numerous new D. P N a opportunities and application managed services and development.
Across our business units. We are also seeing growing client interest in solutions, incorporating advanced data and artificial intelligence within ECS, we unveiled our unisys logistics solution and are actively working on pilots with existing cargo portal clients.
Unisys logistics is a proprietary SaaS application that delivers complex real time logistics optimization, and Leverages quantum computing data AI and transportation industry expertise.
We believe generative AI represents a significant market opportunity for the it services industry.
Our portfolio of solutions engineering capabilities data expertise and our partner ecosystem position us well in this area of growing demand.
N V. W. S. We're working with clients on a chatbot automation solutions that incorporate generative AI to deliver more human like interactions.
Our footprint and diverse client base with N dws combined with our experienced and chatbot design. It gives us an advantage in providing generative AI innovation in dws.
N C. A N I, we're having client discussions related to our core AI capabilities, which includes strategy design infrastructure and development services to support both cognitive and generative AI workloads.
We also have strong data engineering capabilities that are helping clients deploy data lakes data fabrics and purpose built vector databases for AI, which position us well for future services related to generative P. I.
Across the company, we are using or had initiated access to generative AI platforms being built by our partners such as Microsoft 365, Copilot, Google Palm at vertex studio as well as services from AWS Snowflake Salesforce service now and Adobe.
Yeah.
We featured a number of our data and AI solutions at our June analyst and advisor event, which was attended by more than 100 industry analysts and advisors from 31 different firms.
Turnout was more than double that of last year's event and attendees included prominent firms such as a thought the voyage, Ian why Everest Forrester Gartner H F. S. I D C I S G and Nelson at home.
Connecting with influential analysts and advisers is important for our business because when decision makers evaluate technology industry service providers. They often look to this group for insights and recommendations during the event, we were able to make connections and meet one on one and educate these key influencers about ASP.
Strategy and solutions.
Turning to profitability, our second quarter ex L. A N S gross margin expanded to 16%.
10, 4% in Q2 of 'twenty two.
The margin improvement was broad based across detailed in U S. C. A N I and SFC.
We continue to improve our labor efficiencies.
Which was down 440 basis points year over year, and 350 basis points from the first quarter.
At the overall company level, we are leveraging advanced technology tools to rapidly matched talented demand further bolstering our ability to meet client expectations and field world quickly.
Our workforce transformation team has developed efficiency plans to include elements such as rural redesign account rotations and additional moves to low cost geographies, excluding field services, 61% of head count is now in low cost markets up from 58% in the prior quarter.
75% of all Q2 hires were in low cost countries, a 12% increase over the same quarter last year.
Our trailing 12 month voluntary attrition was 14, 4% in the second quarter down from 19, 2% in the second quarter of 2022.
Voluntary attrition in the month of June was 12% annualized the lowest monthly rate we've had since December of 2020.
While voluntary attrition levels have reduced across our industry in part due to easing of the labor market. We believe our investments in the associate experience are having a meaningful impact on retaining talent, we have implemented enhanced new leader training.
On boarding processes and channels for associates to recognize one another's successes.
We have also invested in diversity equity and inclusion or dei both in talent acquisition and retention on our metrics continue to improve as a result exclude.
Excluding field services women now make up 36, 9% of our global associate population up from 35, 4% a year ago.
And under represented ethnic groups are now 31.5% of our U S. Associate population up from 29, 5% last year.
We were recently recognized as a best employer for women by Forbes.
And for the third consecutive year, a best place to work for disability inclusion by the disability equality index.
With that I'll hand, it off to Deb to discuss our financial results in more detail.
Thank you Peter and good morning, everyone. My discussion today will include certain non-GAAP financial metrics as a reminder, a reconciliation of those metrics are available in our supplemental earnings materials posted on our Investor Relations site unless otherwise stated all figures are as reported except for segment revenue growth, which we discussing constant.
Currency I will also provide information, both including and excluding Alan installation to allow investors to isolate the portion of ECS, which includes uneven revenue based on the timing of license renewals to evaluate the progress that you're making in the business outside of this area as Peter highlighted it was another quarter of results that exceeded our expectations.
We are continuing to advance our next Gen solutions improve axon us revenue and margins and build awareness for our generative AI capabilities.
Solutions innovation and go to market initiatives, we could showcase at our June Investor and Analyst Advisors days are also building momentum in our pipeline, which is a positive sign for our future growth.
For the second quarter company revenue totaled 477 million a decline of seven 4% year over year or six 3% decline in constant currency. This was driven by license renewals in our ECS segment as expected and the variability of those renewals inside of here and from year to year year to do.
<unk> revenue totaled 993 million or three 3% year over year increase of five 3% increase in constant currency driven by improving performance in our ex element solutions and the weighting of Alan It's renewables in the first quarter.
Excluding Elena second quarter revenue grew four 9% and six 5% in constant currency while year to date.
There were three 3% and 5.6 in constant currency.
I'll now provide second quarter detail by segment. Please note that as I speak about segments I'll discuss revenue growth rates in constant currency terms.
Gws segment revenue grew seven 7% year over year in the quarter growth was driven primarily by expanded army scope engagement with our existing commercial and public sector clients that we signed in recent quarters.
<unk> segment revenue increased two 6% year over year in the quarter like the first quarter. We continued to see some caution the certain financial services clients, which account for 18% of C&I segment revenue.
Revenue with financial clients declined modestly versus a year ago. However, this was more than offset by growth in C&I commercial sector clients with strength in our next generation D. P N a solution.
Segment revenue, which includes licenses and support and specialized services and Nextgen compute declined 27% year over year, driven by anticipated license and support renewal timing, though the asthma C portion of the segment grew 14, 5%.
Second quarter Alan S revenue was 81 million in the quarter down 41, 2% year over year due to the timing of license renewals. However, this decline was better than expected due to small variations in timing terms and volumes relative to our original assumptions our expectation for <unk> revenue for the year is unchanged.
Notable clear path, Florida renewals during the quarter were signed with life Sciences public sector and financial services clients among others.
Strength in S. S C, which comprises the rest of our ECS segment, partially offset lower year over year. Alan S revenue, a 14, 5% growth in assets and see it was driven by revenue from first quarter wins and price increases negotiated on renewables in prior quarters to offset rising labor costs. As a reminder, we ask that.
Slower access and see growth in the back half as we begin to lap some of these benefits.
Second quarter backlog was $2 $7 billion versus $2 $8 billion at the end of the first quarter. This decline was driven by the timing of renewals within our axon escalations, specifically within dws and our business process solutions were two large bps contracts are expected to be signed by the end of year. This timing dynamic is not.
Indicative of a declining renewal rates, which were above 95% in the quarter.
Looking ahead, we are pleased with our year to date performance and are reaffirming our full year guidance range for total company revenue of negative 3% to negative 7%. We continue to expect excelling us revenue in the range of negative 1% to positive 4%.
And our results year to date, we see a pathway to achieve revenue above the midpoint of these ranges. We continue to expect approximately $350 million in full year <unk> revenue as we mentioned at our June Investor Day, We expect average annual N S revenue of $360 million from 2024 here too.
28 <unk>.
As a reminder, most of our <unk> revenue comes from the licensing and maintenance services related to our clear path forward operating system on which many of our ECS clients run core operations and have built complex application layers over decades, given the complexity of these application ecosystems and the security and performance are clear.
Our path forward, our <unk> revenue is sticky and we have good visibility into our clients' renewal plans, however, renewal timing can be difficult to predict with precision.
Can shift between quarters or even years as.
As clients can renew early based on their budgeting processes or when reaching consumption limits.
Moving on to gross margins, our second quarter gross margin was 24, 3% versus 28, 8% in the second quarter of 2022. The decline is driven by the timing of high margin <unk> renewals, excluding Alan as our gross margin was 16% up from 10, 4% in the prior year period.
The net result of our ongoing initiatives related to labor costs delivery efficiencies and call up pricing.
Touching briefly on segment level gross margins Dws gross margin was 13, 6%, a 60 basis point expansion year over year, driven by labor efficiencies and contracting improvements. This also represents 170 basis points of sequential improvement due to better labor utilization relative to the first quarter of 2000.
'twenty, three which had been impacted by staffing in advance of revenue.
C. A N I gross margin expanded to 16, 9% from five 5% or an improvement of 1140 basis point improvement included labor efficiencies in our C&I delivery organization and prior year included elevated costs associated with certain contracts they.
We are seeing good results in dws and C&I from our focus on the labor pyramid increased use of automation and optimization of contingent labor and we continue to expect more than 250 basis points of aggregate gross margin improvement and our dws and C&I segments.
See as far as margin was 50, 141% down from 66, 2% a year ago due to lower <unk> revenue.
Moving on to total company profitability, our non-GAAP operating margin was three 4% down from 9% in the prior year quarter due primarily to lower levels of Alan S renewals during both the quarter and the year our year to date non-GAAP operating margin was seven 7% versus three 4% last year.
Second quarter, adjusted EBITDA was $50 million or 10, 5% of revenue versus $90 million or 17, 6% of revenue in second quarter 'twenty to <unk>.
Current quarter declines were due to lower <unk> revenue as operating expenses were relatively consistent year over year.
I have a pathway to achieve results above the mid point of these ranges.
Capital expenditures were $18 million in the quarter down from $25 million in the prior year period.
<unk> January $25 million and $17 million of free cash flow in the second quarter and year to date, respectively. This compares to negative $59 million in negative $111 million in the prior year quarter and year to date periods the year over year variances largely driven by the timing of technology collections, we continue.
You to expect full your free cash flow to be in line with 2022 at approximately negative $75 million pre.
Three French and free cash flow, which we define as free cash flow prior to post retirement contributions was $39 million in the second quarter and $48 million a year to date <unk>.
Cash balances were $423 million as of June 30th up from $392 million at the end of 2022.
Net leverage ratio, including all defined benefit plans with 1.8 times as of the quarter and our.
Our balance sheet and liquidity physicians are strong or 6.85, and five per cent senior secure notes with a $485 million face value do not mature until November 2027, and or 145 million dollar a b L facility is undrawn.
Looking ahead to the third quarter due to the cadence of Elena revenue during the year caused by renewal timing, we expect overall company revenue to decline in the low to mid single digits year over year with third quarter Elena revenue expected to be approximately $50 million, which is the lightest Alan S quarter of the year.
We expect a modest third quarter non-GAAP operating loss of approximately $10 million to $15 million driven by the timing of Alan S. Renewals. The third quarter outlook gives us a pathway to achieve results above the mid point of our full year guidance for both revenue and margins <unk>.
Lastly, I will briefly touch on are expected cash contributions. So R. U S qualify defined benefit plans as a reminder, once a year at your end, we provide detailed projections for tenure cash contributions, which change based on financial market conditions funding regulations and actuarial assumptions based upon market conditions as.
Of June 30th.
We estimate that our 10 year contribution would be $600 million to $620 million. This compares to $650 million.
Estimate as of the year in 2022 and is modestly higher than our first quarter estimate of $570 million to $590 million cash contributions are U S qualified to find benefit plans are still expected to begin in 2025 and continue through 2032, I will now turn it over to Peter.
For some closing comments before opening the line for questions.
Thank you good before we open up for today I wanted to share that over the past few months.
<unk> team has been meeting with an ovary conversations bitcoins or positive momentum.
Never been more than her toys or exhibiting more openness to expanding their relationships with you. This is.
<unk> grew to discuss how we were innovative across our portfolio was that operator, please open up to large or questions.
Alright, Thank you Sir.
<unk> the question notes discretion.
Drastic questions <unk> <unk> on the telephone keypad.
You speak your phone who's supposed to put my foot before <unk>.
<unk> no dressing withdraw your question <unk> <unk>.
The store then one blustery question. This tunnel will just pause momentarily <unk>.
Roster.
And the first cluster wearable come from <unk>.
<unk> research.
Yes, alright, so at the junior analysts day, you shared some helpful updates on the business and laid out some longer term financial projections based on your latest results and the prospects that you're seeing at this point I wanted to ask if there are any <unk>.
Changes in how you're thinking about your longer term financial projections.
Alright. This is Peter thanks, very much for for the question.
I Sympathise your last name and my last name both can be challenging.
But you know, it's actually a trickier question than than it appears for a different reason.
So and and the reason is because you know it's really.
Hard for companies to have longterm numbers out there and then you know put the burden on them to update them you know overtime and.
We have always maintained a position that we don't update those numbers.
Overtime that says you know we just you know had the Investor day in June .
Can tell you we don't have any.
Since that number those were really set as longterm numbers and long service.
And they haven't drinks you know as I said in my remarks.
At the quarter.
The first two months of the quarter were kind of similar to the the beginning of the year, but we did see some pick up you'd activity.
Mmm conferences in dialogue.
You know or just across the board with with our clients that activity has really kind of continued in July .
None of that changes or a long-term perspective, so I hope that's helpful.
Yeah definitely helpful. I'm Gonna ask a question on your last point, though about the pick up in activity and you did mention earlier that the new logo activity I think picked up in June after it had earlier been impacted by the macro obstacles.
Always wanted to see if you could expand on on that on that pick up in activity more color or some dimensioning to how much pick up is occurring whether that's that's a maybe a little bit of a green shoot on on the on the macro front.
I'll I'll cover that and then hand, it over to Mike for kind of a more detailed.
Sir you know I think some of that is us.
Some of that is the industry.
And some of that is is really kind of the way. We are we are kind of organized syndrome. So let's take each of those separately so on us.
That you know, we we benefit from the fact that we have a long tenure as many of our clients. We mentioned I mentioned in my discussion you know the the California State University as Bitcoin for 15 years that puts it in the junior category of clients among our top.
50, because our tenure is longer than an average of 15 years that trust in that relationship. When you have a period like we're having now a real dramatic change the way people are thinking about technology and you remember Friday I am specifically janitor they.
We don't necessarily you know have.
The right to win any particular deal and we certainly don't take that for granted the relationships, we have with our clients get an audience.
We have cut it earned an audience.
So I I think that's a big advantage for us. So it allows us to you know put our best foot forward make sure. We have put our pushing forward put in a time of change that some advantage you know with respect to the industry as a whole you know a lot of change going on you know hesitancy in some areas.
Especially you know around willingness to enter into longterm contracts you see you know some the T. C V number slightly down at negative two a negative for but that is related more than anything else for us to the renewal cycle of some of our larger deals.
But when it comes to our organization and how we're approaching business Oh really turned it over to Mike because under his leadership in the sales teams, both new clients and an existing clients I I I think we've made some pretty big changes, but I think it was good a position as well and you see it as a pie.
So, adding a billion dollars of <unk>.
High blood for US is a big deal that's a big number for us and we've done that you know <unk> you know.
And the last quarter until Mike If you if you could talk about you know some of the things we're doing in some of the things we received.
Yeah, great. Thanks, Peter and Rob. Thanks for the question. Good good to talk to you Uhm look I think Peter nailed it in his last comment they're really looking at the increase in pipeline you know over a billion dollars and a quarter is a big deal for us the bulk of that is all in our next Gen solutions, Rachel So I think Rob from.
Our perspective, the go to market activities have been very strong. The interest has been strong we talked about the analyst and adviser day and the feedback from that analysts advisor community about inviting unisys two two more and more opportunities I think the awareness take up has been strong.
As well as <unk> as you know, we really just launch that branding initiative at the tail end of Q4 last year in November and a lot of these contracts take you know six to 12 months in their cycle and and so I think what you're really seeing now is just that activity is starting to come through from that increased pipeline.
You know that qualified pipeline is is that it right. So we feel pretty good about not only the growth in the pipeline, but the fact that that that pipeline has some level of analysis to it right before it before it gets in the pipeline and we expect that will continue to see enhanced when rates.
Our next Gen solutions are are certainly resonating in the market and the activity continues to pick up so I feel like it's kind of the evolution of what we started maybe six to 12 months ago, and we're starting to get into that cycle wherever seeing the benefit of that come through you'll also.
Seeing the impact of deals we wanting the back half of last year, where you know where where.
Kind of getting to know those clients in a better way and they're expanding their relationship with us.
So so I think it's really just the proof point rod that this strategy is starting to take hold.
Nice and and if I can ask one one more on labor productivity in your ear and 2022 earnings report I think you've noted labor costs had declined by 50 basis points, but you're now, citing much bigger labor productivity increases sequentially and year to year.
Here and so can you share more on on the main cause in the labor productivity jumped that you've experienced and how much room is is now left on that front. Thank you.
Yeah, right, Oh, I'll I'll <unk> I'll, let <unk> do that one as well, we'll say that that's a major answer area of emphasis four hours you you heard me talk about our H R statistics.
And you know.
Getting the attrition rate down Hill.
Helps productivity because you don't have to retrain as many new people come in the door, but but beyond immediately getting attrition rate balance the work that Mike and our teams have done around labor is <unk>, so you're seeing that in the middle of the cycle their ups and downs from quarter to quarter, but it is a longterm F.
To take where we are and continue to improve it.
Yeah. Thanks, Peter again <unk>. Thanks for the questions. So look I'll say it from the point of view is we've talked about the kind of talent market place and the talent mobility platforms that we've put into place over the course of the you know again last six to 12 months and you know you noted and Peter noted in his commentary there.
It's about a 4.4.
Points have been proven in that Labour number in three and a half points sequentially right. So there there's a whole host of things that make that up Peter mentioned, the the they're hiring and the attrition and that's a big part of it but let's see the other aspects of that have to do with you know continual automation can.
<unk> kind of rights for sure and continual reskilling and you're right, they're they're very significant movements and and I don't think that we're at the end of the the aspect of that right I know four and a half point is a pretty big jump year over year, but there there's still opportunity there it's ongoing.
Will be continually part of our D N a and and I think they have mentioned that you know, we're still calling for about two and a half points of improvement overall from a company perspective in relation to the full your number so still opportunity to go is still working through that and embedding that in our D. N a.
But we've seen some significant marked improvement.
And then the key is obviously maintaining that run rate and continuing to enhance that gross margin profile.
Thank you.
Alright. Thank you Sir the next question will come from just the athlete of Canaccord.
Hey, guys. Good morning, nice to see that X L enough constant currency growth and a quarter. There were just too you just remind us again on if you look at your next Gen portfolio broadly the.
The margin the gross margin profile on the next gen portfolio versus the traditional portfolio and then I'll have a couple of follow ups.
Sure.
At that Peter did you Wanna.
No I was I was gonna hit it over to them.
Okay Uhm.
Yeah. So the the next Gen. Yeah margins are higher and that's why it's a big focus for US. So you know we haven't been talking as much about mm mm yeah reactions that we did lay out of the investor Diane itself.
Know that we're targeting for those <unk> <unk>.
<unk> excuse me you know.
In that 25 per cent range is what we're we're looking for them to get to that you know expanding we have thought about 50 basis points of expansion of yeah does that so that by 2026.
Got it thanks, Good and then and then what about the capital intensity of of that next gen portfolio versus some of the others.
Yeah, So we don't necessarily expect.
Back to run about five per cent of yeah for Capex as a percentage of revenue you know a big focus on what kind of a capex slight strategy that we've been yeah, having said the past few years to try to reduce the amount.
Capital [noise] interrelated to clients and just being extra cautious with our capital while still ensuring that we're investing so we don't we don't see that changing with the next installation.
Got it and then just maybe one more in terms of on on the renewals you know the macro does add a little bit of extra.
You know.
It doesn't help obviously on the renewal cycle, but who are we.
If you look at some of the renewal center that maybe out there I know you know a coupla years ago. There were some renewals that you just cited warrant.
Worth renewing for a variety of reasons is there any of that out there at this point in terms of renewals that just may not economically work at this point and that's my last question. Thanks.
<unk> I'll I'll take that one if you if you'd like Hey, Joe. Thanks for the question. The short answer is no. There are no renewals out there like that that you know you're talking about some of the contracts that we walked away from and some of our legacy business just based on their margin profile I would say what's left in the portfolio is.
Is quality work either on the traditional side et cetera, where we're happy with you know the work effort that's going on we see it as a gateway to next Gen. The margin profile on those contracts are is fine and I I think I mentioned on our last call that we've been very successful.
<unk> from a pricing point of view in a renegotiation, where we had concerns about the margin profile. So <unk> just that tidbit on the renewables as well I mean, the back half of this year just happens to have more renewals in it than the back half of last year or said differently. The front half was a little <unk>.
Higher this year and Deb mentioned in her prepared remarks that we still have over at 95 per cent renewal rate. So a we're happy with what's out there be we think it's a gateway to the future see we'd be having good pricing power in regards to those renewals and the the back half of the year has a larger set of those renewal.
Who's coming into play, which should help our T. C V and then ultimately help our backlog in both the bill as well.
Sure great. Thanks for that color, Mike Thanks, everybody.
Thank you too.
Next with Anya service from <unk>.
Hi, Thank you for taking my questions and most of them have been addressed already but how shall we think about the timing of technology connections in regards to and forecasting the free cash flow.
Alright, hi, onion. The morning, Thank you as far as the <unk>. The the free cash Slather D. Now you know this quarter. It was it was positive 25 first quarter negative 7.5, and so you know <unk>. It's it's seven.
<unk> are are free cash flow and you know what as we mentioned, we're still holding to that.
You know with a full year, what we're saying is that free cash flow will be similar to 2022.
Which was negative so you know.
As far as specifics exactly on technology collections, Yeah. That's a lot of that is driven by the time, we have technology collections and so you know it as you can proceed right in order to get to that that negative if it works at the end of December 20th <unk>. You know those timing collections are really what has skewed yeah the timing of wherever.
We're gonna Sacred task, though in the next quarters.
Yeah. This is <unk> I would I would add to that if I could you know as you know from the June Investor Day, we're very focused on free cash flow and we're very focused on building free cashflow into a healthy positive number as as we extend multiple years.
Especially in light of the pension obligations in the future. So I I will tell you that as a major effort and focus of US you know Joe that these question mentioned Capex and I think that Debs. After obviously is right that you know we don't expect an inch.
Kris and Catholics pass because of the focus of next Gen solutions to some extent, we expect it to decrease cause when you think about what's not in next Gen solutions. You know it is the traditional Ellen S business and it has a traditional infrastructure business.
Both of which even though we kind of have a lower capital version of those can still be higher capex. The next generation solutions. So we're we're really focused quite intently on cash flow and and so you know you could expect as we discussed in June to see US you know working.
Longterm unimproved.
Okay. Thank you and you didn't hit your right. When you said that the activity that picked up the two were standard <unk>.
Yes, again that that activity. It's a broad word you know where we obviously do not have July numbers, and we're not suggesting we have July results, but in terms of the level of dialogue and in terms of I would say the interest in our clients and our prospects to have.
Really good discussions with us and obviously you know you're seeing you know the pipeline grew last quarter and now you know the the question for US is how do we take the pipeline through the tunnel and work the pipeline to get closure. So I would say that you know we feel good about what we're seeing in you know in June and that is.
Continue.
Okay. Thank you know what's not for me. Thanks.
<unk>.
The next question, we have will come from <unk> <unk>.
Yes, hi, Thanks for taking my question is just maybe one clarification for depth for free cash flow guidance. I think you you you reiterated the your free cash flow guidance and I noticed you didn't you didn't exactly say there was a pop for upside like you saw on the <unk>.
Even even EBITDA line any sort of additional commentary you can provide on that.
Yeah, not not so much so I think you know we.
Yeah, there's there's lots of pets in case, it within that number but pretty similar to what we you know <unk>.
Laid out typically that makes up that some cash phone number. So I felt you know and and I think yeah, there's a little more the precision of the free cash when I was a little more challenging to predict adverse his knee yeah. The revenue in margin. So all they were able to say that I'm, having an emergency it's a little a little more challenging honestly.
Cash I'd, given the timing of some of these collections and not being able to yeah.
Completely anticipate when they're gonna come in but you're right you know we are seen.
Momentum on the revenue in and margins inside and you know the the like all of that eventually that will drive the improvement in the free cash flow with the success, we're having an R. Next translations that your higher margin and create higher free cash flow you know that is the the ultimate they call that where that we've laid out in yesterday and.
We're pushing for from a long-term perspective is Peter laid out for cash so is that a very big priority for us.
Got it. Thank you for that and then and then broadly on X L. N S. Gross margin very nice jumped this quarter just wanted to understand was there anything at all sort of that you consider one time or are are non recurring and that sort of gross margin jump in and sort of how do you.
How should we expect to see the X L. In escrow spungen trend for the balance of the year.
Right. So yes, we did mentioned in the commentary you know there were some elevated expenses due to some some troubles contracts that we had last second quarter that led to some of the the higher you know basis point increase but we do you know that that number a V X L and ask her.
The 16% you know it's it's it should be similar to what we're seeing I think you know, it's not necessarily always sequential right. There's it's not huge numbers, we're talking about right. So a million here American really shift that number so I'm not necessarily saying, it's it's going to be following linear.
But I think you know we are making a lot of those efficiency improvements you know looking at at price and an arm and preventing contacting the improvement in more nexgen solutions, which are improving those margins you know and all of that combined is is where where you know leaving but.
Like I said it doesn't mean you know each quarters is going to be yeah, sometimes there can be some some tests and cakes.
But you know I think the the call is still that total company operating margin that we laid out is where.
Yeah. It is where you can look at and see kinda, where am I, calling.
Got it thank you for that and lastly for me the the X L. N. S. T. C V. Just wanted to make sure I understood. The mechanics of of of that decline. It. It sounds like there's just there was just less traditional business renewing.
In the quarter is that the main takeaway there.
Yeah. This is Peter but again the the number is not you drive to the X O N. S. T. C. V was a 4% if you look at that year on year and two per cent quarter on quarter.
<unk> not a huge number you know not really statistically significant although I'm not using that in a technical term.
And again I I think that's <unk>.
Somewhat you know based on renewal cycle and when you look at the kinds of deals that we got last year and it's somewhat based on you know I I think as we have said you know there there there has been some hesitancy in the industry I think across the board around signings, but again.
For us, it's really a relatively modest.
Got it yeah, I figure if I could just add to that too around so I think your comment is pretty much spot on to the front half of the year from renewal perspective had about.
12% more T C V in it and we're expecting that to be in the back half of this year just based on those renewal cycle. So again to the renewal rate is X S O north of 95 per cent and it's just heavier in the back half of this year.
Got it thank you <unk>.
Thank you.
And next we have a question from Matthew <unk> <unk>.
Hey, good morning, and thank you for taking my question just wanted to I think you mentioned.
Managed services with a clear path forward. So I just wanted to ask for a little more color on those are they competitive take with you know how just anything you could add to those Wednesday you reference.
And you get all the.
Defer to Mike for a little more specifics on that but managed services around for your pet's forward much of that is an R. S. S and C line of E. C. S and so it has been actually focus for several years now to make sure that not not only are we providing and just.
Software to add support which tends to be through a license section.
But that will also looking really hard, but how do we provide.
More broad based managed services around our applications and and that is one of the areas of emphasis in the S. S. N C. So we we have seen some progress on that and we expect it to grow.
Hey, Matt It's it's my bet. Thanks for for the question I I I think that Peter was talking about managed services growth and E. C. S. She was it was really due to some of our industry solutions not necessarily driven bye bye clear path forward and some of that growth.
Can be kind of expanding those relationships ride. So I didn't want to give you. The impression that there was a take away of a man. It's service component with the M. E. C. S that that's if that's what you heard from that I don't I don't believe that's what the intention was it it was the managed services related to industry solution.
<unk>, which I think you're aware, we have both in travel and transportation and financial services and and some other areas, where we have deep industry experience as well as some kind of volume base things on the C. P. F side, so hopefully it answered your question.
Alright, thanks for clarifying.
Yeah, and and that just to be clear those industry solutions you can be a sit on top of clear path forward or is it can be independent of surface or the U C. S. Team is is not only focused on clear path forward, but D. C. S team really specializes in our so.
<unk> and if you will you know proprietary things that that we lead with as opposed to the C. A N I T, which is more about creating solutions on behalf of our clients and that's one way to think about this two different teams managed services opportunities on both sides. So C a and I as well as D. C. S E C S.
S. A matter of services opportunities tend to be around our solutions, whether those the more generic surpass forward, which which deals with many industries or the specific industry solutions that we have some on top with your pets forward and some independent.
Yeah.
If you'd like to participate in today's Q&A. Please press Star then one on a touchtone phone again that is star then wanted to ask you a question yeah. At this time, we'll just pause momentarily to some other roster.
It appears that we have no further questions. At this time, we'll go ahead and conclude our question and answer session. At this time I would like to turn the conference call back over to Mister <unk>, the best phone at closing remarks.
Sir.
Yes, thanks, like very much I'd like to thank everybody for participating on this call and many of you also participated in her dune analyst a call and I really want to thank you for your involvement in that we mentioned the industry analysts call in my remarks.
And of course as you all know we also had an investor analyst Paul like the industry and it's called the Investor Analyst call was very well attended and both both the questions and the level of engagement, we really really appreciate it. So we can continue.
To be available to each of you and and really appreciate the dialogue that we have and continue to develop so thank you very much on behalf of her.
Alright. Thank you Sir for your time I'll soon as the rest of the management team.
Cause not concluded at this time you may disconnect. Your lines. Thank you give everyone take care and have a wonderful day.
[music] [noise].