Q4 2023 Unisys Corp Earnings Call
Good day and welcome to the Unisys fourth quarter 2023 earnings conference call.
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I'd now like to turn the conference over to Mckillop, Hausky Vice President Investor Relations. Please go ahead.
Thank you operator, good morning, everyone. Thank you for joining us.
Morning, Ian let me.
Fourth quarter and full year financial results I'm joined this morning to discuss those results by Peter <unk>, Our chairman and CEO and Mccann, our CFO and Mike Thomson, our president and CFO, who will participate in the Q&A session.
As a reminder, certain statements in todays conference call.
Other forward looking statements within the meaning of the securities laws.
We caution listeners that the current expectations assumptions.
Forming the basis.
We're booking status.
Any factors that are beyond our ability to control or estimate precisely this could cause results to differ materially 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 10-Q filed with the FCC we.
We do not by including this statement assume any comment.
Jason to review, our revise any particular forward looking statement referenced here and in light of future events.
You will also be referring to certain non-GAAP financial measures.
non-GAAP operating profit or adjusted EBITDA that excludes certain items, such as post retirement expense cost reduction activities.
Other expenses the company believes are not indicative of its ongoing operations as they may be unusual or nonrecurring.
We believe these measures provide a more complete understanding of our financial performance. However, they are not intended to be a substitute for GAAP.
What measures have been reconciled to the related GAAP measures and we've provided reconciliations within the presentation.
Slides accompanying today's presentation are available on our own.
Your website with that I'd like to turn the call over to Peter.
Thank you Mikael good morning, and thank you all for joining us to discuss the company's fourth quarter and full year results, our fourth quarter performance capped a successful year for the company.
Despite ongoing macroeconomic uncertainty, we delivered on our targets and progressed toward our long term goals.
In 2023, we grew full year revenue by one 8% as reported and one 6% in constant currency.
Our non-GAAP operating margin was 7% for the year and adjusted EBITA margin was 14, 2%.
All of these metrics were above our original guided ranges and above the upwardly revised ranges, we provided last quarter.
Excluding license and support.
Revenue grew four 9%, both as reported and in constant currency in 2023.
During the year, we strengthened our foundation for growth in multiple ways.
First we demonstrated strong client loyalty renewing 96% of the contract was more than 1 million in T. C V. They came up for renewal in 2023.
We also improved our new business signings and pipeline in 2023, New business T. C. V grew 18% from the prior year and we grew our new business pipeline by 19%.
During the year, we also built awareness for our solution portfolio with clients partners industry analyst and advisors for instance, we improved our ranking and nearly half of the major 20th twenty-three analyst and advisor reports that had included unisys in the prior year.
We also forged several new partnerships, including two arrangements with consulting partners that are expected to drive referrals to unisys as their preferred solution integrator at the same time, we strengthened and expanded key relationships with Hyperscale Oems and other alliances finally, we made investments in it.
Innovation to expand our next generation solutions and advanced industry specific solutions, such as Unisys logistics optimization. These.
These accomplishments supports future growth and advance us towards our long term goals before Jeff reviews, our fourth quarter and full year financial results I will provide an update on some of our leading indicators and key strategic initiatives beginning with playing songs.
Fourth quarter T C V increased more than 300% sequentially and more than 50% year on year, resulting in a full year T. C V increase of 3%.
Excluding L N S fourth quarter T. C V was up more than 300% sequentially and 135% year for year, bringing full year X L. N S. T C V growth to 27%.
Fourth quarter, New business T. C V, which consists of expansion new scope and new logo increased approximately 50% sequentially and 80% year over year.
New business T C b during both the quarter and a year was primarily driven by growth with existing clients.
Among our notable client wins for the fourth quarter was a five year renewal a new scope contract with a leading biotechnology company encompassing both dws and C. A N I solutions. This contract includes new scope elements, including communication and collaboration technology support software asset management and mobile <unk>.
Right.
Turning to our pipeline, our total company and X L. N. S qualified pipelines are relatively flat year over year, a strong result, given healthy fourth quarter signings and the headwinds from fewer expected scheduled renewal signings in 2024.
<unk>, new business pipeline grew 19% year over year.
Within our new business pipeline, we're seeing encouraging signs with prospective clients, our new logo pipeline is up 32% year over year.
Several key 2023 go to market initiatives have contributed to the quality and strength of our pipeline, especially our new logo pipeline in.
In our direct sales teams, we introduced new pricing tools training and standardization that has brought increased rigor and speed to our proposal pricing and review processes for 'twenty 'twenty. Four we have further refined our commission structures to better align incentives with key objectives, such as cross selling and growing certain next generation.
<unk> solutions.
Our marketing efforts are another key contributor to new business pipeline growth our.
Little marketing campaigns have improved visibility to both our portfolio and our thought leadership. This is most evident in the rankings in sentiment towards unisys, among analysts and advisers that influence client purchasing decisions.
As I mentioned earlier, our 2023 ranking improved nearly half of the major analysts reports and which we appeared in the prior year and we received new leader rankings from highly regarded firms such as episodic Everest had ISG. We were also included as a leader or a major player in new IDC reports in.
Digital workplace and application modernization.
The results of our annual analyst and advisor perception survey, which we commissioned through an independent research firm further validate our gains with industry. Influencers. For example, this year more than half of respondents you use this digital workspace market vision is better than our competitors of 28 points and.
Almost three quarters of respondents recently recommended unisys to a client an increase of 14 points and Influencer advocacy.
I'll now discuss X O N S pipeline and client activity in each of our segments.
So you don't use pipeline is up 15% year over year, including more than 100% growth in our modern workplace pipeline, we're seeing growing interest in intelligent solutions, such as our smart P. C refresh offering.
We also have several large new opportunities in traditional workplace services, we believe our commitment to delivery excellence in mission critical services is differentiating uteruses within the dws market.
Our C&I pipeline is also progressing up 3% year over year, despite more than 80% growth in 2023 songs demand tied to public sector Digitization is leading to new opportunities. For example, we have several prospects seeking to modernize the licensing and permitting as well as.
The access and management platforms.
We also have several opportunities to help clients modernize health care.
Education, and Justice related record management systems.
EMEA is an emerging bright spot within C&I, where pipeline grew nearly 60% year over year we.
We deployed client technology officers on key accounts in the region replicating the model will be rolled out in dws in that region.
Incorporating client technology officers brings thought leadership to the forefront of our conversations with these clients.
In the specialized services and next generation compute portion of ECS, we expanded our product portfolio in 2023 with enhancements to our existing cargo portal and the launch of Unisys logistics optimization. We also advanced development of more early stage industry offerings for banking and financial services clients.
Yeah.
Earlier this year, we integrated Unisys logistics optimization with our first pilot clients cargo management system and completed a successful pilot using live data within a test environment. Currently we are moving into production without our clients live environment given the early signs of success in.
Strong market demand, we are rapidly accelerating our commercialization efforts and formalizing our partner pricing and channel strategy.
Across the company clients are continuing to adopt explore and experiment with artificial intelligence, including generative AI.
Our effort here centers on using AI to advanced business outcomes, such as accelerating revenue and product development, reducing R&D, and SG&A expenses and improving customer or employee satisfaction.
We're also supporting our clients' efforts to develop their own AI strategies and Upskill. Their talent for example in Dws, we are consulting with clients on their training measurement and business case creation regenerative AI tools.
We view AI as a powerful tool to help our clients and ourselves achieve breakthroughs faster better and more efficiently than before.
We are focused on expanding and infusing AI into new and existing solutions, rather than selling Standalone AI solutions.
At a high level there are three key elements to our approach to data and AI.
The first is what we call insights and relationships, we have many high quality clients, many of which had decades long relationships with units intimate understanding of our clients' most important business aspirations and challenges coupled with an eye to emerging industry trends relevant to the client are critical too.
Densify, the highest value use cases for AI and helping our clients navigate AI investment opportunities. This is complemented by our deep industry domain expertise.
Second is capability creation.
Where we accelerate solutions that yield the greatest impact for our clients. This approach also includes techniques to make it actionable to enable faster realization of benefits.
And data analytics, we continue to evolve and utilize the best tools engineering talent and best models and architectures as well as those of our alliance partners.
Yeah.
The final element is delivery and realizations.
Here, our clients embrace the AI powered solutions, we deliver to achieve their strategic objectives and ambitions. Some solutions, we're seeing client interest in our delivering personalized content to improve customer interactions leveraging data and analytics and predictive modeling to increase factory or cargo productivity or.
<unk> law and regulations to increase compliance.
Internally, we are applying the same approach we're focused on using generative AI tools to speed delivery of solutions and to improve productivity within our delivery and corporate functions. For example, our legal team deployed a new AI tools in the fourth quarter for initial document review.
Which has already reduced the document review resources required for certain matters.
All of this of the application responsible AI ethics and compliance a strong guiding principles underlying our approach.
Okay.
Let's talk for a minute about unisys logistics optimization.
In general we believe we're entering into a new period, where companies such as Unisys that are nimble have an engineering core and can combine capabilities, such as AI and quantum in innovative ways will bring more relevant and compelling solutions to clients.
Accessible data is critical to successful application of generative AI and many of our clients are challenged by the complexity of disparate datasets siloed within their infrastructure as states.
We believe we can bring clients economic value by helping them modernize their applications.
Minimize their technical debt and capex and unlock the value inherent in their data.
Unisys logistics optimization is an example of that we can leverage our unique combination of advanced quantum computing expertise.
AI acumen developed through our working structuring and building datasets and decades of experience optimizing workflows within industries.
We believe unisys logistics optimization can serve as a blueprint for delivering tangible business value for our clients and for generating new revenue streams for Unisys.
I would like to conclude with a brief update on how we are attracting retaining and developing our associates.
In 2023 initiatives, including global AI training and increased internal fulfillment.
Which sped up sourcing and help reduce our trailing 12 month voluntary attrition to 12.4% at year end down from 18% last year.
In 2024, we are strengthening our winning culture and sense of community a top priority. This year is the launch of a new career passing program to empower our associates to take control of their career development. It will also enhance our mobility platform by matching associates with roles that advance them toward.
Their career goals.
We're also modifying and enhancing our recognition and rewards programs to encourage associates to acknowledge each other successes and career milestones.
Lastly, we are launching a year long events program to provide space for open discussions about our workforce experiences and challenges.
With that I'll turn the call over to Deb.
Thank you Peter and good morning, everyone. My discussion today will refer to slides and the supplemental presentation posted on our website I will refer to revenue has reported as well as in constant currency, but with segment revenue growth only in constant currency.
We also provide information excluding license and support our accelerator to allow investors to assess progress we are making outside the portion of ECS, where revenue and profit recognition is tied to license renewal timing, which can be uneven.
As Peter highlighted we exceeded our upwardly revised 2023 revenue and profitability guidance and latest strong foundation to support our future growth. Our performance. This year progressed us towards our longer term goals and demonstrates the resilience of our recurring revenue in an uncertain macroeconomic environment.
We also furthered our cost initiatives, which will remain a priority in 2024 and will lay the groundwork for continued profitability and cash flow improvement.
Looking at our results in more detail you can see on slide five fourth quarter revenue was $558 million, a 0.1% year over year or a negative two 1% decline in constant currency.
The decline was expected and driven by license renewal timing in our ECS segment.
For the full year revenue was 2.02 billion up one 8% year over year as reported and up one 6% in constant currency.
Excluding license and support fourth quarter revenue was $413 million up six.
For the full year XL in US revenue was $1.59 billion up four 9% year over year as reported and in constant currency. These acts element solutions accounted for 79% of total company revenue and had a nextgen installation next up 38% in 2023.
Now, let's look at our segment revenue, which you can find on slide six and a reminder, that the segment revenue growth rates I'm about to discuss are in constant currency in.
In the fourth quarter digital workplace revenue grew six 3% year over year to $139 million driven by new business with existing clients for the full year Dws revenue was up 7% to $546 million.
Growth resulted from new business signed during 2020 came in strong in your project revenue, particularly in the United States, and Canada and Europe.
Key solutions in 2023, including modern device management as well as traditional workplace services.
Fourth quarter, C&I revenue declined <unk>, 5% to $139 million due to a prior year benefit from the sale of surplus IP addresses.
Leading this impact segment growth would have been more than 2% with strong sales.
Digital platform, an application or a D PNA solutions.
All your C&I revenue was $531 million up 2.2% year over year, we had a good year of growth with both commercial and public sector clients offsetting some softness <unk> seen in the banking and financial services sectors, where budgets have been more challenged many of our commercial and public sector clients embrace.
Higher values D P&A solutions in hybrid infrastructure, cyber security and application modernization, which leverages our engineering core more.
More of our clients view the future as hybrid taking multi cloud approaches the infrastructure incorporating private cloud co location and public clouds for Taylor flexibility and security our balance of expertise in mission critical services, hyperscale or partnerships and next generation capabilities in data.
Artificial intelligence and application modernization.
Our lineup well with these hybrid strategies, we are optimistic about the opportunity to further grow the C&I segment in 2024.
In our enterprise computing solutions segment fourth quarter revenue was $203 million a decline of 12, 2% due to lower license and support revenue. This was partially offset by modest growth in specialized services and nextgen compute for.
For the full year E.
E C. S revenue was $648 million down three 9% from 2022 again with strength in specialized services and next Gen compute partially offsetting a decline in Alan S revenue caused by the removal scheduled timing.
License and support revenue was $144 million in the fourth quarter and $429 million for the full year exceeding our upwardly revised guidance of $420 million due to closing some smaller renewals earlier than anticipated.
Notable fourth quarter renewals included signings with commercial and public sector clients in the United States, and Canada and in Latin America.
It is important to remember that clear path forward license revenue is highly dependent on the specific client contract up for renewal and the term in consumption levels of those renewals.
Backlog was $3 billion at the at year end versus $2 $4 billion at the end of third quarter in.
And $2 $9 billion last year sequential and year over year backlog growth was due to both the timing of renewals as well as strength in new business signings in our digital workplace segment.
Turning to slide seven we can see the fourth quarter gross profit was $181 million or 32.5% margin down 160 basis points from the prior year due to the timing of higher margin element solution renewables.
Excluding <unk>, our fourth quarter gross margin was 16, 5% up from 11, 8% in the prior year.
Most of the expansion of its due to the realization of savings from the prior year quarter's cost reduction charges, which we include in X L. S gross margin.
Full year gross profit was $551 million, an increase of more than $22 million gross margin expanded 70 basis points to 27, 4%.
Improved delivery and pricing in our XL in our solutions and the realization of savings from prior year cost reduction charges allowed us to generate $22 million of incremental gross profit. Despite a 50 million dollar headwind from Elena solutions.
Full year <unk> gross profit grew by 42% in 2000 $23 million to $240 million. This reflects a 15, 1% gross margin compared to 11, 2% last year. This improvement was largely driven by improvements in the C&I segment and assessment fees.
[noise] solutions within ECS, including the realization of savings from prior year cost reduction charges, partially offset by revenue reversal associated with the previously exited contract within all other.
I will now touch briefly on segment gross profit, which you will find on slide eight.
Fourth quarter Dws gross margin was 15, 3% up slightly from 15, 1% driven by new business with existing clients, partially offset by investments, we've made and modernized field service dispatch systems that were implemented late in the year and will help drive future delivery efficiency.
Full year Dws gross margin was flat year over year at 14%.
As we scale, we expect rising utilization improved pricing power growth in modern workplace and are delivering investments to drive steady gross margin improvement in 2024 and beyond.
Fourth quarter see a high gross margin was 16, 3% down from 19% in fourth quarter 2022, primarily due to a benefit in the prior year from the sale of surplus IP addresses.
Full year C. A N <unk> gross margin was 15, 4% up from nine 1% or 630 basis points in the prior year.
More than 200 basis points of this improvement resulted from our cost initiatives, such as labor market and contingent labor optimization and increased use of automation.
The remaining 400 basis points was due to delivery improvement of certain accounts from 2022.
Our focus on these key accounts help derisk the segment from future losses, and strengthening key client relationships for future growth.
In 2020 for our C&I team is building out more standardized solution architectures and increasing the use of generative AI to accelerate solution development and speed revenue generation.
Fourth quarter ECS gross margin was 67, 4% compared to 73, 3% in the prior year again, due primarily to Alan S renewal timing full.
Full year ECS gross margin was 61, 2% compared to 64, 5% in the prior year driven by lower <unk> revenue, partially offset by a 370 basis point improvement in S. SMC margins driven by improved pricing as well as expansion signings with existing clients in search.
<unk> like life Sciences and financial services.
Turning to slide nine.
Fourth quarter non-GAAP operating margin was 11, 5% compared to 22% in the prior year with adjusted EBITDA of $100 million, a margin of 18% compared to 26, 7% in fourth quarter 2022.
This was driven by lower Elena profit due to license renewal timing and higher compensation costs.
Full year non-GAAP operating margin was 7% versus 8% in 2022, and adjusted EBITDA was $286 million a margin of 14, 2% compared to 16, 5% in 2022.
Full year decline was largely due to lower gross profit.
Contribution from our license and support solution.
Fourth quarter GAAP net loss was $165 million or diluted loss of $2 42 per share compared to diluted earnings of 12 cents per share in fourth quarter 2022.
On a non-GAAP basis fourth quarter net income was $35 million or non-GAAP diluted earnings of 51 cents per share compared to $1 22 per share fourth quarter 2022.
Our full year net loss was $431 million or diluted loss of $6.31 per share compared to $1 57 per share loss in 2022.
On a non-GAAP basis full year net income of $42 million or non-GAAP diluted earnings per share of <unk> 60 cents compared to a dollar and 10 cents per share in 2022.
$8 million and reflect accelerated recognition of accrued pension expense associated with the pensioners that were transferred as part of the two transactions.
These annuity purchases reduce the volatility in our GAAP pension deficit and our projected future cash contributions as well as the future cost of a full pension risk transfer of our U S qualified defined benefit pension plans as they lower the annuity purchase premium that is based on total liabilities.
Capital expenditures totaled approximately $19 million in the fourth quarter and $79 million for the full year.
In 2024, we expect capital expenditures of approximately 90 million to $100 million supporting both Elena and Exxon is growth while keeping in line with our Capex light strategy.
Turning now to slide 10 free cash flow Regeneron.
We generated $4 million of free cash flow in the fourth quarter, bringing our full year free cash flow to negative $5 million compared to negative $73 million last year. This put US ahead of the expectations. We provided last quarter of negative 25 to negative $30 million, which is largely the result.
Improvements in working capital and higher than expected profitability.
In 2024, we expect to be free cash flow positive by approximately $10 million. This reflects expectations for cash taxes to decline to approximately $50 million compared to approximately $63 million in 2023 for net interest payments that are in line with 2002.
Twenty-three levels of approximately $20 million.
Pension contributions of approximately $20 million as well as environmental legal and restructuring and other payments of 75 million to $80 million relatively in line with 2023.
Turning now to slide 12.
Our cash and cash equivalents balance was $388 million at year end relatively consistent with $392 million at the end of 2022.
Our net leverage ratio, including all defined benefit pension plans was two nine times up from two one times at the end of 2022 <unk> Levered.
Leverage was higher primarily due to the increase in the GAAP pension deficit, which I will discuss shortly.
Our liquidity is strong and cash balances are well ahead of where we anticipated they would be when we started the year with no major debt maturities in 2024 and no borrowings against our revolver.
I will now provide an update on our global pension plans.
Our global a GAAP pension deficit, which can be seen on slide 13 was approximately $700 million compared to approximately $540 million at the end of 2020 to.
About $70 million of this $160 million increase was related to the purchase of insurance contracts by our Overfunded U K plans as a first step in eliminating the plans from our corporate balance sheet effectively eliminating the surplus associated with these overfunded plans.
The remaining roughly $90 million increase is due to the net impact of lower discount rates, partially offset by returns in plan assets at the end of the year. We report a detailed estimate of tenure expected cash contribution forecast, which you can see on slide 14.
Expected contributions to our global pension plans for the five year period, beginning in 2024 or $484 million $48 million lower than our projections at the beginning of 2023, we will continue to evaluate opportunities for additional reduction in our global defined benefit pension.
Obligations, depending on overall market conditions, which could result in material noncash settlement charges like those we have incurred over the past few years.
I will now discuss our guidance ranges and provide additional 2024 color, which can be seen on slide 15.
Looking ahead, the revenue growth upside we captured 2023 in both our <unk> and Alan a solution creates a more difficult comparison for 2024, specifically, we had nearly $40 million of incremental revenue and profit in 2023 from signing a multiyear Alan S renewal.
That had been expected to be a single year renewal.
It is important to note that even with this contract signing in 2023, we see positive trends and the continued and in some cases expanding use of our platform and so we now expect $370 million average annual <unk> revenue for the three years beginning in 2024.
$10 million annual increase from our previous projections of $360 million.
For total company revenue.
We expect a guidance range for constant currency revenue growth of negative one 5% to positive one 5%.
Revenue growth in constant currency equates to revenue growth of negative 1% to 2% as reported.
This revenue guidance also assumes approximately $375 million of license and support revenue and growth in our <unk> solutions of one 5% to 5.0% in constant currency.
2024, non-GAAP operating profit margin is expected to be five 5% to seven 5%. The midpoint is slightly below our 2023 margin due to lower Alan S. Gross profit due to renewal timing, partially offset by improvement we expect in our exon are solutions, where we.
Expect to expand our gross margin by 150 to 200 basis points in 2024.
<unk> on our 2024 guidance well position us for accelerating profitability and free cash flow in 2025, which is when we also expect to see a larger impact from SG&A cost savings and additional margin expansion from continuing delivery actions, we are taking to improve our gross margins.
Looking at the first quarter, specifically axon S revenue is expected to be approximately $385 million to $390 million, which translate to low single digits growth.
You don't renewal timing, we expect Alan S revenue of approximately $70 million to $75 million compared to $137 million in the prior year period.
The first quarter is expected to be our lowest revenue quarter of the year and we expect 45% of Alan its revenue in the first half of the year with the remaining 55% in the second half given.
Given the cadence of allies renewal timing this translates to our expectation for our first quarter total company revenue decline of approximately 10%.
We also expect our first quarter non-GAAP operating margin in the low single digits I am pleased with the performance. We have delivered this year and excited for what's to come in 2024, as we progress further towards achieving our operational and financial goals I will now turn it back to Peter.
Thank you very much with that we'll turn the call over to questions operator.
We will now begin the question answer session.
To ask a question you May Press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
The first question today comes from Rod bourgeois with a deep dive equity research. Please go ahead.
Okay, great. Thank you. So first I wanted to ask about the bookings and pipeline activity.
And it's it's a two part question, so your quarter to quarter and year to year bookings surges, where.
Very strikingly strong there.
And it also enabled some backlog expansion. So my first question on that is.
How did you pull that off and.
Essentially in your turnaround progress what's the main effort that's enabled that level of bookings activity and then then I'll ask a follow up on that as well.
All right. So thanks for the question I'll take the first part of that and then let Mike take the second part.
No.
We have consistently said it's that.
There is lumpiness, particularly you know in our renewal timing.
And so what we've had in the fourth quarter was simply a very strong quarter of renewals.
And also a strong quarter of what we consider new business, which is new logos expansion and new scope of existing clients as I said in my discussion earlier much of our success in 2023 was really a very very strong new business a year.
And we have indications of much stronger new logo year in 'twenty four.
I would say you know we we are pleased with our fourth quarter performance. It is it is lumpy.
But that's kind of the way our businesses, so, but but the most important element I would say to answer your question is really the growth.
And the pipeline quality for X L. N S. So if we if we take <unk> out and say that's going to go up and that's going to go down we had strengthened in.
In 2023, we increased our guidance for <unk> in 2024, all that is good and obviously, that's very important for us for cash flow and profit as well, but long term you know.
That strength of X L N S and increasing the profitability increasing the revenue increasing the quality of the pipeline that will give us more we hope that will give us more breathing room going forward, Mike any thoughts on that.
Yeah, Hey, Brian Thanks for the question yes.
Yes.
I think he covered a good chunk of it but.
Would say that is the byproduct of a lot of the hard work that we've been doing all year.
You know the macros have been a little soft and folks have been a little delayed in siding and some of those renewals came in the fourth quarter for EXL in that business I think that the things I would call out that I would want you to take away not only where are they signing but they ultimately signed at.
At higher values, our pricing power was really strong in regards to the offerings that we brought forth there was new scope associated with those.
The expansion and consumption of those accounts were strong as well so not only did we do 96%.
For the year and had a very strong fourth quarter. We saw cross selling we saw expansion we saw pricing power contained embedded in that so we ended up increasing revenue and increasing margin on those renewals, which as you know it makes us stronger backlog and booking for the subsequent.
Your or 24 as well so we're really pleased with the execution, we're pleased with the ability for us to do.
Differentiate in the market and see the acceptance of our next gen solution by that existing base. So you know the byproduct of a lot of hard work.
Yes.
Okay, Great and then the follow up on that is when you have that level of bookings that detracts from the pipeline at least in the near term from your commentary it sounded like the pipeline with new logos is still strong even after the Q4 bookings.
And so.
So I guess, what I want to ask here is in your pipeline with existing clients do you expect that pipeline to re expand in upcoming months.
In other words it seems like you should be heading into a period of pipeline replenishment and I'm looking for any outlook on that front.
Yes, Peter.
I'll I'll take that one and then flip it back to you Deb if you want to add some additional commentary so with Ron I guess the short answer is we're happy to with the.
Base of our prospecting portion of the pipeline you're exactly right, even though we increased our backlog year on year, a sign that level of.
Renewals and new business certainly the police that pipeline, but we've got a great line of sight into the prospecting aspect of that and we have a new logo a strong pipeline, we talked about some of the increase there as well so.
Both the new logo analytics fashion, and we fully expect the same times.
Kinds of levels of increases in the existing base or the things that are up for renewal in the current year as well. So again I think pretty consistent to your question pretty consistent with our prospects for growth in 2004.
Yeah, Yeah, right I don't have anything to add.
Yeah, Deb and I, you know, where it will yield to Mike on that.
I guess the only thing I would add is is when we do talk about pipeline broad you.
You know the fact that we have you know, 18% new business growth in the pipeline and you're right a lot of that is new logo.
I do expect you know the the the new scope.
And to increase over time, there is a little bit of a reloading of that.
But I'm really happy with where the pipeline is from a quality standpoint as well. So when we look at where we are in in the kind of staging.
We think that were significantly better off than we were last year at this point alright.
Alright, if I can slip one more and I've got to ask the L. N S average revenue outlook you've up that.
That that's that's really important can you just talk about what's enabling that.
You might have seen some of the early signs of that brewing last year, but but it's nice to see it coming through in your actual outlook. Now. So can you talk about the enabler of the L. N S revenue outlook uptick.
Yeah, So David if I could take that.
Okay.
Yeah, I was going to start and then let you follow up on that the.
The.
When we look at what happened in 2023.
There were a couple of things that happened in the elements, we had a better L. N S year. In 2023, then we thought we would have.
Now part of that was due to a contract that we thought would be a one year renewal and it turned out to be a five year renewal. So that was the clients doing that hours, we were happy to make that five year renewal instead of a one year, but beyond that you saw increases in our revenue on L. N S.
You know kind of.
As one would assume was because we had a five year renewal instead of a one year renewal in 2023 that are L. N. S revenue would take a hit in 2024 for that the reality is we're increasing our Illinois expectations for 2024 and increasing the three are average for 'twenty four 'twenty.
Five and 26, and so that overcomes first of all the renewable right. We've got to feel that and that that gap. If you will and it goes beyond that and that is really largely because of those consumption patterns.
So we're pleasantly I'm looking at the numbers for NOL at S. It still will be lumpy from year to year, but but we do believe that that's a nice side just C diff over to you.
Great. Thank you.
The next question comes from Anya Soda Schrum with Sidoti. Please go ahead.
Hi, and thank you for taking my questions.
I have some follow ups on the commentary so.
Yeah. The thing and then you loved what has been strong and and what is what has been driving the new logo and where they're coming from are they replacing are you, placing someone else sorry.
Yeah. So so thanks Anya very very good question as I said in my remarks, the majority of our new business revenue in the year, which is both new logo, new scope and expansion.
Came from existing clients, which which happens every year frankly.
But also the same this year.
We do expect new logo revenue to increase in 2024 now to your question about where new logo revenue comes from it really can only come from a couple of sources. So one source is it just brand new work.
So think of generative AI consulting work or are those similar projects they might not have existed before.
So everyone in our business as kind of scrambling for that work.
The second source is from clients that had work that was internal to their operations and they have decided to give it to an external provider like us in the third.
Third element is where we are competing for existing work that is with an external provider.
Yes, I think.
The two that Peter mentioned are certainly the most prevalent there is the first time I'll say outsource managed service component and then there is obviously the market share component of that and we have been.
<unk> active in all markets, we've seen a pretty nice uptick in EMEA as it pertains to new logo. The other piece I would add to that is also the cross sell in our existing base right. When we talk about new business, we were about 39 ish percent.
Cross sold so we do have opportunity to grow new business in the existing base through cross selling.
But I would say heavier two components are going after additional market share and first time Outsourcer for managed service contracts as Peter alluded to.
Okay. Thank you and plastic consumption patterns, what has been the biggest surprise to you.
Hi.
Yeah, So I assume on who you're talking about consumption pattern and an L. S. With that question look I think when we when you look at what's going on in the market right now and obviously all of the efforts around <unk>.
And building out models.
Need more compute and need more power, we had been seeing probably over the course of the last 18 to 24 months continued increases in consumption and that's one of the reasons why we ultimately after our future a three year average by $10 million.
Because it is a byproduct of what we've been seeing over the course of the last 18 to 24 months and I think it's frankly, just a natural spin off of the.
The build out of L. L Evans and other more complex models and storage needs.
Things along that line from a compute power perspective, so really pretty consistent to what we're seeing in the market overall.
Okay. Thanks Ruth.
Yeah.
Okay.
No go ahead please.
In terms of the banking and financial services has been a bit challenged you said you're in the past year. What are you seeing there now is that easing up.
Yeah. So Deb do you want to comment on that from a number standpoint. There then Mike can provide some color in terms of market.
Yes, so we discussed that in our C&I section I'm, just saying that there is you know a little softness there you know where budgets have been a little challenge and that's a lot of our growth. This year was really more commercial and public sector.
So I don't have the specific numbers in front of me, but that's you know that's the color around some of that C&I revenue. So I think as far as the softness you know I'm not sure Mike If you want to comment on any trends you've seen.
No different than that.
Yes look I think it's a little more just hesitancy in the macro I don't view it as being something that is in perpetuity, where they're just not spending I think there is we're just seeing more freestanding and commercial and public sector.
And I would say a little bit of hesitancy hesitancy in banking and financial services, but I would echo or at least comment that when we look at the new logo pipeline in 'twenty. Four there are plenty of folks you know sector is embedded in that new logo pipeline. So again I think it's probably.
Just and outflow of the macroeconomics that we're starting to see things a little bit.
Okay. Thank you that was all for me.
As a reminder, if he would like to ask a question. Please press Star then one to enter the question queue.
The next question comes from Aboon, So Hardy with B N P. Parable. Please go ahead.
Yes, hi, everybody. Thanks for taking my questions and I appreciate all the details and the outlook today.
Just wanted to understand if you will.
Look overall at X L N S. A revenue growth guide.
Given your signings it seems like you're being somewhat conservative for 2023, I think you guided for a pretty wide range of outcomes on topline and X L. N. S. M. And then came in near the high end.
Are you taking a similar conservative approach is that a result of I guess hesitancy the macro on the broader enterprise side do you still expect to see you know more I guess, a spending from the commercial and public sector. It's just some color would be helpful.
Yeah. So I want to thank you very much for that but I guess, let me start and then turn it over to Ted. So the first thing I would say is we really do not ever.
Ever tried to give a conservative approach to our numbers. So our numbers are our expectations are in 2023, we we thought that we were exceeding those expectations and so we've raised guidance during the year and then of course, the ultimate numbers came out even better than the raised guidance.
But I think that is just a more.
Function of the uncertainty in the market Arun.
You know there was a lot going on in 2023, and you know frankly.
Frankly, we are very pleased with.
Was the fact that we performed.
L. A N S was better than expected O&M.
<unk> was better than expected.
Kind of outperformed our guidance across the board.
In 2024, we are expecting healthy growth in ex U S.
And healthy growth in the profitability of X out all of that.
And that's part of really kind of what we hope to be a multi year expansion. So turning it over to that but I think we've built in.
For us some pretty good numbers in X L. N S for twenty-four and Deb will go through those in detail, but you know.
Certainly hope that we X we excel at it you know over those but we're starting from a pretty good number step.
Alright, Thanks, Peter Yeah. So for 2023 like Peter said, we saw ourselves outperforming we raised guidance.
Between Q3, and the end of the year it.
It's very specific items were a few smaller deals came in in Allen asset that we didn't anticipate.
And then there are some uncertainties in our XL and that's revenue that we were working through and we're able to to get you know all of that work through an end. So that was it that abled enabled us to come in over our guidance. So I think Peter said, it well and I think we're very comfortable kind of where we're saying for 2024 with Exxon.
Growth continued growth more than 150 to 200 basis points.
So on that gross margin expansion as we really look to the mix change that the mix shift towards more of a higher margin solutions.
As we continue delivery improvements automation a lot of the work we're doing around SG&A to get that more normalized with our peers. So a lot of the work. We're doing is really we feel makes us comfortable with our 2020 for guidance.
Thank you just a follow up from me.
Cost savings standpoint.
It sounds like you still expect a fairly significant margin uptick in 2025 versus 24.
Just just wanted to see if you could provide any context in terms of you know I guess.
I guess numerically obviously, it's early to call, but just from a from a SG&A percent of revenue and from a from a gross margin perspective, how much additional upside do you think there is in 'twenty five versus 24, obviously as the as the you know.
The the pension contribution ramps.
Cramps in 'twenty, five and that's sort of a baseline for the question.
Oh really.
A really great question.
Yes, I'm going to get into just one second.
And that is so we have put them in charge of kind of a multi year SG&A effort.
That effort started in earnest last year relatively early last year.
And will extend through this year and 25 and 26.
So debit has put together a plan working with the rest of our team that we expect will lower SG&A as a percentage of revenue over that timeframe and continue to lower it over that time frame. So it's not a one time thing for us Arun, it's very well timed and has its own project leader.
And we we are performing according to plan we lowered.
What we thought would be SG&A spend we will lowered again in 'twenty for unexpected.
And expect to continue to lowered in 'twenty five and 26 that is at the same time, making more investments there.
Our SG&A investments in things like artificial intelligence so.
Where we think under <unk> leadership I'm you know, we've got a solid approach to this and certainly we'll let the outline of that approach works overtime.
Right.
Yes, Oliver and I would say the the gross margin expansion is a little more of a slow and steady.
So we are planning a S L and asked to do 150 to 200 million and that's what we have laid out kind of a slow and steady margin improvement.
That along with our Ellen as revenue of 370 million average a year and that sort of at about 65% gross margin and then as well as the SG&A effort Peter talked about I think youre right that is a little more we expect to achieve on an annualized basis about 70% of that by the end of this year and so that does take because we have to do something.
Investments in order to save but that will you know as opposed to the gross margin that is more slow and steady SG&A will kind of be more of a you'll see that more in 2025 and then in addition to that you get to the free cash flow that we laid out you know theres other some other things on the free cash flow side that we're working such as <unk>.
Improving our working capital dynamics.
Some of the more one time cash flow items will start to go down over these next few years and so that's another important part of the formula to get us to those free cash flow number we've laid out as part of our long term targets.
Thank you so much I could jump in as well just a just one quick comment Deb mentioned $150 million. It was 150 to 200 basis points of improvement in gross margin.
And if you look at the Investor day materials that we put out.
We see in there that are doing for additional improvement in basis points, and 25, and 26 kind of consistent in that manner. Now, we're not saying that is kind of a linear path and it's going to be the same amount every year or so we will ebb and flow a bit but it's.
As Peter mentioned in his opening remarks, we're doing quite a bit in regards to the associate base rates scaling right shoring AI automation speeding up so we're seeing all kinds of elements embedded in kind of managing that resource delivery.
So we think that's going to yield additional benefits in the outer years to get us aligned with them.
The projections that we put out at Investor day.
Got it. Thank you everyone can I ask one last thing on the pension cliff it sounds like you've made a good amount of progress reducing that cliff. The 2026 to 29 cliff by by some 10 to 20 million a year any sort of high level thoughts on sort of what are your plans for 2024 in terms of further progress there. Thank you.
Yes, Jeff do you want to speak to ours.
Sure Yeah. So we're you know the contributions came down and that's primarily driven by asset returns and so you know there's there's.
We try to manage that and and you know we don't have full control over asset returns and so we put in the slide deck.
Sensitivity, so you can understand that but.
As we've spoken about and continue our plan to really look at continuing to Derisk. The plan. We took out you know we had two annuity purchases in 2023, we'll continue to look at that given market market conditions. If another one makes sense and so you know the goal there is just to lower the amount of of.
Liabilities using plan assets not corporate cash to just overall, you know lower the risk there.
You know the volatility of the overall pension plans. So that's our one of our strategies a key strategy for now, but we're always looking at all of our options as it relates to the pension.
Pending market conditions, and Oh, you know what makes sense at the time.
Thanks very much.
Youre welcome.
This concludes our question and answer session I would like to turn the conference back over to Peter out to Beth for any closing remarks.
Thanks, Betsy very much I'd like to thank everybody for joining the call I I know, we went a little over today, but the questions were really good and so we wanted to give everybody an opportunity to ask them.
When you review our materials on the website.
You'll see some modernization so kind of a one pager.
<unk> has been updated its got a different format.
And even the slides that we have showed over the course of this cole have some different formats and we have even more information in the appendix to the slides. So I do hope that you take some time and and looked at the materials and of course, our Investor Relations team is.
As always available for any follow on questions as is Mike and Doug and myself with that thank you very much and I appreciate you joining the call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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