Q2 2024 Unisys Corp Earnings Call
Speaker Change: Good morning and welcome to the Unisys Corporation second quarter 2024 financial results and conference call.
Operator: 2024 Financial Results and Conference Call. All participants will be in listen-only mode.
Operator: Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Michaela Pewarski, Vice President.
Speaker Change: All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1, on your telephone keypad. To withdraw your question, please press star, then 2. Please note this event is being recorded.
Michaela Pewarski: I would now like to turn the conference over to Michaela Pewarski, Vice President of Investor Relations. Please go ahead.
Michaela Pewarski: Thank you, operator. Good morning, everyone. Thank you for joining us.
Michaela Pewarski: Thank you, Operator. Good morning, everyone. Thank you for joining us.
Michaela Pewarski: Yesterday afternoon, Unisys released its second quarter financial results. I'm joined this morning to discuss those results by Peter Altabef, our chairman and CEO, Deb McCann, our CFO, and Mike Thomson, our president and COO, who will participate in the Q&A session. As a reminder, certain statements in today's conference call contain estimates and other forward-looking statements within the meaning of the securities law. We caution listeners that the current expectations, assumptions, and beliefs forming the basis for our forward-looking statements include many factors that are beyond our ability to control or estimate precisely.
Speaker Change: Yesterday afternoon, Unisys released its second quarter financial results. I'm joined this morning to discuss those results by Peter Altabef, our Chair and CEO , Deb McCann, our CFO , and Mike Thomson, our President and COO, who will participate in the Q&A session.
Michaela Pewarski: This could cause results to differ materially from our expectations. These items can also be found in the forward-looking statement section of today's earnings release furnished on Form 8K and in our most recent Forms 10K and 10Q as filed with the SEC. We do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events. We will also be referring to certain non-GAAP financial measures, such as non-GAAP operating profit or adjusted EBITDA, that exclude certain items, such as post-retirement expense, cost reduction activities, and other expenses the company believes are not indicative of its ongoing operations, as they may be unusual We believe these measures provide a more complete understanding of our financial performance. However, they are not intended to be a substitute for gas.
Speaker Change: As a reminder, certain statements in today's conference call contain estimates and other forward-looking statements within the meaning of the securities laws.
Speaker Change: We caution listeners that the current expectations, assumptions, and beliefs forming the basis for our forward looking statements include many factors that are beyond our ability to control or estimate precisely.
Speaker Change: This could cause results to differ materially from our expectations.
Speaker Change: These items can also be found in the forward-looking statements section of today's earnings release furnished on Form 8K and in our most recent Forms 10K and 10Q as filed with the SEC.
Speaker Change: We do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events.
Speaker Change: We will also be referring to certain non-GAAP financial measures, such as non-GAAP operating profit, or adjusted EBITDA, that exclude certain items, such as post-retirement expense, cost reduction activities, and other expenses the company believes are not indicative of its ongoing operations, as they may be unusual or non-recurring.
Speaker Change: We believe these measures provide a more complete understanding of our financial performance. However, they are not intended to be a substitute for GAAP.
Michaela Pewarski: The non-GATT measures have been reconciled to the related GATT measures, and we have provided reconciliations within the presentation. The slides accompanying today's presentation are available on our investor website. With that, I'd like to turn the call over to Peter.
Peter: The non-GAAP measures have been reconciled to the related GAAP measures, and we have provided reconciliations within the presentation. The slides accompanying today's presentation are available on our investor website. With that, I'd like to turn the call over to Peter.
Peter Altabef: Thank you, Michaela. Good morning, and thank you for joining us to discuss the company's second quarter results. It was another solid quarter for the company, and we remain on track to achieve our full year guidance ranges for both revenue growth and profitability. The second quarter adds to our track record of executing the strategy we presented at our June 2023 investor conference. The impact of our portfolio transformation and initiatives in sales and marketing, delivery, and associate development are becoming increasingly evident in our signings, pipeline quality, and delivery efficiency.
Peter: Thank you, Michaela. Good morning and thank you for joining us to discuss the company's second quarter results.
Peter: It was another solid quarter for the company, and we remain on track to achieve our full year guidance ranges for both revenue growth and profitability. The second quarter adds to our track record of executing the strategy we presented at our June 2023 Investor Day.
Peter: The impact of our portfolio transformation and initiatives in sales and marketing, delivery and associate development are becoming increasingly evident in our signings, pipeline quality, and delivery efficiency.
Peter Altabef: In the first half of the year, we have signed more than three times the number of new logos TCV signed all of last year, a positive signal of awareness and demand for our solutions in the market. The second quarter also demonstrates a clear positive trajectory on our ex-LNS gross margin, where expansion has been substantial and broad-based. Our first half X LNS gross margin of 18.4% is a 350 basis point improvement over the prior year that gives us a pathway to a non-gap operating margin above the midpoint of our guidance.
Peter: In the first half of the year, we have signed more than three times the new logo TCV signed in all of last year, a positive signal of awareness and demand for our solutions in the market.
Peter: The second quarter also demonstrates a clear positive trajectory on our ex-LNS gross margin, where expansion has been substantial and broad-based.
Peter: Our first half X LNS gross margin of 18.4% is a 350 basis point improvement over the prior year that gives us a pathway to a non-gap operating margin above the midpoint of our guidance.
Peter Altabef: We are well positioned to accelerate our progress next year when the new logos we have signed in the first half of this year and are signing in the third quarter will begin generating margin-accretive revenue. In addition, we anticipate new scope and expansion opportunities with these clients in the coming quarter. For next year, we also expect continued delivery efficiencies, lower legal and environmental payments, and increasing benefits from our SG&A initiatives, all of which will benefit cash generation. Looking more closely at second quarter client signings, total company TCV increased 25% sequentially and 19% year-over-year. Excluding licenses and support, TCV was up 35% for the last quarter and up 10% year-over-year.
Peter: We are well positioned to accelerate our progress next year, when the new logos we have signed in the first half of this year and are signing in the third quarter will begin generating margin accretive revenue. In addition, we anticipate new scope and expansion opportunities with these clients in the coming quarters.
Peter: For next year, we also expect continued delivery efficiencies, lower legal and environmental payments, and increasing benefit from our SG&A initiatives, all of which will benefit cash generation.
Peter: Looking more closely at second quarter client signings, total company TCV increased 25% sequentially and 19% year over year.
Peter: Excluding license and support, TCV was up 35% for last quarter and up 10% year-over-year.
Peter Altabef: The strength in XL&S signings is the result of continued new business momentum. We signed 17% more new business than the prior quarter and 64% more new business than the prior year period. New business growth was driven by a more than doubling of new logo TCV on both a sequential and year-over-year basis. Growth in new business signings was strong in both our CANI and DWS sectors. In DWS, many of our new business signings have a combination of traditional and modern workplace solutions, validating our belief that focusing on excellence in the mission-critical capabilities clients need is a pathway to securing more revenue at attractive blended rates. In CNI, clients are turning to Unisys for our end-to-end expertise in transforming, running, and securely increasing complex IT estates across multiple cloud environments.
Peter: The strength in XL&S signings is the result of continued new business momentum.
Peter: We signed 17% more new business than the prior quarter and 64% more due business than the prior year period.
Peter: New business growth is driven by a more than doubling of new logo TCV on both a sequential and year-over-year basis.
Peter: Growth in new business signings was strong in both our CA&I and DWS segments.
Peter: In DWS, many of our new business signings have a combination of traditional and modern workplace solutions, validating our belief that focusing on excellence in the mission-critical capabilities clients need is a pathway to securing more revenue at attractive blended markets.
Peter: In C&I, clients are turning to Unisys for our end-to-end expertise in transforming, running, and securely increasingly complex IT estates across multiple cloud environments.
Peter Altabef: We're also seeing a much higher mix of cross-segment solutions in our new business science, proving the strength in our strategy to provide integrated mission-critical offerings. For example, we were engaged by one of the world's largest private trading groups to provide IT support to their approximately 55,000 employees, manage their hybrid infrastructure across data centers and cloud environments, and provide security and network-managed services. We also had a large logo signing with a public sector client in Australia, including both DWS and CANI solutions.
Peter: We're also seeing a much higher mix of cross-segment solutions in our new business science, proving the strength in our strategy to provide integrated mission-critical offerings.
Peter: For example, we were engaged by one of the world's largest private trading groups to provide IT support to their approximately 55,000 employees, manage their hybrid infrastructure across data centers and cloud environments, and provide security and network managed services.
Peter: We also had a large new logo signing with a public sector client in Australia.
Peter Altabef: As part of this agreement, Unisys will help this government agency integrate new technologies and support its approximately 6,000 end users with solutions and services in communications and collaboration, security, and compliance. So far in the third quarter, we have seen continued momentum in our new business signings with both existing clients and new customers. Turning to a discussion of our pipeline, we exited the quarter with a robust pipeline, and our opportunities are better aligned to our portfolio as a result of an increased emphasis on pipeline quality, which has led to improved new business win rates this year.
Peter: including both DWS and CANI solutions.
Peter: As part of this agreement, Unisys will help this government agency integrate new technologies and support its approximately 6,000 end-users with solutions and services in communications and collaboration, security, and compliance.
Speaker Change: So far in the third quarter, we have seen continued momentum in our new business signings with both existing clients and new lovers.
Speaker Change: Turning to a discussion of our pipeline, we exited the quarter with a robust pipeline and our opportunities are better aligned to our portfolio as a result of an increased emphasis on pipeline quality, which has led to improved new business win rates this year.
Peter Altabef: New business pipeline with existing clients, which consists of new scope and expansion, is up 7% sequentially. However, our overall pipeline declined 7% quarter over quarter, driven by a combination of the timing of our XL&S renewal schedule, strong conversion of new logo opportunities, and some normal pipeline fluctuations.
Speaker Change: New business pipeline with existing clients, which consists of new scope and expansion, is up 7% sequentially.
Speaker Change: Our overall pipeline declined 7% quarter over quarter, driven by a combination of the timing of our XLNS renewal schedule, strong conversion of new logo opportunities, and some normal pipeline fluctuation.
Peter Altabef: In the third quarter, we're seeing a good inflow of new opportunities and are pleased with the size, solution mix, margin profile, and winnability of our pipeline. For digital workplace solutions, we had strong growth in new scope opportunities for modern workplace solutions, such as unified endpoint management and device subscription services, which typically include intelligent PC refresh that optimizes hardware spend within an OPEX model. During the quarter, we also signed several framework agreements for DWS field services, which put in place contractual terms to serve future demand with speed and agility and will create future pipeline as that demand materializes.
Speaker Change: In the third quarter, we're seeing a good inflow of new opportunities and are pleased with the size, solution mix, margin profile, and winnability of our pipeline.
Speaker Change: In digital workplace solutions, we had strong growth in new scope opportunities in modern workplace solutions, such as unified endpoint management and device subscription services.
Speaker Change: which typically includes intelligent PC refresh that optimizes hardware spend within an OpEx model.
Speaker Change: During the quarter, we also signed several framework agreements for DWS field services, which put in place contractual terms to serve future demand with speed and agility, and will create future pipeline as that demand materializes.
Peter Altabef: In cloud applications and infrastructure solutions, we continue to see increasing demand for our higher-margin digital platforms and application solutions in both the public sector and in public and private higher education. Many of these clients will need to invest to adopt emerging technologies, modernize administrative functions, and provide a digital experience for residents, students, and employees. We have built specialized public sector software partnerships with Unisys, providing implementation and customization on the front end and typically providing a recurring managed service on the back. This model has been successful with our partner Clarity, which provides permitting and licensing software.
Speaker Change: In cloud applications and infrastructure solutions, we continue to see increasing demand in our higher margin digital platforms and application solutions in both the public sector and in public and private higher education.
Speaker Change: Many of these clients will need to invest to adopt emerging technologies, modernize administrative functions, and provide a digital experience for residents, students, and employees.
Speaker Change: We have built specialized public sector software partnerships with Unisys providing implementation and customization on the front end, and typically providing a recurring managed service on the back end. This model has been successful with our partner Clarity, which provides permitting and licensing software.
Peter Altabef: We also have four new public sector software and technology partners in areas such as health and human services. For example, in child welfare information systems, we have already built a pipeline of more than 100 million dollars in opportunities to modernize these platforms for several large U.S. states. In specialized services and next-gen compute within our ECS segment, new business pipeline grew more than 20% sequentially, driven by growth in financial services and the public sector, including a number of new application expansion opportunities.
Speaker Change: We also have four new public sector software and technology partners in areas such as health and human services.
Speaker Change: In child welfare information systems, we have already built a pipeline of more than 100 million in opportunities to modernize these platforms for several large U.S. states.
Speaker Change: In specialized services and next-gen compute within our ECS segment, new business pipeline grew more than 20% sequentially, driven by growth in financial services and the public sector, including a number of new application expansion opportunities.
Peter Altabef: Clients in every sector and region are continuing to focus on AI, both generative and traditional, and there is broad interest in AI-enabled solutions with enhanced service. First, we're seeing new opportunities for AI-related consulting across our business. For example, we are working with a global food processing client to enhance their data inputs and engineering to increase the value of an AI application already in production. As another example, we're advising a technology, media, and telecom client to leverage multiple large language models to enable dynamic ad generation for target audiences.
Speaker Change: Clients in every sector and region are continuing to focus on AI, both generative and traditional, and there is broad interest in AI-enabled solutions with enhanced services.
Speaker Change: First, we're seeing new opportunities in AI-related consulting across our business.
Speaker Change: For example, we are working with a global food processing client to enhance their data inputs and engineering to increase the value of an AI application already in production.
Speaker Change: As another example, we're advising a technology, media, and telecom client to leverage multiple large language models to enable dynamic ad generation for target audiences.
Peter Altabef: The second area of AI-related growth is in data services, which is the fuel for artificial intelligence. We're seeing growing demand for services and solutions relating to migrating, transforming, and managing data within a cohesive data layer, as well as delivering actionable data. For example, Unisys will leverage generative AI and machine learning to help one of the world's premier quick service restaurants analyze service data. We will utilize inputs from all restaurant technology, including point of sale, ordering kiosks, visual displays, and automated kitchen equipment, to identify and prioritize process, technology, and behavior changes to improve restaurant operations.
Speaker Change: The second area of AI-related growth is in data services.
Speaker Change: which is the fuel of artificial intelligence. We're seeing growing demand for services and solutions relating to migrating, transforming, and managing data within a cohesive data layer, as well as delivering actionable data insights.
unisys: For example, Unisys will leverage generative AI and machine learning to help one of the world's premier quick service restaurants analyze service data.
unisys: We will utilize inputs from all restaurant technology, including point-of-sale, ordering kiosks, visual displays, and automated kitchen equipment to identify and prioritize process, technology, and behavior changes to improve restaurant operations.
Peter Altabef: A third area of opportunity is providing managed services supporting maintenance and optimization of AI platforms and applications. This includes multi-cloud application and security managed services, AI operations, and data center management. For example, Unisys is providing field services to help a client in the technology sector with the relocation of their data centers in North Carolina. Finally, there is delivery of AI-enabled solutions, which are beginning to take shape through AI-enabled platforms and applications, infusing AI into existing solutions and through tools and accelerators to speed model tuning and AI development.
unisys: A third area of opportunity is providing managed services supporting maintenance and optimization of AI platforms and applications.
unisys: This includes multi-cloud, application, and security managed services.
Speaker Change: Unisys is providing field services to help a client in the technology sector with the relocation of their data centers in North America.
Speaker Change: Finally, there is delivery of AI-enabled solutions.
Speaker Change: which are beginning to take shape through AI-enabled platforms and applications, infusing AI into existing solutions, and through tools and accelerators to speed model tuning and AI development. For instance,
Peter Altabef: For instance, in a digital transformation project with a leading provider of automated test equipment, we were able to modernize 90 enterprise applications in half the time. By infusing AI into every facet of the project, including co-generation, design, development, and management.
Speaker Change: Within a digital transformation project with a leading provider of automated test equipment, we were able to modernize 90 enterprise applications in half the time by infusing AI into every facet of the project, including code generation, design, development, and testing.
Peter Altabef: I now want to spend a few minutes discussing innovation within our segments, specifically enterprise computing. More than half of ECS revenue and profit is licensed and supported, which is primarily related to our Clear Path Forward operating systems for secure, high-volume transaction processing in sectors such as financial services, health and life sciences, public sector, and travel and transport. Our systems are typically embedded within complex client IT environments, consisting of hybrid infrastructure, data, and applications.
Speaker Change: I now want to spend a few minutes discussing innovation within our segments, specifically enterprise computing solutions.
Speaker Change: More than half of ECS revenue and profit is license and support.
Speaker Change: which is primarily related to our clear path forward operating systems for secure, high volume transaction processing in sectors such as financial services, health and life sciences, public sector, and travel and transportation.
Speaker Change: Our systems are typically embedded within complex client IT environments consisting of hybrid infrastructure, data, and application layers.
Peter Altabef: While this makes our technology relatively stable, it is also dynamic, and we devote capital engineering resources to continually strengthen our platform. For example, we rolled out a new generation of our software this quarter to increase transaction speed and security. The remainder of ECS revenue and profit consists of our specialized services and Next Generation Compute Solutions, or SSC, which includes specialized services supporting the use of our platform and our portfolio of industry applications and services, including in areas such as cargo management, retail banking, and mortgage processing.
Speaker Change: While this makes our technology relatively sticky, it is also dynamic, and we devote capital engineering resources to continually strengthen our platforms. For example, we rolled out a new generation of our software this quarter to increase transaction speed and security.
Speaker Change: The remainder of ECS revenue and profit consists of our Specialized Services and Next Generation Compute Solutions, or SS&C.
Speaker Change: which includes specialized services supporting the use of our platforms.
Speaker Change: and our portfolio of industry applications and services including in areas such as cargo management, retail banking and mortgage processing.
Peter Altabef: Our expertise positions us to meet growing demand for application expansion services by providing engineering and integration capabilities needed to modernize application layers by infusing new digital capabilities. In the second quarter, we enhanced our application expansion services by partnering with a leading provider of retail banking point sources. Unisys will custom engineer our partners' digital products for clients in Europe and Latin America to enable digital retail banking experiences for their customers. We also continue to see a compelling opportunity to leverage our expertise to develop new industry solutions that utilize AI and hybrid computing platform capabilities such as quantum annealing.
Speaker Change: Our expertise positions us to meet growing demand for application expansion services.
Speaker Change: by providing engineering and integration capabilities needed to modernize application layers.
Speaker Change: by infusing new digital capabilities. In the second quarter, we enhanced our application expansion services by partnering with a leading provider of retail banking point solutions.
Speaker Change: Unisys will custom engineer our partners digital products for clients in Europe and Latin America to enable digital retail banking experiences for their customers.
Speaker Change: We also continue to see a compelling opportunity to leverage our expertise to develop new industry solutions that utilize AI and hybrid computing platform capabilities such as quantum annealing.
Peter Altabef: Our next-generation SS&C industry solutions within ECS are accessible on multiple platforms, including public and private cloud. Unisys Logistics Optimization is now in production at our first. We have also rolled out a design portal we developed to speed prototyping, market validation, and testing of new features. Finally, our OEM partner, Dell, has a validated design integrating Unisys Logistics Optimization into their AI-ready server. We are also continuing to advance our Productivity and Workforce Management Foundation, where we made important progress during the COVID-19 pandemic.
Speaker Change: Our next generation SS&C industry solutions within ECS are accessible on multiple platforms, including public and private clouds.
Speaker Change: Unisys Logistics Optimization is now in production at our first client.
Speaker Change: We have also rolled out a design portal we developed to speed prototyping, market validation, and testing of new features.
Speaker Change: Finally, our OEM partner Dell has a validated design integrating Unisys logistics optimization into their AI ready service.
Speaker Change: We are also continuing to advance our Productivity and Workforce Management Foundation where we made important progress during the quarter.
Peter Altabef: Our AI-powered HR talent marketplace is now available globally to all associates and is already increasing internal efficiency. We are redesigning our job architectures to provide associates with a clearer path to continued investment. These initiatives will enhance our workforce management capabilities while providing associates with better access to the multitude of opportunities that are being created by our new business signing. During the quarter, we published our 2023 sustainability report, which outlines our progress and milestones achieved in our ongoing commitment to sustainability.
Speaker Change: Our AI-powered HR talent marketplace is now available globally to all associates and is already increasing internal mobility.
Speaker Change: We are redesigning our job architectures to provide associates with a clearer path to continued investment.
Speaker Change: These initiatives will enhance our workforce management capabilities while providing associates with better access to the multitude of opportunities that are being created by our new business signings.
Speaker Change: During the quarter, we published our 2023 Sustainability Report, which outlines our progress and milestones achieved in our ongoing commitment to sustainability.
Peter Altabef: This includes our approach to real estate and energy consumption, business continuity, ethical and responsible use of AI, and the well-being of our associates. Our trailing 12 month voluntary attrition remains very low at 12%, which compares to 14.4% a year ago and we believe reflects our ongoing commitment to fostering a workplace with opportunities for employees to develop and grow. With that, I will turn the call over to Deb to discuss our second quarter financials in more detail.
Speaker Change: This includes our approach to real estate and energy consumption, business continuity, ethical and responsible use of AI, and the well-being of our associates.
Speaker Change: Our trailing 12-month voluntary attrition remains very low at 12%, which compares to 14.4% a year ago, and we believe reflects our ongoing commitment to fostering a workplace with opportunities to develop and advance.
Speaker Change: With that, I will turn the call over to Deb to discuss our second quarter financials in more detail.
Debra McCann: Thank you, Peter, and good morning, everyone. As a reminder, my discussion today will reference slides from the supplemental presentation posted on our website. I will refer to revenue growth as reported and in constant currency and segment revenue growth in constant currency only. I will also provide information excluding license and support revenue or XLNS to allow investors to assess the progress we are making outside the portion of ECS where revenue and profit recognition is tied to license renewal timing, which can be uneven year to year and between quarters. Thank you.
Deb: Thank you, Peter, and good morning, everyone.
Deb: As a reminder, my discussion today will reference slides from the supplemental presentation posted on our website. I will refer to revenue both as reported and in constant currency and segment revenue growth in constant currency only. I will also provide information excluding license and support revenue or XLNS.
Deb: to allow investors to assess the progress we are making outside the portion of ECS where revenue and profit recognition is tied to license renewal timing, which can be uneven year-to-year and between quarters.
Debra McCann: As Peter discussed, we are pleased with our financial results and our momentum in new business signings, which were up 25% year-over-year for the first half. New business strength has continued so far in the third quarter, and we are well positioned to benefit from growing demand for AI-enabled solutions and the services and solutions that support AI workloads. The expansion in our XLNS growth margin gives us a line of sight to a non-GAP operating margin above the midpoint of our guidance range, and we are executing our delivery on FG&A initiatives, which contribute to profitability. Also, in 2025 and 2026, our cash conversion is expected to improve as environmental, legal, and restructuring payments decline compared to 2023.
Deb: As Peter discussed, we are pleased with our financial results and our momentum in new business signings, which are up 25% year-over-year for the first half.
Speaker Change: New business strength has continued so far in the third quarter, and we are well positioned to benefit from growing demand for AI-enabled solutions and the services and solutions that support AI workloads.
Speaker Change: The expansion in our XL and S growth margin gives us a line of sight to a non-gap operating margin above the midpoint of our guidance range. And we are executing our delivery in SG&A initiatives, which contribute to profitability.
Speaker Change: Also, in 2025 and 2026, our cash conversion is expected to improve as environmental, legal and restructuring payments decline compared to 2023.
Debra McCann: Looking at our results in more detail, you can see on slide four that the second quarter revenue was $478 million, an increase of 0.3% year-over-year and 0.5% in constant currency. Second quarter XLNS revenue was slightly better than anticipated at $396 million, flat year-over-year and in constant currency, which was slightly better than expected, driven by the performance of our DWS segment. Year-to-date total company revenue is $966 million, down 2.7% year-over-year and down 3.5% in constant currency due to license and support renewal timing.
Speaker Change: Looking at our results in more detail, you can see on slide 4, the second quarter revenue was $478 million, an increase of 0.3% year-over-year and 0.5% in constant currency.
Speaker Change: Second quarter, XLNS revenue was slightly better than anticipated at $396 million, flat year-over-year and in constant currency, which was slightly better than expected, driven by the performance of our DWS segment.
Speaker Change: Year-to-date total company revenue is $966 million, down 2.7% year-over-year, and down 3.5% in costs and currency due to license and support renewal timing.
Debra McCann: Excluding license and support, our revenue was up 2% and up 1.5% in constant currency in the first half. I will now discuss our segment results referring to constant currency growth rates for revenue. Digital Workplace Solutions revenue was $132 million, a 2.2% decline compared to the prior year period. However, the decline was more modest than anticipated at the start of the quarter due to higher discretionary volume.
Speaker Change: Excluding license and support, our revenue was up 2% and up 1.5% in constant currency in the first half.
Speaker Change: I will now discuss our segment results referring to constant currency growth rates for revenue.
Speaker Change: Digital Workplace Solutions revenue was $132 million, a 2.2% decline compared to the prior year period. The decline was more modest than anticipated at the start of the quarter due to higher discretionary volume.
Debra McCann: We remain confident in the second half growth trajectory in DWS. DWS new business PCV in the first half was up more than 60% compared to the first half of 2023, with a much higher ratio of recurring managed services in our new logo signings. We are confident the segment will generate sequential growth in the back half as these new logos begin generating revenue, which will also benefit 2025 given their long-term nature.
Speaker Change: We remain confident in the second half growth trajectory in DWS.
Speaker Change: DWS new business PCV in the first half was up more than 60% compared to the first half of 2023 with a much higher ratio of recurring managed services in our new logo signing.
Speaker Change: We are confident the segment will generate sequential growth in the back half as these new logos begin generating revenue, which will also benefit 2025, given their long-term nature.
Debra McCann: CA&I revenue was $134 million, an increase of 1.3% compared to the prior year period, driven by growth in hybrid infrastructure and infrastructure as a service across all regions and particularly in the United States and Canada. ECS revenue was $138 million, an increase of 2.5%, including 3.3% constant currency growth in S&C solutions, which was driven by specialized services growth with clients in the financial sector. License and Support revenue within the ECS segment was $82 million, an increase of 2.1% in constant currency.
Speaker Change: CA&I revenue was $134 million, an increase of 1.3% compared to the prior year period, driven by growth in hybrid infrastructure and infrastructure as a service across all regions and particularly in the United States and Canada.
Speaker Change: ECS revenue was $138 million, an increase of 2.5%, including 3.3% constant currency growth in S, S&C solutions, which was driven by specialized services growth with clients in the financial sector.
Speaker Change: License and support revenue within the ECS segment was $82 million, an increase of 2.1% in constant currency.
Debra McCann: This was below the $90 million we had expected due to a shift in the timing of a renewal from the second to the third quarter. This renewal has since closed, and will be recognized in our third quarter revenue.
Speaker Change: This was below the $90 million we had expected due to a shift in the timing of a renewal from the second to the third quarter. This renewal has since closed and will be recognized in our third quarter revenue.
Debra McCann: We continue to expect $375 million of L&S revenue for the full year and $370 million of average annual L&S revenue for the three-year period of 2024 through 2026. It is important to remember that the timing and exact amount of LNS revenue can be difficult to forecast with precision, given that it is dependent on the timing of renewal signing, which can vary depending on client budgeting and the pace of decision making related to contract structure and duration, among other factors.
Debra McCann: We exited the quarter with a backlog of $2.8 billion, up 4% year-over-year and relatively flat on a sequential basis. Year-over-year backlog growth was driven by a more than 15% increase in the digital workplace and mid-single-digit growth in our CA&I and ECS segments. Trailing 12-month book-to-bill with 1.1x for the total company and 1.2x for our XLNS solutions. Moving to slide five, second quarter gross profit was $130 million, representing a 27.2% growth margin compared to 24.3% in the prior year period. Expansion was primarily driven by delivery improvement and an increase in revenue from higher margin solutions in new business signing.
Debra McCann: XL&S gross profit margin was 18.7% compared to 16% in the prior year period, or an increase of 270 basis points. This was also 70 basis points higher than our first quarter gross margin. Year-to-date total company gross margin is 27.5% compared to 27.7% in the prior year, and XLMS gross margin is 18.4% compared to 14.9% in the prior year first half. While XL&S margin improvement will not have a linear trajectory, we are pleased with the progress we have made and are well positioned to achieve the top end of the 150 to 200 basis points of annual expansion we are targeting through 2026.
Speaker Change: <unk> gross profit margin was 18, 7% compared to 16% in the prior year period or an increase of 270 basis points. This was awesome 70 basis points higher than our first quarter Exxon etch gross margin.
Debra McCann: DWS segment growth margin was 16.2% in the second quarter, a 260 basis point year-over-year increase, reflecting improvements in delivery. As part of our efficiency strategy in DWS, we have increased focus on upskilling lower-cost talent and aligned variable compensation of delivery leaders to delivery improvement.
Debra McCann: We continue to see meaningful incremental opportunity from the mix of higher margin solutions in new business signings, improving utilization rates, and adopting new technologies, efficiency models, and analytics. CA&I segment growth margin was 17.8% in the second quarter, an increase of 90 basis points year over year. In CA&I, we have also benefited from accelerating new business with a more favorable margin match. We have also achieved significant labor efficiency through a strong focus on increasing internal mobility and a new campus hiring program.
Debra McCann: We believe these initiatives can provide further benefit and see an incremental margin opportunity from optimizing our use of low-cost labor markets for C&A and I shared service. ECS segment growth margin was 55.9% in the second quarter, which compares to 54.1% in the prior year. The 180 basis points of year-over-year expansion were primarily driven by the timing of software license renewals and managed services growth. As a reminder, our L&S cost base will be fairly consistent in the short and medium term, but the license portion of renewals is recognized in full upon renewal signing, leading to fluctuations in ECS growth margin based on renewal levels.
Speaker Change: But the license portion of renewals is recognized in full upon renewal signing leading to fluctuations in ECS gross margin based on renewal levels.
Debra McCann: Moving to slide 6, our second quarter NOMGAP operating profit margin was 6.1%, up from 3.4% in the prior year period. This was above the expectation we provided last quarter of low single digits due to the improvement achieved in XLNS solutions. Operating expenses also declined on a sequential end-year-over-year basis, primarily due to a decline in certain legal expenses, as well as some benefit from our SG&A initiative. We continue to implement the plan laid out on Investor Day to streamline corporate operations, rationalize our real estate costs, and centralize IT.
Speaker Change: Moving to slide six our second quarter non-GAAP operating profit margin was six 1% up from three 4% in the prior year period.
Speaker Change: This was above the expectation we provided last quarter of low single digits due to the improvement achieved in Exxon I solutions.
Speaker Change: Operating expenses also declined on a sequential and year over year basis, primarily due to a decline in certain legal expenses as well as some benefit from our SG&A initiatives. We continue to enact the plan laid out on Investor day to streamline corporate operations rationalizing, our real estate costs and centralize the I T.
Debra McCann: Second quarter adjusted EBITDA was $58 million, representing an adjusted EBITDA margin of 12.2% compared to 10.5% in the prior year period. First half non-GAAP operating margin was 6.6% compared to 7.7% in the prior year. And the first half adjusted EBITDA margin was 12.8% compared to 15% in the prior year, primarily due to lower levels of L&S revenue in the first half of the year. We had a net loss in the second quarter of $12 million, or a diluted loss per share of $0.17.
Speaker Change: Second quarter, adjusted EBITDA was $58 million, representing an adjusted EBITDA margin of 12, 2% compared to 10, 5% in the prior year period.
Speaker Change: First half non-GAAP operating margin was six 6% compared to seven 7% in the prior year and first half adjusted EBITDA margin was 12, 8% compared to 15% in the prior year, primarily due to lower levels of Elemis revenue in the first half of the year.
Debra McCann: This compares to a net loss of $40 million, or negative 59 cents, in the second quarter of 2023. On an adjusted basis, net income was $11 million, or $0.16 per share, compared to a loss of $6 million, or negative $0.09 per share, in the prior year. Year-to-date adjusted net income is $13.7 million, or earnings per share of $0.19 compared to adjusted net income of $28.6 million or $0.42 per share in the prior year. Lower net income was again largely due to the timing impact of LMS renewal.
Debra McCann: Turning to slide seven, capital expenditures totaled approximately $21 million in the second quarter, up $3 million on a year-over-year basis. As a reminder, a portion of our capital expenditures is related to research and development of our L&S platform, and we have a capital light strategy focused on limiting capital intensity of the remainder of the business. Second quarter free cash flow was negative $19 million compared to positive $25 million in the prior year period due to the timing of L&S collection.
Debra McCann: On a year-to-date basis, free cash flow is negative $15 million compared to positive $17 million in the prior year period, with the variance largely driven by the timing of collections and other fluctuations in working capital. Excluding environmental, certain legal, and restructuring and other payments, as well as post-retirement contributions, our adjusted free cash flow was negative $8 million in the second quarter and positive $9 million year-to-date. We still expect to generate approximately $10 million of free cash flow for the full year and more favorable working capital dynamics in the back half.
Debra McCann: Moving to slide 8, our cash balance is worth $345 million as of June 30th, compared to $388 million at year-end. The variance in our cash balances is primarily due to the timing of our quarterly free cash flow and its negative effects. Given our cash flow outlook, we expect cash balances to increase from these levels by year-end. Our net leverage ratio is 0.6 times, up slightly from 0.5 times at the end of the first quarter.
Speaker Change: Slightly from 0.5 times at the end of the first quarter, including all defined benefit pension plan.
Debra McCann: Including all defined benefit pension plans, our net leverage ratio is 3.3 times flat sequentially. Our liquidity is strong with no borrowings against our revolver and no major debt maturities until our $485 million senior secured notes become due in November 2027. I will now provide an update on our global pension plan. At each year end, we provide detailed, estimated projections for our expected global pension cash contributions and gap deficit, which change based on factors such as financial market conditions, funding regulations, and actuarial assumptions. We also provide quarterly updates which are estimated and do not have the same level of detail.
Speaker Change: Our net leverage ratio of 3.3 times flat sequentially.
Speaker Change: Our liquidity is strong with no borrowings against our revolver and no major debt maturities until our $485 million senior secured notes become due in November 2027.
Debra McCann: Based on asset returns and market conditions, we are looking forward to the next year. We estimate that as of June 30, 2024, our cash contributions to our global pension plans for the five-year period beginning in 2024 and our global pension deficit will be both essentially unchanged from year end. Turning to slide 9, I will now discuss our full year financial guidance and then provide color for our third quarter expectations. For the full year, we continue to expect total company revenue growth of negative 1.5% to positive 1.5% in constant currency, which, based on recent FX rates, now equates to reported revenue of negative 1.7% to positive 1.3%.
Speaker Change: I will now provide an update on our global pension plans.
Speaker Change: Each year and we provide detailed estimated projections for our expected global pension cash contributions in GAAP deficit, which change based on factors such as financial market conditions funding regulations and actuarial assumptions. We also provide quarterly updates which are estimated and do not have the same level of detail based on half over.
Speaker Change: In terms of market conditions.
Speaker Change: We estimate that as of June 32024, our cash contributions to our global pension plans for the five year period, beginning in 2024, and our global pension deficit are both essentially unchanged from year end.
Debra McCann: This guidance continues to assume L&S revenue of $375 million and ex-L&S constant currency growth of 1.5% to 5%. Non-GAAP operating profit margin is expected to be between five and a half percent and seven and a half percent. As I mentioned earlier, the strong margin expansion we have achieved in Excel on a solution gives us a line of sight to exceed the midpoint of the range.
Speaker Change: Turning to slide nine I will now discuss our full year financial guidance, and then provide color for our third quarter expectations.
Debra McCann: Assumptions behind our $10 million of free cash flow are essentially unchanged, with capital expenditures expected to be between $85 million and $95 million, net interest payments of approximately $20 million, international cash pension contributions of approximately $20 million, and cash payments for environmental, certain legal matters, restructuring, and other of approximately $75 to $80 million in total. Elevated legal payments in 2023 and 2024 are primarily related to a matter in which Unisys is the plaintiff.
Debra McCann: Payments for certain legal matters are expected to decline next year. We also expect to see declines in environmental payments in the coming years, during which we also expect an approximate $30 million partial reimbursement of certain costs once cleanup work has been approved and finalized. Lastly, cash taxes are expected to be approximately $55 million for the year.
Debra McCann: Looking at the third quarter, we expect total company revenue to grow mid to high single digits on a constant currency basis, which equates to approximately $485 to $490 million of reported revenue. This assumes approximately $90 million of license and support revenue and low single-digit constant currency growth in ex-LNS revenue. We expect XLNS revenue to show sequential growth in the fourth quarter as well, driven by revenue generation from our recent new business fund.
Debra McCann: We also expect third quarter non-GAAP operating profit margins in the mid-single digits. I am excited about the momentum in new business signings and our continued progress improving profitability, which will drive higher free cash flow. Thank you. I will now turn the call over to Peter for any closing remarks.
Peter Altabef: Thank you, Deb. While we have covered a lot of information today, I want to emphasize three important takeaways. First, the momentum in new business we achieved in the first quarter is continuing in the second quarter and is a positive indicator of demand for our solution portfolio. And we have exciting opportunities in all our segments to drive new business signings growth. Second, we believe we have additional gross margin opportunities from delivery efficiency initiatives and accretive new business science.
Peter Altabef: And third, we expect higher profit and cash generation in the second half of the year as we benefit from the first half's new logo signings, results from SG&A initiatives, and improved working capital gains. Operator, please open the line for
Speaker Change: Please open the line for questions.
Operator: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Rod Bourgeois with Deep Dive Equity Research. Please go ahead.
Speaker Change: We will now begin the question and answer session to ask a question you made press Star then one on your telephone keypad.
Speaker Change: If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Rod bourgeois with deep dive equity research. Please go ahead.
Rod Bourgeois: Yes, thank you. So my first question is about the margin. It's further encouraging to see the progress in the XLNS margin improvement there. And it sounds like you're getting margin benefits from productivity improvement efforts but also from a positive mix shift. So my question is, is the positive mix shift point correct, that that's an enduring margin lever? And then to what extent do you see that positive margin mix shift as a continuing factor? Or is that just some unique dynamic that's happening this year? Or do you see that?
Rod Bourgeois: Yeah. Thank you. So my first question is about the margin.
Speaker Change: It's further encouraging to see the progress and the X L N X L S margin.
Speaker Change: Improvement there and it sounds like you're getting margin benefits from productivity improvement efforts, but also from positive mix shift.
Speaker Change: Question is it is the positive mix shift point correct that that's a <unk>.
Speaker Change: Enduring margin lever and then.
Speaker Change: To what extent do you see that positive margin mix shift a continuing factor or is that just some unique dynamic that's happening this year or do you see that as more lasting.
Peter Altabef: Yeah, Rod, thanks very much for the question. This is Peter.
Speaker Change: Yeah Rod Thanks, very much for the question. This is Peter I'm actually going to turn that question over to Mike in a second.
Peter Altabef: I'm actually going to turn the question over to Mike. It's really interesting. Yes to all of your questions.
Michael Thomson: Mixed shift is happening, and mixed shift is positive. One of the interesting dynamics we're seeing, though, is, you know, the strength in what we call our traditional business as opposed to our next generation business, because, you know, you're seeing margin improvement in our numbers across all of Exelon S, and that improvement includes traditional business. So as we become more efficient in the traditional business, you know, you're seeing that be more of a positive.
Michael Thomson: So yes, the shift is continuing, but it's actually less important than it used to be because of the profitability increase of the traditional business. But I'll hand it over to Mike for a little more. Great, thanks Peter, and hey Rod, thanks for the question. Look, I think you're both on to something there, right?
Michael Thomson: It's really a combination of things, Rod, and I think very consistent with what we talked about at Investor Day and continue to see in the market, right? Our pricing power remains strong in our new solutions, the margin profile on those solutions are in line with what we expected back in our 23 Investor Day and continue that way. We've seen continual improvement in the margin profile on the delivery of our traditional business, and I think just really consistent, solid performance across the board, and Deb mentioned a little bit too around our talent marketplace and, you know, what we're trying to do with our associate base, so I really feel like those three components, the makeshift component, the delivery component, as well as what we're seeing from pricing power and our solutions being, you know, taken in the marketplace, have all really contributed pretty equally across the board, and again, I think it's really just solid performance and kind of keeping our head down and making sure we're delivering as we said we would.
Rod Bourgeois: Great. And so, I will follow up.
Rod Bourgeois: I mean, as you head into 2025, environmental and legal costs need to drop. It sounds like you're underscoring that you're on track to make progress there. I think last quarter, you had indicated that the environmental and legal costs could drop by 50% or more. And you also have a refund on the environmental side, which seems like it's likely. Is your outlook on a 50% or more drop in environmental regulations legal? Is that outlook still intact? Or is there some kind of updated view on that?
Peter Altabef: Yeah, so Rod, thanks for that. I'll give the specific percentage to Deb, but in broad strokes, the answer is that nothing has really changed.
Peter Altabef: I want to keep everybody's attention on the legal side. You know, the biggest expense we have had is a suit where we are the plaintiff. So, you know, that is the case that we feel good about, and we obviously expect to have rewards from that, if you will. On the environmental side, we're keeping a very close track on that, and nothing has changed of any substance. Deb, over to you.
Debra McCann: Hi Rod. Thanks, Rod, for the question. Yes, Peter's right. Everything is still on track for that. And as we've discussed before, it is an important element of our improvement in our free cash flow conversion rate. And so, you know, we're keeping an eye on those things, but nothing's changed. And as we mentioned last time, our estimate about half from what they were in 23 is still accurate.
Rod Bourgeois: Okay. And if I could just ask one more follow-up.
Rod Bourgeois: You mentioned the AI and machine learning work you're doing for a restaurant client, and I wanted to see if you could speak to the potential scale of that opportunity. It sounds like an interesting use case that's actually moving beyond the ideal pilot stage. You know, especially in the AI world, we're seeing a lot of ideas and pilots, but it's been pretty light on things actually moving into production. And that sounds like an interesting use case. Is it moving to more of a production stage, and what could be the potential scale of that?
Speaker Change: But it's been pretty light on things actually moving into production and that sounds like an interesting use case is it moving to more of a production stage and what what what could be the potential scale of that.
Peter Altabef: Yes, so the answer is yes. It is moving toward more of a production stage. It is for a very significant client in that space, and we're very excited about it. You know, still relatively early days in terms of seeing how far it could expand and what it would mean for us. So, early days on that. But the quality of the client, and the quality of the work we're doing, is absolutely an indicator of the things we could do, you know, on a broader basis. But we're very excited about this client and the specifics. Mike, anything further you want to add to that situation?
Mike: Yes. So the answer is yes. It is moving towards more of a production stage. It is for a.
Speaker Change: Very significant client in that space, we're very excited about it still relatively early days.
Speaker Change: In terms of seeing how far it could expand.
Speaker Change: And what it would mean for us so early days on that but the quality of the client the quality of the work. We're doing absolutely is an indicator of the things we could do you know on a broader base, but we're very excited about this client and the specifics Mike anything further you want to add to that situation.
Michael Thomson: No, look, I think you covered it too, Peter, in some of your prepared remarks earlier when we talked about this being an interesting play, Rod, when we talk about data, right? In this particular case, data telemetry from POS machines and kiosks and digital boards and the cooking equipment, etc. This particular opportunity is a full North America opportunity, so the scale can be pretty substantial. But it's early days, lots to do, but I really like to see the progress we're making from an innovation perspective.
Mike: No look I think he covered it to Peter in some of your prepared remarks earlier when we talk about this is an interesting play Ron when we talk about data right. In this particular case, the data telemetry from Pos machines, and kiosks and digital boards and cooking equipment et cetera.
Speaker Change: This particular opportunity is a full north America opportunity.
Mike: So scale can be pretty substantial.
Debra McCann: And this client is global. So it is a North American opportunity right now. And Rod, this is Deb. I just want to jump in and make sure it was clear that the, you know, half of the environmental legal other is by 2026. So similar to our other targets we laid out, just to make sure that's clear that that's not this year.
Rod Bourgeois: Got it. Thank you.
Joe Vafi: The next question comes from Joe Vafi with Canaccord Genuity. Please go ahead.
Pallav Saini: Good morning. This is Pallav Saini on for Joe.
Pallav Saini: Thanks for taking our questions. The first question is kind of a follow-up on the AI question. Peter, can you share what percentage of your new business signings currently have a Gen-AI component to them? And I know you said it's a bit early, but is there a way to frame this opportunity from a revenue perspective over time?
Peter Altabef: Yeah, you know, I think it's a great question. And, you know, it's a question being asked of us, and many of the companies similarly situated with us. I can only give you, you know, kind of our approach and the way we have thought about AI. First of all, you know, as you notice in my comments, Gen AI is important, but it's not the only AI, right? So it's kind of weird to talk about traditional AI, because, you know, the question is, "Wow, how can AI be traditional?". But the reality is things like machine learning and deep learning have been around for 20 years.
Peter Altabef: And when we talk about AI initiatives, and when we track those inside the company, you know, we're looking at Gen AI, but we're also looking at traditional AI. So when I speak of AI, I really am including both of them, because the advances in what we call traditional AI have been very significant and really help the end results of what our clients are looking for as well. In terms of our approach, I can tell you that we have established some company-wide AI initiatives.
Peter Altabef: Those initiatives really work to core solutions that we're infusing AI into. Some of those already have AI; many of them do, as well as efficiency models from how we develop code to how we run organizations like marketing, finance, and legal. So we're really looking at AI. I hate to say it because it seems trite, but it's like oxygen. I mean, AI is infused and will continually be infused throughout the company. And while there are some AI-specific engagements, like the one for the restaurant I just talked about, we're doing more than AI work for them. And Mike talked about the data-rich environment there and what we're doing in data analysis.
Peter Altabef: But in most cases, we're simply putting AI and infusing it into all of our solutions. So I can't answer the question, and I don't think I'll ever be able to answer the question of, you know, what revenue is generated by generative AI. Because, you know, unlike, let's say, a specific technology company that is charging extra on top of their ordinary cost for generative AI, that's not our approach. Our approach is really to charge for our services, and those services include generative and non-generative AI. That's really the way we're approaching it. I hope that helps.
Pallav Saini: That's helpful. Thanks, Peter. And just a modeling question. Can you remind us the cadence of your renewal schedule for next year? Is it more first half-weighted or back half-weighted?
Peter Altabef: Yeah, that's a great question. And Deb, I'm going to turn that one over to you.
Debra McCann: So that is a guess what the question is really about renewal about LNS, but I'm not sure whether it is. Yeah. Okay.
Debra McCann: As far as next year, we haven't really laid that out yet. We're still, you know, modeling that so we don't have I can always be offline. You know, we're on another call to lay that out, but for right now, I don't think we've really laid out the exact timing. We have laid out that $370 million per year over the next few years is what we expect, but we haven't laid out the quarter. So I'm not allowed to, you know; I can't give that to you. Got it, okay.
Pallav Saini: Got it. Okay. Thanks.
Arun Seshadri: The next question comes from Arun Seshadri with BNP Paribas. Please go ahead.
Arun Seshadri: Hello, everyone. Thanks for taking my questions. First, I just wanted to talk a little bit about gross margin. It's nice to see the improvement there.
Arun Seshadri: Is there any way to sort of talk about your proportion of overall cost of goods sold? Is it like, you know, in terms of fixed versus variable? And are there any one-timers in this quarter at all? I know that Q1 had a contract settlement benefit. So I just wanted to understand if this was sort of like a run rate, sort of a run rate performance.
Peter Altabef: Yeah, it's a great question. I'll turn it over to Deb in a second.
Peter Altabef: You know, fixed versus variable cost is always a function of time. Right? There's really almost no cost that is fixed forever, even real estate costs. And you've seen us actually drive real estate costs down over several years. So more a function of time, I can tell you that, from a leadership standpoint and management standpoint, the shorter the time you can get costs from fixed to variable, the more flexible you will be.
Peter Altabef: And I think we've done a very good job of that. A lot of the work we've done, obviously, people costs are the majority of our total costs. And the changes we have made, which I alluded to in my remarks around, you know, the way we are creating a really fullsome, vibrant marketplace inside the company. As jobs change and as jobs need new technologies, one of the things we are really encouraging our team to do is to get training, and we make that training available to the entire company for new technologies.
Mike: Being really a fulsome vibrant marketplace inside the company.
Mike: As jobs change and as jobs need new technologies.
Speaker Change: One of the things we are really encouraging our team to do is to get training and we've made that training available to the entire company in new.
Peter Altabef: We'd much rather have somebody evolve who is already an associate than someone who has to come into the company laterally. So, that's an example of really kind of speeding up, if you will, the movement from a fixed to a variable compensation model. Deb, any further questions or more specifics on that?
Speaker Change: <unk>, we'd much rather have somebody evolve who was already an associate.
Speaker Change: Someone who has to come into the company laterally.
Speaker Change: That's an example of really kind of speeding up if you will the movement from a fixed to a variable.
Speaker Change: <unk> model.
Any further questions or more specifics on that.
Debra McCann: No, I'll answer his question on the timing for gross margin is that, you know, really in Q2 from a year over year basis, there are no big call outs as far as one time, as you're right, that in Q1, there was that one time, but not necessarily in Q2. But as a reminder, we've said before, the XLNS gross margin improvement is not always going to be linear because there are, you know, quarter to quarter some times, and we're still holding to what we had laid out on investor day that 150 to 200 basis point improvement a year in XLNS gross margin. So Unknown Attendee, Pallav Saini, Michaela Pewarski, Anja Soderstrom, Ajay Shah, Debra McCann, Michael Thomson, Joseph Vafi, Anja Soderstrom, Ajay Shah, Debra McCann, Unknown Attendee, Pallav Saini, Michaela Pewarski, Michaela Thomson, Ajay Shah, Debra McCann, Unknown Attende
Speaker Change: No I'll answer his his question on the timing for gross margin is that real.
Speaker Change: In Q2 from a year over year basis, there, but there are no big callouts as far as one time as you are right that in Q1, there was that that year over year, one time, but not necessarily in <unk>, but as a reminder, we've said before the <unk> gross margin improvement.
Speaker Change: Not always going to be linear because there are quarter to quarter. Some one times and we're still holding to what we had laid out at Investor day that 150 to 200 basis point improvement here.
Speaker Change: <unk> gross margin so right.
Speaker Change: Alright, hopefully that hopefully that answers the question.
Michael Thomson: I think it does, And Mike, you know, you have been one of the leading architects in the company working with Richie Kulhari and our HR team. Obviously, to get back to one of the points that people cost is our largest type of expense. Would you like to give a little background on the work we're doing on that, because it really does point to the future and point to us to being a more efficient organization in so many ways.
Michael Thomson: Yeah, thanks Peter and everyone, thanks for the question. Maybe the one piece I want to touch on was embedding your question, is this a run rate?
Michael Thomson: And Deb mentioned it already, you know, we talked about a point and a half to two points of improvement in gross margin. Well, that's coming through the efforts that Peter just mentioned and our talent marketplace. The delivery component of that continues to be refined and enhanced. Opportunities for our associates continue to be, I'll say, brought forth to them. Peter talked about the low attrition rate and the cultural aspect of what we're doing.
Michael Thomson: Opportunities to move vertically up the chain are really important to us. The training efforts that we're putting in, the fresher program, and the talent acquisition at the junior level, training, and holding on to those associates. I mean, we really took a kind of grassroots level to kind of rethink our gross margin profile and think about it through the lens of, I'll say, the happiness of the associate and what that drives for our clients as well as their skill set.
Michael Thomson: So it really has been, I'll say, we're not at the culmination yet of this. We're still kind of early on, which is why we're still talking around having another point and a half to two points of improvement over the course of the next two years consecutively. So we're seeing really good progress on track for what we said we were going to do at Investor Day and have a good line of sight to continued improvement. So speaking to the run rate portion of that question.
Arun Seshadri: Great, thank you very much. You're welcome.
Arun Seshadri: I have one more quick thing to ask. In the, I think you said your LNS revenue, I guess, this quarter, the somewhat deceleration on a year-over-year basis versus Q1 was generally as expected. Can you talk about the pipeline? And I guess when you look broadly into the second half of the year, despite the pipeline reduction, you still sound like you're pretty confident around a pickup in ex-LNS revenue. Just talk about the drivers for that. Thank you.
Peter Altabef: So it was the first part of the question related to LNS or ex-LNS. I just want to be sure I understood the question.
Arun Seshadri: All of it was ex-LNS. I got it.
Peter Altabef: Got it. Yeah, so when we think about xLNS, there are a couple of components to that. You know, the base component is just like the LNS business; xLNS has what we will call a renewal segment, right? And just like the LNS business, you know, we have very, very high renewal rates and are very successful at renewal rates.
Peter Altabef: So when we talk about the advancement of the company, you know, you see us talk about XLS, and then you see us talk about new business, XLS, because that is really beyond the renewal. So a new business has three parts to it. One is expansion and new scope within existing clients. And the other is a new logo. So when we talk about new business, it's all three of those components, and all of them are above renewals. We think that's one of the best ways we can describe the growth and momentum in the company on the new logo sign. We expect
Peter Altabef: Continued increase in new logos in the second half, even compared to the first. And the first half, as you have seen from our numbers, is a dramatic improvement over last year. So, you know, if that is an indication of our competitiveness in the marketplace, you know, we're wrapping that up quite significantly. And I think that is a culmination of not only the maturity of our solutions but also, you know, informing people about the solutions.
Peter Altabef: It's the marketing and communication. It's the new website. It's the new branding. You know, all of those things have kind of, you know, taken about a year to fully mature, but they're mature. And so that's why we're seeing, I think, the ramp up in the new logo. In terms of the rest of the business on the expansion and new scope side, you know, that depends on specific clients and specific client
Peter Altabef: I can tell you we've been very successful in terms of our win rates as well as in terms of marching forward as those clients in their mission-specific environments require. So we feel very good about the momentum, as Mike said, not only in the cost efficiency but in the demand drivers and growth of the company. Mike, anything further on that? Yeah, maybe just...
Peter Altabef: Yeah, maybe just one or two points. So, you know, you talked about the pipeline movement. I think Peter mentioned even earlier that the quality of the pipeline, we think, is better. And I think that is a real byproduct of the marketing efforts, the digital campaigns that we have going out. We're getting a lot more inbound, very specific to our solutions and our offerings, so the alignment of that is really strong. And when I think about the maturity of the pipeline, a lot of our pipeline is in what we call the more mature aspect, which is, you know, we're in the negotiation phase, right, as opposed to very early on prospecting.
Peter Altabef: So we need to, again, feel really good about our coverage ratio, feel good about our win rates, and really feel good about how that front end lead gen is really driving higher quality pipeline and hence higher win rates.
Speaker Change: It is really driving higher quality pipeline.
Speaker Change: Hence a higher higher win rates, so so feeling pretty.
Speaker Change: Pretty bullish on that right now.
Speaker Change: Thank you.
Michael Thomson: The next question comes from Anja Soderstrom with Sidoti. Please go ahead.
Speaker Change: The next question comes from Anja Soderstrom with Sidoti. Please go ahead.
Anja Söderström: and thank you for taking my Unknown Attendee, Pallav Saini, Michael Thomson, Anja Soderstrom, Anja Shah, Joseph Vafi, and Michael
Anja Söderström: Thank you for taking my question.
Speaker Change: Sure.
Speaker Change: Okay.
Speaker Change: Our restaurant clients.
Speaker Change: What's that.
Speaker Change: I am such expanded with helped by Dan and you use cases or was that a new logo.
Peter Altabef: So, Anja, thanks for the question. That is a new logo. We have worked with that client very occasionally over the years on a kind of project-by-project basis in various parts of the world. But, really, in terms of this effort and working with that client, it's really a new logo for us and one we're very excited about.
Speaker Change: Yeah.
Speaker Change: Thanks for the question that is a new logo, we have very occasionally.
Speaker Change: It worked for that client over the years on a kind of a project by project basis in various parts of the world, but we really in terms of this effort and working with that client, it's really a new logo for us and one we're very excited about.
Anja Söderström: Okay, thank you. And then you mentioned you're very competitive. Can you just talk a little bit about the competitive environment that has changed recently and also your pricing power?
Speaker Change: Okay. Thank you and then you mentioned you rather competitive I'm curious has there been a competitive environment has changed recently in Montana and in your pricing power.
Peter Altabef: Well, yes. I think we have been able to maintain, you know, our estimated gross margins for both new work and for new customers, whether that is expansion, renewal, or new logo or new scope. You know, our competitors vary. It's a busy market with a lot of competitors.
Speaker Change: Well, yeah. So you know I think we have.
Peter Altabef: But as I alluded to in the prior answer, you know, we're kind of creating our own identity. I think we are differentiating ourselves, and we're doing that successfully. And the success we're having around new scope, as well as the other elements of new business, I think we're kind of charting our own path, and I think that has been very successful, and I think the market is understanding it. So, you know, we're cognizant of other players. But, you know, at this point, we're really kind of marching ahead to our own drumbeat. And I think so far, that it's working pretty well.
Anja Söderström: Okay, thank you. And also, it seems like I'm moving in the right direction for you. But how do you perceive the macro environment and the customer sentiment? And is there any specific cost in terms of verticals?
Peter Altabef: Well, when you look at verticals, as well as geography, we are pretty diversified. So when we look at revenue by, if you will, customer segment, whether it's commercial or whether it's public or whether it's financial services, you see a relatively evenly spaced between those three. And then from a geographic standpoint, again, you tend to see about 45%-ish in the U.S. and Canada and about 55% in the rest of the world.
Peter Altabef: So I think one of the advantages of our company is our diversification. And then from our solutions, again, you know, our ECS and CNI and DWS segments are all about the same size. So, you know, what we tend to do is take advantage of that diversification, and where we see specific areas of opportunity, whether that's by geography, whether that's by solution, whether that's by client vertical, we tend to rush more resources into those areas.
Peter Altabef: So that goes back, Anja, to an earlier question about fixed versus variable costs. We're really quite able in the way we have organized the company with our go-to-market strategy to be able to see, you know, where we can rush in. And that go-to-market increasingly covers all of our solutions in all geographies. It's like giving us a little more flexibility. So, you know, I think everybody on this call is aware that there are some geographies that are moving ahead more smartly than others. There are some industry verticals that are, you know, moving ahead faster than others. And our approach is, you know, we're in all of those and to take advantage of those. Mike, any other thoughts on that?
Michael Thomson: Yeah, look, Anja, thanks for the question. The only thing I would say, part of your comment there, I think, was in regards to the macros and what we're seeing in the market. I haven't really seen a huge movement yet. I mean, I think we're all kind of waiting a little bit for this uptick to come, but it's been pretty consistent.
Michael Thomson: Maybe things are getting a little better, a little less pressure, but the companies that we're dealing with are still very cost-conscious. You know, Peter really talked about our ability from a defensive perspective to make sure we've got diversity, not only in geography but in the markets we serve. That has served us well in the past and continues to serve us well. We have a very high renewal rate, as we talked about, and a very high recurring revenue base, right?
Michael Thomson: So I think we've been protected nicely in that regard and are starting to see the market turn a little bit. And I think, as evidenced by the tremendous first half we've been having on New Logo, and as we've indicated a couple times during this call, we expect that momentum to continue in the back half.
Anja Söderström: Okay, thank you. And one last question in regards to CapEx spend. What are you investing in? And do you expect that to be the same level in the coming years or go down or increase? How should we think about CapEx spend?
Peter Altabef: Yeah, Anja, that's a great question. I'm going to turn it over to Dev in just a second.
Peter Altabef: You know, historically, we have, I think, been a proponent, at least going back to your question about the sector and the industry. We have a relatively CapEx-lite approach. So, we don't think it's necessarily beneficial for the company to take on a great deal of CapEx in terms of deals. We don't think that that makes sense for most of our clients.
Peter Altabef: And so you actually see us declining CapEx, you know, over the last several years to the current ratio. And, you know, we had a $3 million uptick this quarter, not a significant uptick. And that will change from quarter to quarter. We do a significant amount of CapEx investment in what we call our L&S business. That is not at all a static business, even though from a revenue standpoint, you know, it's relatively, you know, we're saying over the next three years, we expect about $375 million a year from it.
Peter Altabef: But we do a lot of work to make that happen. And then obviously, outside of that, you know, you have specific investments in new technologies and occasionally for clients. So Deb, do you have any specific comments to give to Anja on the level of CapEx and kind of what we've talked about what we're seeing this year compared to last year, perhaps with a view to next?
Debra McCann: Yes, so we
Debra McCann: And if I could, Anja, just...
Peter: As we kind of maintained the I'll say the innovation component of our solution offerings. So you know deb spot on as as Peter we've kind of gotten to a fairly normalized level of capex spend and the variation in that Capex spend is largely due to certain of our solutions and can be.
Speaker Change: Variable.
Anja Söderström: Okay, great. Thank you all for having me.
Speaker Change: Great. Thank you.
Speaker Change: And yes, thanks very much for the questions.
Kevin DeLava: The next question comes from Kevin DeLava with Jeffrey. Please go ahead.
Kevin DeLava: Anja, thanks very much for the question. The next question comes from Kevin DeLava with Jeffrey. Please go ahead.
Kevin deliver: The next question comes from Kevin deliver with Jefferies. Please go ahead.
Kevin deliver: Hey, guys just quickly I wanted to follow up on the total pipeline. Obviously, we saw a decline sequentially. It sounds like that's more of a timing nuance than anything so could you just give us some color as to how you see that trending in the back half of the year when looking across the.
Speaker Change: The renewal calendar that you have.
Peter Altabef: Yeah, it's a great question. As I pointed out in my comments, the total pipeline is down a little bit. Frankly, we expected that given the success we have had in the new logo signings, but it's important to replace it. The other thing I would point out, and I think Mike alluded to this in one of the earlier questions, is that our win rates for new logo signings have gone up significantly, and so that adds to the quality of that pipeline.
Speaker Change: Yeah, It's a great question.
Speaker Change: As I pointed out in my comments the pipeline. The total pipeline is down a little bit frankly.
Speaker Change: Frankly, we expected that given the success we've had in the new logo signings, but it's important to replace it. The other thing I would point out and I think Mike alluded to this in one of the earlier questions are.
Speaker Change: Our win rates for new logo signings have gone up significantly.
Speaker Change: And so that adds to the quality of that pipeline, but Mike do you want to talk specifically about how you see the pipeline refreshing over the next six months in the next year.
Peter Altabef: But Mike, you want to talk specifically about how you see the pipeline refreshing over the next six months and the next. Sure, great question. You know, again, when I look at the coverage of our pipeline, yes, it's down slightly, but we had such a high renewal rate.
Michael Thomson: Sure, great question. You know again when I look at the coverage of our pipeline yes it's down slightly but we had such a high renewal session really in Q4 of last year and and that drove some of that pipeline down but the prospecting that we're seeing come through that pipeline normally that's like a two to three three-quarter refresh cycle. We do have some some really interesting opportunities that we expect to be replenishing that with over the backup of this year but again as we continue to expand our win rates and close more deals you don't need as large a pipeline in order to do that and we have more coverage than we need to do what we need to accomplish for this year so we're pretty comfortable with where we're at and and really focused on the quality of that pipeline the conversion rate of that pipeline and the win rate so so I think you should think about on the back half of a high renewal quarter that you've got a quarter or two to replenish that pipeline but I think you'll see a fairly consistent level of overall pipeline for us pretty much around where we're at I expect it to come up slightly but again the coverage ratio that we look for we're well in line with.
Mike: Sure Great question.
Mike: Again, when I look at the coverage of our pipeline, yes, it's down slightly but we had such a high renewal.
Speaker Change: Secondly, really in Q4 of last year and that drove some of that pipeline down, but the prospecting that we're seeing come through that pipeline normally that's like a two to three three quarter refresh cycle are we do have some some really interesting opportunities that we expect to.
Speaker Change: Be replenishing that with over the back half of this year, but again as we continue to expand our win rates and close more deals you don't need as large a pipeline in order to do that and we have more coverage than.
Speaker Change: And then we need to do what we need to accomplish for this year. So we're pretty comfortable with where we're at and and really focused on the quality of that pipeline the conversion rate of that pipeline and the win rates. So so I think you should think about on the back half of a high renewal quarter.
Speaker Change: That you've got a quarter or two to replenish that pipeline, but I think you'll see a fairly consistent level of overall pipeline for us are pretty much around where we're at and I expect it to come off slightly but again the coverage ratio.
Speaker Change: That we look for where were well in line with.
Speaker Change: Okay great.
Speaker Change: And just one last one for me on that pension and things like the estimate is mostly unchanged from your comments.
Speaker Change: Give us high level thoughts on how those may fluctuate if we do enter a rate cutting environment in the back half of the year.
Michael Thomson: Also, a very good question, Deb; over to you.
Speaker Change: Also a very good question Deb over to you.
Debra McCann: Okay, great. So I think, from an interest rate perspective, because the contributions are on a 25-year, you know, average number, it doesn't impact that so much. And so I think, you know, the real impact is, as interest rates come lower, if there's a benefit on the asset returns for the fixed income assets we have within the portfolio, you know, that's where we'll really see, you know, most likely some benefit if the market's moving that way.
Deb: Okay, great. So I think the you know from an interest rate perspective, because the contribution.
Speaker Change: On a 25 year average number it doesn't impact that and so much and so I think the real impact as interest rates come lower.
Speaker Change: If there is benefit on the asset returns for the fixed income assets, we have within the portfolio, that's where we'll really see you know most likely some benefit.
Speaker Change: The market is moving that way so, but we are very diversified in the assets, we have them and so you know as you've seen over the past few quarters not too much volatility.
Debra McCann: So, but we are, you know, very diversified in the assets we have. And so, as you've seen over the past few quarters, not too much volatility. And so, you know, we think that will continue. And just to kind of put a, you know, to summarize, I think, to your point, regarding pensions, I think what we're really happy about is just the progress we're making on XLMS margin, which will be improving our operating profit, our EBITDA, our SG&A initiatives that we're working on, as well as some of those cash flow items we talked about So what's good is we feel really good about where we are going as far as being able to meet those obligations and, you know, meet the goals that we laid out on Investor Day.
Speaker Change: And so yeah. We think you know that that will continue.
Speaker Change: Okay.
Speaker Change: And I think I think great name, so much and just to kind of put a.
Speaker Change: You know to summarize I think to your point you know.
Speaker Change: You know regarding pension I think what we're really happy about is just the progress we're making on Exxon is margin, which will be improving in our operating profit or EBITDA. Our SG&A initiatives that we're working on as well as some of those cash flow items, we talked about declining you know over the next few years. So.
Speaker Change: What's good is we feel really good about where we're going as far as being able to meet those obligations.
Speaker Change: And and you know meet the goals that we laid out on Investor day.
Speaker Change: Okay.
Speaker Change: Great. Thank you so much.
Speaker Change: Yeah.
Speaker Change: Thanks.
Peter Altabef: This concludes our question and answer session. I would like to turn the conference back over to Peter Altabef for any closing remarks.
Peter Altabef: Well, thank you everyone for being on the call. As you can see from our published earnings release, as well as the quality of this call, the numbers, I think, speak for themselves.
Peter Altabef: The company is excited about the progress we're making. We're frankly thankful for your engagement on this call. And we have a continuing information session. So, the information that we're posting on the IR site continues to be dynamic, and we refer you to it. And the information about our solutions and our interaction with customers is also dynamic. So, a lot of the work we have done on the website is not only for the benefit of clients and prospects and third-party advisors but, frankly, also for you.
Peter Altabef: And so, we hope you take advantage of that. And we continue to be, you know, eager to engage in conversations with you as time goes on. So, thanks very much on behalf of Deb and Mike. We greatly appreciate you being on the call. Thank you, operator.
Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.