Q3 2024 Unisys Corp Earnings Call
Speaker Change: The The
Speaker Change: The
Speaker Change: Good morning and welcome to the Unicist Corporation, third quarter 2024 Financial results and conference call.
Speaker Change: All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Speaker Change: After today's presentation, there will be an opportunity to ask questions.
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Speaker Change: Please note this event is being recorded.
Speaker Change: 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, the morning everyone. Thank you for joining us. Yesterday afternoon, UNIFF's released its third quarter financial results.
Speaker Change: I'm joining this morning to discuss those results with Peter Altabef, our chair and CEO, Deb McCann, our CFO, and Mike Thompson, our president and CLO who will participate in the Q&A session.
Speaker Change: As a reminder, certain statements in today's conference call contain estimates and other forward-looking statements within the meaning of this turdies laws.
Speaker Change: We caution listeners that the current expectations of assumptions and beliefs forming the basis for our forward-looking statements include many factors that are beyond our ability to control or estimate precisely. This quick cause results to differ materially from our expectations.
Speaker Change: These items can also be found in the forward-looking state infection of today's earnings release for an 8K.
Speaker Change: 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.
Speaker Change: We will also be referring to certain non-gap financial measures such as non-gap operating profit or adjusted EBITDA that excluid 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.
Speaker Change: 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 call 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, everyone, and thank you for joining us to discuss the company's third quarter results.
Peter Altabef: It was another solid quarter of execution, and we are pleased to be raising our full-year non-GAAP operating margin guidance and have an improved outlook for 2024 free cash flow.
Peter Altabef: Third Quarter Revenue grew 8.2% in constant currency, which keeps us on track to achieve our full year revenue guidance range.
Peter Altabef: Our results provide a number of encouraging signs for future revenue and our ability to accelerate growth next year.
Peter Altabef: For example, new business TCV was up significantly year-over-year again this quarter and with a higher contribution from new logo signings. We generated solid sequential growth in our pipeline with solutions that are well aligned to market demand.
Peter Altabef: We expect an incremental $40 million of revenue upside this year in our L&S solutions, and we are slightly increasing our previous L&S forecasts for the next two years.
Peter Altabef: Our results also demonstrate year-over-year expansion in our gross margin and non-GAAP operating margin, which are benefiting from our delivery and operational efficiency initiatives.
Peter Altabef: Over the coming quarters, we expect to further enhance our pre-pension, free cash flow as new business signings generate increasing revenue, we execute our efficiency plans, and as legal and environmental payments decline through 2025 and 2026.
Peter Altabef: Looking more closely at our third-quarter client signings, new business TCV grew 50% year-over-year and is up 32% year-to-date.
Peter Altabef: Similar to the first half, new logos were a strong contributor to new business in the third quarter, and new logo TCV more than doubled year over year for the third consecutive quarter.
Peter Altabef: Adding new clients to our base is important for future growth as they increase our potential to generate revenue from new scope and expansion opportunities. We have a number of these opportunities with new roller logos signed in the first half of the year.
Peter Altabef: In CNI, new logo signings were particularly strong, including in application development and cloud service engagements with public sector clients. For example, one of the most populous cities in the United States chose Unisys to transform, simplify, and streamline its licensing and permitting processes.
Peter Altabef: As part of this engagement, we will partner closely with this client to create an innovative citywide system with a single point of entry, secure identity management, and data protection.
Peter Altabef: In DWS, we also had a notable public sector new scope win with an existing large nonprofit U.S. hospital system client. Unisys will provide a variety of digital workplace solutions to modernize and upgrade end-user devices and operating systems.
Peter Altabef: and work with individual hospitals and offices to ensure compliance with system-wide standards.
Peter Altabef: This new scope adds to the IT support we already provide to nearly 200,000 end-users at this client.
Peter Altabef: In ECS, there is demand for specialized services to modernize the infrastructure and applications adjacent to our platforms.
Peter Altabef: As an example, during the quarter we signed a new scope to modernize mission-critical infrastructure for an existing large European financial services client.
Peter Altabef: In sales and marketing, we have accelerated our go-to-market speed.
Peter Altabef: improved sales processes and technology adoption, including the adoption of new AI tools, are helping us prospect, scope, price, and propose at a faster pace, leading to faster average sales cycles in our third quarter cycles.
Peter Altabef: I'll now discuss some of the trends we are seeing in our pipeline.
Peter Altabef: Total pipeline grew 9% sequentially, including 10% growth in our X, L, and S pipeline, and positive sequential pipeline growth in all geographic regions.
Peter Altabef: We are building awareness of our innovation with existing clients through our client technology officers and new business pipeline with existing clients increased more than 20% sequentially in our xLNS solutions.
Peter Altabef: In CA&I, we have strengthened relationships with large key public sector clients, where we saw an increase in new opportunities, driven by interest in our application development capabilities and security managed services.
Peter Altabef: In DWS, we have a number of new opportunities in communication and collaboration, unified endpoint management solutions, and frontline worker enablement.
Peter Altabef: In the ECS segment, we are seeing new opportunities to help existing clients modernize and expand the digital capabilities in their application layers, especially in the financial services and public sectors where our teams have deep industry and data expertise.
Peter Altabef: We are seeing client demand for AI-enabled solutions in all three segments.
Peter Altabef: and we are increasing adoption of AI in our delivery and internal corporate functions.
Peter Altabef: There are more than 120 active AI projects across the company. The majority of these projects include generative AI, and many are forming the basis for standardized solution architectures.
Peter Altabef: About 50 of these projects are in production, and about 40 of them are client-facing.
Peter Altabef: As an example, in DWS, our Unisys Service Experience Accelerator is a generative AI foundation and knowledge generator that we can deploy within a client's trusted environment, allowing it to securely leverage operational data and maintain data sovereignty.
Peter Altabef: In CA&I, we are custom engineering and education companion for one of our higher education clients.
Peter Altabef: This generative AI offering uses specified open source textbook content while interacting in multiple languages. It reduces barriers to education caused by language limitations and the need for physical textbook ownership.
Peter Altabef: with the result of making education more accessible to a diverse student body.
Peter Altabef: We expect specialized generative AI knowledge systems that are specific to an industry, function, and organization to become commonplace productivity drivers.
Peter Altabef: These assistants can quickly identify gaps and inconsistencies in knowledge and generate content to accelerate code generation, solution development, and training, building shared intelligence across delivery and solution architecture.
Peter Altabef: In DWS and CA&I, we are deepening our capabilities in managed services that are required to run and optimize AI workloads, such as multi-cloud management and data center management solutions.
Peter Altabef: These include managing and servicing data and, where applicable, the physical infrastructure required in AI factories.
Peter Altabef: In our corporate functions, we have engineered specialized generative AI assistants to navigate internal systems and policies more efficiently.
Peter Altabef: In ECS, we are innovating our travel and transportation solution portfolio. This includes Unisys logistics optimization, our cargo capacity, warehousing, and routing solution that leverages both AI and quantum annealing.
Peter Altabef: We are enhancing this solution by expanding cargo and container types for capacity optimization and are adding revenue management capabilities to enable financial forecasting and contract optimization through the platform.
Peter Altabef: will also begin offering multimodal routing in the near future.
Peter Altabef: Recognizing our innovation in travel and transportation, Avasant included Unisys as a disruptor in its Air Freight and Logistics Digital Services radar view published during the third quarter.
Peter Altabef: We are also increasing awareness in our travel and transportation portfolio enhancements with our base of airline and freight forwarder clients.
Peter Altabef: These existing relationships position us as a known provider in the industry for scaling new solutions such as Unisys Logistics Optimization.
Peter Altabef: Also in the third quarter, we added a new airline client through our cargo portal solution, which will allow this top five global air cargo carrier to sell capacity to freight forwarders booking through our portal.
Peter Altabef: I'll now touch on the progress we are making from our workforce initiatives.
Peter Altabef: Our success with new logos has created a host of new opportunities for associate development.
Peter Altabef: and our initiatives to map talent and facilitate mobility have allowed us to improve internal fulfillment rates on new logos. As part of our internal efforts to improve delivery efficiency, we are also increasing campus hiring and optimizing our labor markets.
Peter Altabef: We are investing in technology, process improvement, and talent initiatives that prioritize skill development and career growth for our employees while expanding our capabilities in areas relevant to our clients.
Peter Altabef: Our trailing 12-month voluntary attrition is low at 11.8%, which compares to 13.3% a year ago.
Peter Altabef: Before turning the call over to Deb, I want to share some of the recent acknowledgments we have received from third-party analysts and advisors.
Peter Altabef: These industry experts influence client decisions and access to RFPs, and we have been building awareness and relevance with this group.
Peter Altabef: Unisys has received a number of new recognitions from these industry experts. Since June, Avisat, Everest, ISG and Nelson Hall have published reports recognizing our solutions.
Peter Altabef: These include leader designations from ISG in global digital workplace services, from Everest in a new report for digital workplace services for mid-market enterprises, and from Nelson Hall in end-to-end cloud and infrastructure management services.
Speaker Change: I'll now hand the call over to Deb to discuss our financial results in more detail.
Deb 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 be discussing total revenue growth both as reported and in constant currency and segment growth in constant currency only.
Deb McCann: As Peter discussed, we continue to lay a strong foundation for future growth in the third quarter. Growth in new business signings remains strong on a year-over-year basis, and we are attracting new clients, which will fuel new scope and expansion.
Deb McCann: Backlog is up from the prior year and our pipeline grew sequentially. Additionally, ECF revenue and profit is exceeding our forecast, and we are delivering on our efficiency plan, translating to profit and free cash flow upside for the full year.
Deb McCann: Looking at our results in more detail, you can see on slide 4 that third quarter revenue was $497 million, an increase of 7% year-over-year for 8.2% in constant currency. Growth was driven by L&S.
Deb McCann: Excluding license and support, third quarter revenue was $393 million, a decline of 1.3% year-over-year and 0.1% in constant currency.
Deb McCann: Year-to-date, XLNS revenue is up 0.9% year-over-year for 1% in cost and currency.
Deb McCann: We expect full-year XLNS revenue growth near the low end of our previous range of 1.5% to 5% in constant currency, primarily due to lower in-year revenue from our mix of 2020 for signings.
Deb McCann: New logos were a much stronger contributor to our growth and new business signings year-to-date. Many of these were long-term contracts that expand our revenue base and give us increased confidence we will grow XLMS revenue closer to our long-term target rates in 2025.
Deb McCann: I will now discuss our segment results in constant currency terms.
Deb McCann: Digital Workplace Solutions revenue was $131 million, a 7.1% decline compared to the prior year period as expected.
Deb McCann: The third quarter and year-to-date declines were primarily driven by lower discretionary volumes with clients, including third-party technology revenue.
Deb McCann: New business signings in the DWS segment are at 46% year-to-date. The majority of those signings in the second and third quarter are just beginning to generate revenue and will support revenue growth into 2025.
Deb McCann: Cloud applications and infrastructure solutions revenue was $132 million, a 1.5% decline compared to the prior year period. The decline was driven by some lumpiness in non-recurring revenue and project volumes with commercial clients in the United States.
Deb McCann: Enterprise Computing Solutions revenue was $158 million in the third quarter, an increase of 29.2% compared to the prior year period.
Deb McCann: Specialized Services and Next Generation Compute Solutions revenue grew 2.5% in cost and currency, led by growth in specialized services with commercial sector clients and application services revenue with financial services clients.
Deb McCann: License and support revenue with NECS was $105 million, an increase of 57% year-over-year in cost and currency. This exceeded the $90 million we had expected for the quarter, predominantly due to a third quarter renewal we had expected in the fourth quarter.
Deb McCann: We now expect approximately $415 million of L&S revenue.
Deb McCann: for the full year, compared to our previous outlook of approximately $375 million. The majority of this upside is related to an increase in deal sizes within our expected fourth quarter revenue.
Deb McCann: We do not anticipate this revenue and profit upside will negatively impact our future overall expectations.
Deb McCann: For 2025 and 2026, we anticipate annual L&S revenue of $370 million on average, a slight increase from our prior expectation.
Deb McCann: It is important to remember that the timing and exact amount of L&S revenue
Deb McCann: and Peter Altabef.
Speaker Change: We exited the quarter with a backlog of $2.8 billion, up 18% year-over-year, with aggregate DWS and CANI backlogs up nearly 25%.
Speaker Change: Trailing 12 months book-to-bill is 1.2 times for both the total company and our XLMS solutions.
Speaker Change: Moving to slide 6, third quarter gross profit was $145 million.
Speaker Change: A 29.2% birth margin.
Speaker Change: This compares to gross profit of $95 million and a 20.5% gross margin in the prior year period, an expansion of 870 basis points. This was primarily driven by Eleanor Solutions with additional benefit from increased profitability in the remainder of the business.
Speaker Change: Excluding license and support, gross margin was 17.9 percent, up 390 basis points year over year. As a reminder, in the third quarter of 2023, we also recognized a revenue reversal related to a previously exited contract, which had a 200 basis point impact on XL&S gross margin.
Speaker Change: The remaining 190 basis point improvement was due to improved delivery efficiency through workforce optimization and increasing use of automation and AI.
Speaker Change: On a sequential basis, our third quarter XLNS gross margin included an incremental 70 basis points of impact from workforce optimization investments we made to drive future gross margin expansion.
Speaker Change: We are pleased that our improved profitability year-to-date is being driven by improvement in our Exelon S solutions.
Speaker Change: And we continue to expect full year XLNS growth margin to expand towards the 150 to 200 basis point range that we are targeting annually through 2026.
Speaker Change: BWS segment growth margin was 16.3% in the third quarter, up 150 basis points year-over-year driven by delivery improvement.
Speaker Change: Future DWS margin improvement is expected to come from a combination of higher value new business and frontline worker delivery improvement where we continue to invest in technology and training to improve associate utilization and productivity.
Speaker Change: Up 100 basis points year-over-year, workforce optimization initiatives including expanded campus hiring are continuing to yield positive results. Going forward, we expect to see increasing gains from the use of automation and AI and our focus on further optimizing labor markets.
Speaker Change: ECF segment growth margin was 60% in the third quarter, up from 50.2% in the prior year due to increased revenue from our L&S solutions over a relatively steady cost base.
Speaker Change: Moving to slide 7, third quarter non-GAAP operating profit margin was 9.9%, up from 0.1% in the prior period, and above the mid-single digit color provided last quarter, primarily driven by L&S revenue.
Speaker Change: Operating expenses also declined on a sequential and year-over-year basis driven by a decline in legal expenses as well as G&A cost savings.
Speaker Change: We remain focused on streamlining corporate functions, rationalizing real estate, and centralizing IT, while also investing in go-to-market. We are targeting run rate SG&A expenses of approximately 17% of revenue by the end of 2026.
Speaker Change: Third quarter adjusted EBITDA was $77 million, and adjusted EBITDA margin was 15.5%, compared to 8% in the prior year period. For the first nine months, our adjusted EBITDA margin was 13.7%, an expansion of 100 basis points.
Speaker Change: Third quarter GAAP net loss was $62 million, a diluted loss per share of $0.89.
Speaker Change: This compares to a net loss of $50 million, or 73 cents, in the third quarter of 2023.
Speaker Change: The GAP net loss includes both a non-cash goodwill impairment of $39 million related to the DWS segment, or a $0.56 impact to GAP EPS,
Speaker Change: as well as a tax accrual established for certain foreign subsidiaries of $29 million or $0.42 in tax to Gap EPS.
Speaker Change: The tax accrual is related to historical profit generated in those jurisdictions and increases our flexibility to allocate this capital more optimally across the business. Excluding these two non-cash items, gap net income would be a gain of $6 million or $0.09 per share.
Speaker Change: On an adjusted basis, third quarter net loss was $6 million or a diluted loss per share of $0.08 compared to a loss of $22 million or $0.33 per share in the prior year.
Speaker Change: Excluding the net impact of the tactic rule, we would have generated a adjusted net income of $23 million for earnings per share of $0.34.
Speaker Change: Turning to slide 8, capital expenditures totaled approximately $18 million in the third quarter and $59 million year-to-date, which is relatively flat year-over-year.
Speaker Change: As a reminder, a significant portion of capital expenditures relate to research and development for our LNS platform, and we are maintaining a capital light strategy.
Speaker Change: Free cash flow was $14 million in the quarter, compared to negative $26 million in the prior year period, driven by L&S renewal levels and the $9 million benefit.
Speaker Change: for which we recognize the gain in the first quarter. These were partially offset by working capital dynamics related to L&S collections that are expected to benefit the fourth quarter.
Speaker Change: Year-to-date free cash flow is negative 0.4 million dollars compared to negative 8.5 million dollars in the prior year period.
Speaker Change: Excluding pension and post-retirement contributions, environmental, restructuring and other, and certain legal payments, which includes the tax settlement, adjusted free cash flow was $28 million in the third quarter and $38 million for the first nine months.
Speaker Change: Moving to slide 9, cash balances were $374 million as of September 30th, compared to $388 million at year-end. Given our increased cash generation outlook, we expect year-end cash balances to be up on a year-over-year basis.
Speaker Change: Earlier this week, we strengthened our liquidity position by obtaining a two-year extension on our ABL facility, which has capacity of $125 million with an accordion feature up to $155 million and matures at the end of October 2027.
Speaker Change: Our AVL remains undrawn, and this extension aligns the facility with our $485 million senior secured notes maturing November 2027.
Speaker Change: I will now provide an update on our global pension plan.
Speaker Change: Each year-end, we provide detailed estimated projections for expected global cash, pension contributions, and gap deficits, which change based on factors such as financial market conditions, funding regulations, and actuarial assumptions.
Speaker Change: We also provide quarterly updates which are estimated and do not have the same level of detail.
Speaker Change: Based on asset returns and market conditions, we estimate that as of September 30, 2024, both our GAAP deficit and expected cash contributions for the next five years, which is 2024-2028, are essentially unchanged from year-end 2023.
Speaker Change: Turning to slide 10, I will now discuss our financial guidance.
Speaker Change: For the full year, we continue to expect total company revenue growth of negative 1.5 percent, positive 1.5 percent in constant currency, which based on recent foreign exchange rates now equates to reported revenue of negative 1 percent to positive 2 percent.
Speaker Change: Non-GAAP operating profit margin is now expected to be between 6.5% and 8.5%, an increase from our previous guidance of 5.5% to 7.5%, primarily due to higher expected L&S revenue.
Speaker Change: In the fourth quarter, we anticipate approximately $20 million of legal, environmental, restructuring and other charges in aggregate, primarily related to restructuring and other, as we continue to streamline our portfolio and accelerate our G&A efficiency initiative.
Speaker Change: For the full year, we now expect approximately $30 million of free cash flow, up from prior expectations of approximately $10 million.
Speaker Change: The increase is primarily due to improved profitability and lower legal, environmental restructuring and other payments, which is partially offset by fluctuations in working capital largely related to L&S collections.
Speaker Change: We continue to expect declining legal, environmental, and other payments during the coming years, during which we also expect an approximate $30 million partial reimbursement of certain environmental costs once cleanup work has been approved and finalized.
Speaker Change: The remainder of the assumptions underlying our pre-cash flow expectations are essentially unchanged and can be found on slide 10 of the Supplemile presentation. With that, I'll turn the call back to Peter.
Peter Altabef: Thank you, Deb. Before taking questions, I want to emphasize three important points we hope you take away from today's remarks.
Peter Altabef: First, we are increasing our 2024 profitability guidance, primarily due to an increase in our L&S revenue expectations, and we are slightly raising our outlook for average annual L&S revenue in 2025 and 2026.
Peter Altabef: Second, we have increased our full-year free cash flow expectations from $10 million to approximately $30 million and obtained an extension on our ABL, strengthening our liquidity position.
Peter Altabef: And third, our new business signings are up 32% year-to-date and 50% in the quarter on a year-over-year basis, driven by long-term contracts that expand our recurring XLNS revenue base.
Peter Altabef: Operator, please open the line for questions.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then 1 on your telephone keypad.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question today comes from Rod Borges with Deep Dive Equity Research. Please go ahead.
Rod Borges: Okay, thank you. Hey, so I want to first ask about the LNS revenue outlook. You you had an above-expected renewal in LNS in Q3. Sometimes that can pull from future revenues.
Rod Borges: But you're increasing your LNS revenue outlook for the next couple of years. That's encouraging I just wanted to ask about what is enabling you to increase your LNS revenue outlook. Thanks
Speaker Change: Yeah, thanks very much. And for those of you new to this call, that's Rod Bourgeois.
Peter Altabef: and I will have two folks on the call with me, Mike Thompson, who is our Chief Operating Officer and President, and Deb McCann, who you've already heard from as the CFO. And so the three of us will go back and forth on questions.
Speaker Change: At a very high level, Rod, thanks for your question.
Speaker Change: And you're exactly right in what you took away from our discussion. We did raise in-year L&S revenue guidance.
Speaker Change: More projections?
Speaker Change: and we specifically slightly increased the 2025 and 2026 average and we also made a reference in the remarks
Speaker Change: to the fact that we do not expect that these changes will lower the expected revenue that we have from L&S in the future.
Speaker Change: So, we really believe these are incremental additions.
Speaker Change: L&S projections, so not the same level as the changes in 24, but we're not reducing them anywhere. Mike, any further insight into that?
Mike Thompson: Yeah, thanks for the question, Rod. Just maybe a couple things, and I know you know this business well, but for the group on the phone here.
Mike Thompson: Clearly it's a very sticky business. If you recall back when we were doing our Investor Day, we talked about that average being around 360, 360 million per year. As Deb indicated, we've increased that to 370.
Mike Thompson: I think what you've seen from us over the last several years at business is that we've continued
Mike Thompson: able to have strong pricing power in that and we continue to see strong consumption in that business.
Mike Thompson: and that's the reason for the incremental uptick in that business. So, to Peter's point, it's not a pull from the future, although, you know, obviously the short-term.
Mike Thompson: aspect of the renewal and the length of that contract term is but in our long term projections as indicated we're we're picking those both up in 25 and 26 albeit slightly but again I think a good proof point on the stickiness of that business our ability to maintain pricing in that business and the continued consumption in that business.
Mike Thompson: So hopefully that gives you a little follow-up on that.
Speaker Change: Yeah, just a quick follow-up on that, I mean, there is a view that the L&S business is a legacy business that has the propensity to fade over time, but yet...
Speaker Change: Your revenue outlook is going up, and you mentioned increased consumption volumes I think that trend started over a year ago, and it seems to be continuing to happen Does that mean when you renew an LNS deal?
Speaker Change: The renewals, are they coming in at higher, consistently at higher volumes, and that's what's contributing to the somewhat better revenue outlook? Is it the renewals embedding higher volumes? Is that what's going on?
Speaker Change: I think some of it is is embedded higher volumes some of it is you know also increased pricing as you think about the longer term aspect of the support component of that as you know Rod these deals are three five and seven year you know if I if I look at them in those three buckets
Speaker Change: So I think there is, you know, a mix of what I would consider consumption and price power when we talk about that. But I, you know, internally when we think about this business
Speaker Change: You know, you use the term a legacy business, and it's true that it's been, you know, a strong business for us for decades. But we think about it through the lens of L&S, you know, ClearPath 2050, and our roadmap, and the things that we've done over the course of the last.
Speaker Change: I'll say three to five years in building that business up.
Speaker Change: and really making it future-proof, making it cloud-enabled, you know, open AI. We have a lot of apps development and modernization around the perimeter. And we continue, through that apps modernization, to drive traffic to the core LNS.
Speaker Change: So we have a very long-term view of this business, and I would say, at least in the client signings that we've seen recently, where we've been surprised.
Speaker Change: in the sense of enhanced revenue, it's really around the extension of these deals, and I think, again, that speaks to the stickiness of it and the support from our client base for long-term view on the support of this business. You know, a five-year deal turning into a seven-year or a three-year turning into a five- or seven-year really gives us great comfort that, you know, there's strong support for the continued growth in this business.
Speaker Change: Thank you.
Speaker Change: Okay, got it. And then, just real quick, in the DWS business, you cited some...
Speaker Change: Do you just give some color on the discretionary business that weakened and then is the outlook there more stable or is there further, are you seeing any further risk on the discretionary side in BWS?
Speaker Change: Yeah, let me take that at first Rod and again hand it over to Mike.
Mike Thompson: We expect our signings for DWS over the course of the year to be very strong. What we have seen so far in the year is that the signings have been largely longer term and less project work.
Mike Thompson: So, they have resulted in less revenue in an immediate context because it takes longer-term contracts longer to begin to be revenue producing.
Mike Thompson: That's why when you see our year-to-date new business in DWS, it's very strong, but less strong from a revenue standpoint.
Mike Thompson: We also expect a strong quarter of DWS signings in the fourth quarter.
Mike Thompson: So, from our perspective, it has been a bit weaker in the discretionary short-term project work, but long-term, we feel very good about the prospects for DWS.
Mike Thompson: We believe that that market in general
Mike Thompson: is still beginning to kind of work its way through. We have been committed to that market. We stay committed to that market. We think that's a differentiator for our company. And we intend to get market share as some other people do not necessarily focus in that market. So we feel very good about that market, but for the short term, it has had slightly less short-term discretionary revenue.
Speaker Change: Mike, thoughts on that?
Mike Thompson: Yeah, look, I think you covered the primary points, Peter, on that. The only thing I would add, Rod, as you know and see,
Rod Borges: The market in general has still been a little soft.
Mike Thompson: I would say we are seeing, at least based on our pipeline, a kind of a little bit of a reduced exposure in that. Clearly the deals that we've signed already to Peter's point are longer-term deals.
Mike Thompson: As you know, we've got a three- to six-month transition, so that backlog in those businesses, we see, as Deb indicated on her comments, a strong backlog, which really support growth in that business. And we're going to continue to do that.
Mike Thompson: in line with our expectations in 25 and beyond. And the other thing I'll say is there has been a little bit of a mix.
Mike Thompson: shift in that business.
Mike Thompson: in the sense that when I look backwards, there's a third-party component in there that has not been as fully resonant in the current quarter.
Mike Thompson: But we still expect as we progress forward that that will pick back up. So probably a little lighter third-party component, which is some of the weakness that we're seeing on a quarter-over-quarter or year-over-year expectation. But the reality is the backlog already has these longer-term deals in it. And as Deb indicated on her comments,
Mike Thompson: when you have that support in your recurring base.
Mike Thompson: It is a growth opportunity on top of that, a new scope and expansion post the revenue recognition normalizing. So, to Peter's point, we feel really good about the strength of that business, really good about the ultimate growth potential in that business, aligned with our expectation, and probably starting to see some benefits from a little stronger market demand.
Speaker Change: The next question comes from Joseph Zafi with Canaccord. Please go ahead.
Joseph Zafi: Hey everyone, good morning. Thanks for all the color. Just following up on Rod's question on LNS. I get the dynamics on maybe pricing and consumption.
Joseph Zafi: But it does feel like the upside in Q3 was pretty big and then, you know, Q4 is clearly
Joseph Zafi: It looks like it's going to come in pretty strong, and when you kind of add up that upside, it seems more than the kind of fine-tune up to the outlook, so just wanted to drill down into that a little bit more, and then I'll follow up. Thanks.
Peter Altabef: Yeah, this is Peter. Thank you very much, Joe. So the upside in the third quarter numbers, as Deb mentioned, is largely a pull-through from...pulch is the wrong word...it's largely revenue that we had been expecting in the fourth quarter that's coming into the third quarter.
Peter Altabef: The upside in the fourth quarter is not. So the upside in the fourth quarter is revenue that was not in our guided numbers And was not reflected in let's say the 2526 and it's really incremental revenue
Peter Altabef: So that's revenue coming in from a variety of sources, there's not just one thing, but it
Peter Altabef: We consider that incremental revenue.
Peter Altabef: And while we are slightly increasing the 25 and 26 average, we're obviously not pulling, you know, that incremental revenue into a year-to-year analysis. But we're excited about it. As Mike said, it's all good news. And I think it does show the strength of.
Peter Altabef: Really, our approach to ClearPath Forward, Chris Aerosmith, who leads that team for us,
Peter Altabef: about two years ago started what Mike referred to as Clear Path Forward 2050.
Peter Altabef: a roadmap, not just for the next year or so, but really a long-term roadmap around all sorts of things. So that includes, you know, going out into the future of post-quantum encryption.
Peter Altabef: It's very vibrant, it shows the clients that not only are we investing, but we're investing effectively in that market. We will always have ups and downs, depending on cycles and contracts. We can have a quarter up or a quarter down, or we can have a year up or a year down.
Speaker Change: But, you know, it is a vibrant, important part of this company, and I think you're seeing that in the numbers. Mike?
Mike Thompson: Thank you.
Mike Thompson: Yeah, again, I think he covered a bunch, and Joe, I think we picked up a handful of these all-rods.
Mike Thompson: Again, I think consistently over the course of the last couple years, we're seeing strong consumption.
Mike Thompson: You know, when we typically have a client that ends up either signing early or wanting to extend, that's usually a byproduct of enhanced consumption and maybe getting a little bit of inside baseball here, but when we talk about that, it's really that...
Mike Thompson: that, you know, we have a consumption model embedded in a contract and when they consume that and they go beyond that need, they typically have an uptick in pricing. So what ultimately happens, instead of paying the uptick in pricing at kind of list pricing rates, they come back and they want to extend the contract for a longer duration. And then, you know, obviously there's an upfront revenue recognition with that. But at the end of the day, it's about they're using the consumption and then some.
Mike Thompson: and it also proves the pricing power and value.
Mike Thompson: of the ClearPass Forward operating system to those particular clients. So again, feel really good about the longevity of that, feel really good about our ability to maintain that base, in fact, enhance that base slightly, and then feel really good about the continued use and our ability to modernize around that base.
Mike Thompson: so that the end-user experience is...
Mike Thompson: enhanced utilizing the legacy tools. So it really gives us a lot of vectors to kind of attach to that existing client base and I think that's what you've been seeing over the course of the last couple years and what you're you know seeing as the basis for the increase in 25 and 26.
Speaker Change: Great, that all makes sense and it's nice to see. So, and then maybe just secondly, you know, it does feel like, you know, new TCV signings are up which is great.
Speaker Change: Maybe kind of just, and I know you talked a little bit about duration on some of that TCV.
Speaker Change: that new TCV.
Speaker Change: Maybe kind of touch on renewal dynamics outside of new contract TCV and how that's trending and how that may, you know, affect or influence the outlook moving forward. Thanks a lot guys.
Speaker Change: and Mike, that one is yours as well.
Mike Thompson: Yeah, thanks again, Joe. Look, I would say, you know, as Deb indicated on her commentary,
Mike Thompson: The signings were all primarily for longer term contracts. The one thing we probably didn't note in there and should have, there are also multi-
Mike Thompson: They're primarily a mix of DWS, NCA, and I, which, as we've talked about in the past,
Mike Thompson: is a much stickier proposition for us.
Mike Thompson: Most of those signings are kind of three-year duration type things, which are pretty consistent to our managed service base.
Mike Thompson: And so when we see up the, I'll say the average contract length, it's been pretty consistent across the board, and we continue to have very strong renewal rates, right? We talk about that in the 95 plus percent range from renewal base on the existing client base.
Mike Thompson: That continues to trend in that same manner.
Mike Thompson: a lot of those renewals that we do end up being renewals plus.
Mike Thompson: We've been able to effectively add some new scope or expand that renewal. So we talk about those renewal rates, and it's really important for us to maintain and keep that base to support our future growth, but most of that is coming with Renewal Plus.
Mike Thompson: and that plus can be either new work, new scope, bringing in some of the new solutions.
Mike Thompson: ultimately modernization, and or helping our cross-sell opportunities. So we feel great about the renewal base as we have historically. And I think that speaks to our really strong MPS scores and CSAT scores that our clients continue to.
Mike Thompson: renew with us at that clip level and then are continuing to add to those renewals and and then the new base that we brought in Joe you know just adds to that renewal base and as you know we have a very strong
Speaker Change: If you think about our renewal base year-on-year...
Speaker Change: that allows for continued expansion in the future. So, from a strategic point of view, very happy to see that and very consistent with, you know, what we talked about even back in our Investor Day from 23, very consistent with that modeling, very directionally consistent with that modeling.
Speaker Change: Great. Thanks for that color, Mike. Thanks, everybody.
Joseph Zafi: Thank you, Joe.
Speaker Change: The next question comes from Anya Soderstrom with Sidoti. Please go ahead.
Anya Soderstrom: Hi everyone, and congrats on the nice progress this quarter, and thank you for taking my questions.
Anya Soderstrom: I have a follow-up on the LMS revenue as well and the outlook there. To what magnitude do you expect it to increase in 2025 and 2026?
Peter Altabef: Anya, this is Peter. I got most of the question. Ellen asked, what is the question about 25 and 26?
Ellen: You were talking about the outlook would expect the revenue to be higher for 2026 and 2025 for L&S. Can you just speak to what magnitude?
Speaker Change: Yes, so if you look at what we had previously guided to, we had previously got into revenue of about $370 million on average for 2024, 2025, and 2026.
Speaker Change: we had already got into 375 for 24 which implied a slightly lower average than 370 for 25 and 26.
Speaker Change: So, what we're doing today, obviously our 2024 number has now gone above that 375.
Speaker Change: to 370. It was below 370 before because all three numbers were average at 370. So we've categorized it as a slight increase. And the real reason for that is because we do have a slight increase.
Speaker Change: And we also want to highlight the fact that the increase this year is not expected to decrease our expectations for 2025 and 2026. Those expectations have slightly increased. Deb, any further color on that?
Deb McCann: no no I think that that is exactly right so the math you went through so
Deb McCann: I don't know if that answers the question or not.
Speaker Change: Yes, it did. Thank you, that was helpful. And then I'm just curious about the goodwill impairment for GWS. What's that for?
Speaker Change: Right, I think Peter got me to take that. Please.
Speaker Change: Oh.
Peter Altabef: Okay, so, yes, it was a non-cash impairment we took in the third quarter, and really it was triggered by, you know, economic and industry dynamics that overall, you know, and you probably hear it on several calls, are impacting the pace of client signings. And so when we kind of apply that market lens to our forecast.
Peter Altabef: you know, resulted in an impairment. So I think, you know, many large competitors in the market are facing significant challenges in the DWS, you know, solutions, which we have to take into consideration as we do our valuation testing.
Peter Altabef: You know, we're still, as we've talked about, really enthusiastic about the DWS space.
Peter Altabef: We're looking for Unisys to take share.
Peter Altabef: That's really what resulted in the impairment. So it is non-cash, so, you know, it impacts our EPS. And as I mentioned on the...
Peter Altabef: the call, you know, without that, as well as with the tax approval, you know, we would have been a lot higher with our EPS, but that's the result of that. So, did that answer your question?
Speaker Change: Yes, that was helpful. And then I'm just curious about the margin expansion in the XLMS. You see good expansion there as well, and you forecast it for this year. But where are you in the innings with efficiencies there? And how should we think about that margin expanding next year? Will that be driven by continued efficiencies or more by scale?
Speaker Change: So when we think about margin expansion, we're really thinking about it three ways, Anya. One way is we're selling more value-added solutions.
Speaker Change: So we think the pricing that we're getting for our newer solutions Will be at a higher margin than the previous solutions that we offered. That's really true kind of across the board There's obviously competitive pressure, but we think we're adding
Speaker Change: more value to our clients than we had before. So the pricing, we expect inherently to have more margin.
Speaker Change: The second part of that is the delivery efficiencies within the things we are providing to our clients.
Speaker Change: So delivery efficiencies and the third is really our SG&A
Speaker Change: So our SG&A, we have a very specific plan to reduce SG&A over time. So all three of those really will affect our profit and our margins going forward. And Deb, if you want to give color on any of those three, please go ahead.
Deb McCann: Yeah, I think, Peter, you covered everything. I think the efficiencies we laid out, you know, when we talked at our investor day, that improvement in gross margin that we expect each year, and I think we're achieving those and will continue to as we laid out.
Speaker Change: Okay, thank you. That will help for me.
Speaker Change: The next question comes from Arun Siddharthi with BNP Paribas. Please go ahead.
Speaker Change: Subs by www.zeoranger.co.uk
Arun Siddharthi: Hello everyone, thanks for squeezing me in. Just wanted to ask on the xLNS side, sounds like it's good to see the new business pipeline was up sequentially pretty nicely. If you could unpack that and also maybe talk a little bit about, I think the xLNS revenue has been flattish.
Arun Siddharthi: Sort of address that specifically. I know you've discussed it in the context of DWS, but just would love to hear a sort of a broader look on the XLNS side.
Speaker Change: Yeah, Arun, thanks very much. Obviously, we are very pleased to see the pipeline increasing sequentially, 9% and 10% for that XONS pipeline increasing. We're also, you know, very enthusiastic about the backlog increasing.
Speaker Change: Mike, any further color on either of those that you want to add?
Mike Thompson: Yeah, look, Arun, thanks for the question and I'm glad you pointed it out. I do have a couple things I'd like to add there.
Arun Siddharthi: Thank you.
Mike Thompson: You know, we talked a little bit about the softness and discretionary spend in general in this sector.
Mike Thompson: But what we also talked about is this increase in pipeline and the increase in backlog. And based on the increase in backlog in our renewal schedule, I think the way that you've characterized your question even is really great in the sense that it gives us a tremendous amount of confidence that the growth trajectory that we have put forth for that business is starting to be underpinned in our backlog, right? So really the strength of that business.
Mike Thompson: signed for that business in the year is really giving us that high degree of confidence and I would almost tie it into Anya's question a little bit.
Mike Thompson: We've seen the margin improvement in that XLNS business.
Mike Thompson: to the tune of, as Deb indicated, about almost 300 basis points of improvement across the board, I think, when we look at the overall kind of XLNS space.
Peter Altabef: And to Peter's point, a lot of the future is coming from increased revenue. So, we've been able to prove the dynamics of our delivery.
Peter Altabef: margin benefits, and to do that on a fairly flat revenue base as you indicated. And now we're seeing the backlog really support revenue growth which will help expand those margins in the future. I think Deb talked about.
Peter Altabef: about 150 to 200 basic points improvement over the next two years in that XLNS space.
Speaker Change: Peter's point some of that's from top-line growth which we feel like is embedded in our backlog and then some Continual delivery so that that's the reason why we feel very strongly about That market in general think we got our strategy, right?
Speaker Change: I think that the kind of external efforts that Peter mentioned around our selling and our go-to-market are starting to really resonate. Peter talked about the industry analysts.
Speaker Change: component of that so that the visibility the introduction to RFPs are also building up our pipeline and our backlog and then ultimately translating that to win. So again feeling pretty pretty comfortable and strong about returning to that growth trajectory on the top line and having that enhance the profit that we've already seen.
Speaker Change: Thank you for that, Mike, that was helpful. And then just one other quick thing, is there, you know, as your outlook for L&S has improved, you know, is there any, you know, can you talk about the attach of X L&S to L&S revenue at a high level, you know, is that, has that changed in any way or do you see that changing in any way? That's all I had, thanks.
Speaker Change: Yeah Mike, Mike already, well I think Mike if you as you talk about that there's really two questions.
Speaker Change: One is a fundamental effort, Aruna, that we've had company-wide.
Peter Altabef: And I mentioned it in my comments, to, you know, attach, even at the time of signing of a new client, more than one segment. And so that would be DWS, CA&I, or ECS. So we've been very effective with that. Now your question is very specific.
Speaker Change: It's when, you know, as we sign L&S business, have we been able to attach DWS or CA&I business to L&S? So, Mike, do you have any specifics on that element of the overall strategy?
Mike Thompson: Yeah, Arun, again, thanks for the question.
Mike Thompson: That user experience and it really sits around the core so we've actually had some pretty good success. Thank you very much.
Mike Thompson: on the apps modernization side attached to specifically ClearPath Forward clients and ClearPath Forward ecosystem. I mean, we have clients that have...
Mike Thompson: hundreds of applications that are kind of custom apps that sit on top of our ClearPath Forward operating system. So who better to help modernize that, and that's the attachment either to CA&I or.
Mike Thompson: SS&C, which is the kind of next-gen component of our ECS practice.
Mike Thompson: direct that consumption to maintain that base. So there's a lot of real benefits for us to do that, and it's probably much more akin to attachment to CA&I, as well as the other components of ECS.
Speaker Change: Thank you, Rune.
Rune: Thank you.
Speaker Change: The next question comes from Kellen DeLaver with Jeffreys.
Speaker Change: Please go ahead.
Speaker Change: Hey guys, thank you for squeezing me in, and congrats on the strong corridor and the raise to the Outlook here.
Kellen DeLaver: Just one question from my end. Obviously, the new logo signing is very strong in the pipeline growth sequentially. Can you just parse out maybe a bit more specifically where you are seeing success with new customers across capabilities or geographies or end markets, just so we have a sense of where that new activity is coming from?
Kellen DeLaver: Bye.
Speaker Change: Yeah, thanks very much. And one of the things that is interesting about this company is from a geography standpoint.
Speaker Change: We have a lot of diversity.
Speaker Change: We have about 44%
Speaker Change: of our Revenue in the US, about 56% outside the US, 28% in AMEA, and about 16% and 12% respectively in Asia Pacific and Latin America. And the result of that diversification
Speaker Change: means we really are not overly dependent on any one country or any one region and as different countries and region experience different growth rates, we can kind of migrate a bit our emphasis to those areas where we think there's bigger growth. Mike, any specifics on that question?
Speaker Change: Thanks for watching!
Mike Thompson: Look, I would say, Kellen, first, thanks for the question. I think the diversity, not only from a geography perspective, but also from
Mike Thompson: sector or segment perspective, it's true. We are seeing our solutions and frankly our strategy is our solutions, although geared to a specific industry when we have dialogue on how it applies,
Mike Thompson: are homogeneously applied, right? So I don't think that there's any...
Mike Thompson: kind of one sector or region.
Mike Thompson: that dominate that spend, which is great, right? We want to have solutions that are universally applied. They always have a...
Mike Thompson: a very specific industry slant, or sector slant, or even region slant when we tailor it to our clients, but in general, I would say
Mike Thompson: we're seeing a much more combined offering when we go to market and the success that we had. I mentioned on one of the other comments earlier here, most of the new logos and the new business that we're signing are either adding a component to an existing base that gives us a cross-sale component to it, or the business itself, when it signs a new logo, has both our DWS and CA&I component pieces in it. So, one of the beauties of our strategy, I think, is that regardless of the starting point, there's a connection to the other solutions that we do, and it really depends on the scope.
Mike Thompson: of the client, RFP or RFI that comes our way, and we can pivot our messaging to be tailored to that specific ask. So I guess the macro view is.
Mike Thompson: pretty diverse.
Mike Thompson: both regionally and by industry and can be tailored to those, so our solutions in general are resonating. And I think that you could look at that, how it resonates both from the industry analyst's perspective and the things that Peter mentioned around
Mike Thompson: kind of how we sit in those in those various quadrants and then in the solutions that we've had success in penetrating this soft market with.
Speaker Change: Thanks for watching!
Speaker Change: Okay, great. That's very helpful. Thank you for the time today.
Speaker Change: Thank you.
Speaker Change: The question and answer session has now ended. I would like to turn the conference back over for quoting remarks.
Speaker Change: Thank you, operator, and I really want to thank everyone for your indulgence in keeping you a little longer for this.
Speaker Change: There was a lot to cover. There is still more on our website, which is
Speaker Change: actively updated and I encourage you to kind of take a look at it as you
Speaker Change: go about your other efforts.
Speaker Change: We're frankly very, very excited about what we announced this quarter.
Speaker Change: you know the increased profitability guidance, the increased expectation on free cash flow, the increase in new business signings, year-to-date up 32% and 50% for the quarter, which we think that ultimately that will expand our recurring XLNS revenue, as well as obviously the good news on LNS that you heard today.
Speaker Change: So, thank you again for following us and we look forward to the next call.
Speaker Change: Thanks for watching!