Good day everyone and welcome to the Unisys Second Quarter 2007 Earnings Results Conference Call. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Jack McHale, Vice President of Investor Relations at Unisys Corporation. Mr. McHale, please go ahead sir.

Well, thank you, operator. Hello everyone and thank you for joining us this morning. Earlier this morning, Unisys released its second quarter 2007 financial results. And with us this morning to discuss these results are Unisys CEO, Joe McGrath; and our Chief Financial Officer, Janet Haugen. Before we begin, I want to cover just a few housekeeping details. First, today's conference call and the Q&A session are being webcast by the Unisys' Investor website. This webcast including the question-and-answer session is being recorded and will be available as a replay on our website shortly after the conclusion of the live event. Call participants are in a listen-only mode until the Q&A session. Second, you can find on our investor website, the earnings release and the associated spreadsheets as well as the presentation slides that will be used this morning to guide the discussion. Third, today's presentation, which is complimentary to the earnings press release, includes some non-GAAP financial measures. Certain financial comparisons made in this call will be with and without the impact of retirement expense and restructuring charges. In the presentation, we have provided reconciliation of our reported results on a U.S. GAAP basis compared with our results excluding the impact of restructuring charges and retirement expense. Finally, I would like to remind you that all forward-looking statements made in this conference call are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. These factors are discussed more fully in the earnings release and in the company's reports as filed with the SEC. Copies of these SEC reports are available from the SEC and also from the Unisys Investor website. Now let me turn the call over to Joe. Thank you.

Thanks Jack. Hello everyone and welcome to today's call. To begin our discussion this morning, please turn to slide 1. This was a solid quarter for Unisys, as we continue to enhance our profitability and reposition the company in the marketplace. As most of you know, we're about half-way into a three-year program to drive toward an 8% to 10% operating profit margin, excluding retirement expense in 2008. We made continued good progress toward that goal in the quarter. As you'll see in a moment, excluding restructuring charges and retirement expense, we improved our operating profit by $48 million and drove to a 3.7% profit margin in the quarter. We also saw significantly improved cash flow from operations. Importantly, we continue to lay the foundation for future revenue growth. We saw strong double-digit growth in our Services orders in the quarter. We have a great deal of work yet to do as we drive toward our 2008 financial goals; but we are making steady progress. We are focused on continuing to execute the repositioning program in the second half of this year. This morning, I will update you on where we stand with key elements of the repositioning. But before I begin, let's take a look at the financial results in the quarter. Please turn to slide 2 for an overview of the results. At the top line, revenue declined 2% in the quarter. Services revenue declined 1% in the quarter. We saw continued good revenue growth in outsourcing, which was offset by our weakness in our systems integration and consulting business. Our SI and consulting business has been impacted by disruptions from our repositioning program, but we did see strong orders in this business, as I will discuss in a moment. Technology revenue declined 9% in the quarter, driven…

Thank you, Joe and hello everyone. This morning I would like to provide more details on our second quarter 2007 financial results. I will explain the impact of restructuring charges, retirement-related expenses and the significant change in the year-over-year tax provision. To begin, please turn to slide 11. At the top line, we reported revenue of $1.38 billion for the second quarter of 2007. This was down 2% from the year ago quarter and currency had a 3 percentage point positive impact on our revenue in the quarter. Our results through the second quarter of 2007 include a net pre-tax restructuring charge of $24 million, related to facility consolidation and headcount reduction. A year ago, the second quarter included a net pre-tax restructuring charge of $141 million. The second quarter 2007 results include $25 million of pre-tax retirement-related expense compared with $45 million a year ago. Retirement-related expense includes the expense for the company's defined benefit pension plans and the U.S. 401K plan. The tax provision also significantly changed from the year ago quarter. The second quarter 2007 results include $40.6 million of tax expense compared to a tax benefit in the second quarter of 2006. As you know, the company's provision or benefit for taxes will vary significantly quarter-to-quarter depending on the geographic distribution of income. In the second quarter of 2007, we saw increased income in certain international jurisdictions, where we still provide for taxes. This increased income was due in large part to the profit improvement coming from our repositioning actions. We reported a second quarter 2007 GAAP net loss of $65.5 million, or $0.19 per share. By comparison, in the year ago quarter, we reported a GAAP net loss of $194.6 million, or $0.57 per share. As Jack mentioned, please note at end of the these…

Well, thank you, Janet and thank you, Joe. Operator, we'd now like to move to investor questions please.

Yes. [Operator Instructions]. The first question will come from Jason Kupferberg with UBS.

Good morning guys and nice progress here on the margin front. Wanted to ask a question on the subcontracted labor and I mean in the context of the fact that the margins have improved nicely year-over-year, and we are seeing some acceleration, which I think is the most important point. Can you give us an idea of how the elevated use of subcontracted labor is impacting your operating margins currently?

First of all good morning Jason, and thanks for the complement. On this whole contracted labor issue; let me just you some background that I shared with you last time as well. If you remember, we said that it was really going to take us some serious work around process redesign using fixing the people and actually some system design meaning, IT systems design in support of this change to really allow us to work through this on a continuous improvement basis on the second half. I am looking at Janet to see if we really shared numbers previously on what was the size of it?

No. We did say that as we build our plan to get to the 2008 goal, we did talk about the fact that we anticipated the savings to improve in the second half of the year versus the first half. Well, all the contractor expenses up compared to what we would have like to see it right now, we don't thing that is something that is detracting us from getting towards 2008 goal.

I think, the other important here... issue here Jason is, we've been very sensitive as we went through this, considering the largest part of all of our reductions in terms of this restructuring was in our services labor force and so... and considering that between infrastructure and outsourcing, approximately 50% of our entire business. So we've worked very, very carefully to make sure that none of these changes improved service levels for a combination of maintaining high costumer satisfaction as well as, there is penalties involved in not meeting it. So we've had a high degree of sensitivity both on the customer sat level, the service level agreements and the financial implications of that to us as well. So, if anything we've been a bit conservative in reengineering these people out of the business, but we are convinced we can make it happen based on the programs we have underway.

Just to clarify there in the second half of '07 you expect this extra expense to diminish relative to the first half?

Yes, we do, but you will see it happen on a continuous improvement basis over the third and fourth quarter respectively.

Okay. And just to shift to the revenue line for a moment. You expect to restore year-over-year growth, positive growth in the services business? Revenues in the third quarter obviously, orders were up again nicely in 2Q and I would assume that some of the consulting and SI orders might convert to revenue a bit faster than some of the other types of orders?

Yes, well you're on precisely that right issue. The biggest weakness that we've had was in our Systems Integration and Consulting business as we shared with you, had the greatest amount of disruption around the repositioning around rationalizing the solution set, refocusing them up from like 4000 clients to these top 500 clients, and so on. And we are starting to see the path from that, you saw strong double-digit revenue growth in Systems Integration in the second quarter and you are going to see that just as you outlook, be able to turn to revenue faster that you might in the traditional outsourcing business. And the other positive thing here that we've seen is this growth back this high order growth is in the strategic areas that we have them focused on. So, we knew there is going to be disruption as we move from these kind of fragmented older programs to the new. Probably the best case study here happened to be this Federal Reserve deal which was essentially, predominantly open source technology. It's a very, very high volume transaction processing. If you remember, years ago people talked about Check 21 and image exchange instead of paper images. This is a major strategic investment by the Federal Reserve and a major project for us here and it's a metaphor for the shift. So lot of small projects, disruption now we are starting to see these larger very strategic projects come through at the other side and you're right, you will start to see that in the third and the fourth quarter respectively improving the performances of the SI business.

Do you expect Services revenue growth overall those to be up in the third quarter year-over-year?

That would be me giving guidance and we are not giving guidance on third quarter, fourth quarter.

Okay thanks

Thanks

[Operator Instructions]. Moving on now to James Friedman with Susquehanna.

Hi thanks. Not to beat the dead horse of about the subcontractor topic, but Janet is there any way that you can help us quantify the magnitude of these subcontracts. For example, is there... is it... could you give us an estimate what it is as a percentage of revenue or if you keep it this way with the difference between gross and net revenue might be?

No, that's Jason, I am sorry, James, let me just... when we talk about the contractors, we are talking it about it relative to particular areas of the business so it is not broad-based across the entire business. It is primarily geared around customers where there are service level agreement in place and where we have been... where we have engineering, we've taken headcount out and we still have some more efficiencies to be gained in implementing this system that track and support the ongoing activities to customers. So, it's more in the annuity-based business and it's in the shorter term systems integration business. In that... so it's not broad-based across the business. We are continuing to work through the issue; we don't think that it's anything that is outside of the norm. We also do have some overlap as we moved toward offshore during the transition as well, and so we haven't... as a percentage of our overall spend in this area, the amount of subcontractor temporary labor that we use on a regular basis, it's up as a percentage of that, but it is a smaller portion of our overall business. We haven't... I know, other than giving you an absolute number, the only thing I can tell you is that we are not talking of something that's north of two or three points of margins.

Okay. We may have asked you because it's not readily visible in your financial results?

That's right.

As the gross margins are obviously improving?

That's right and so what we are saying... that reinforces what I am trying to say. As we look at what we want to execute as a company, we think the contractor spend is higher than what we want to have on an ongoing basis. It is intentional to make sure we meet the customer service levels, but as we said operational little bit higher than we would want. It is not masking the improvement in the gross margins; we are continuing to improve them. This is one of the issues that caused us to say, when we've taken the head down that the savings would happen more in the second half of the year than the first half of the year, and we are just trying to identify that we've got an addition to the Systems Integration, weakness in revenue. We have this other operational issue that as we get through it should yield further benefits as we move into the third and fourth quarter.

And James, I will be any more specific there either, but we do think it's important that we get it out by year-end. We will always use some subcontractors as the business, so it's not that we will completely eliminate it. It helps us with the cyclicality parts of our business around the world. But it is important for us to hit our final state 8% to 10% operating profit in 2008, and it's important that we manage this carefully through the second half to ensure it's out by year-end, at least the portion we have targeted.

Okay. Switching gears for a second, some of your competitors had reported disruption in the calendar second quarter with regard to the various challenges in the federal budgetary cycle. Unless I missed, you didn't speak about your federal operations explicitly, any observations or commentary there, federal or municipal?

Yes. Well, I'll stay with federal for you there for a second, but we see our revenue flattish over the course of this year, and so we don't really see growth. As you are probably aware that we look at our business in three major segments on there, civilian, homeland security and defense. We continue to see growth in our civilian business even though you would think based on some of the cost restraints they tried to put in, in place of civilian, our team have been creative and we have figured out how to price a creative way and allow that business to grow. So, civilian has actually been a price spot for us in terms of revenue growth. We also note that the strong position we have in Department of Homeland Security and our ability to expand in the various agencies and we see growth in that business as well in the second half of this year. But like many of our competitors, our biggest pressure on the downward basis is in defense, it's because of the amount of money spent in the war effort and so that part of our business, although we've had some strategic wins like the re-compete for this RFID project and a number of other ones downstream. That's the softest of our three businesses and why it ends up being a flattish for us. We're bullish on that business on a forward-looking basis because we're pursuing a pretty aggressive pipeline across all of the major agencies with a very high multi-billion dollar a pipeline of opportunities in pretty large deal sizes. So even though our expectations are modest for 2007, we have upbeat expectations for 2008 in the federal business.

Okay. And then the last question for Janet, with regard to the account receivable securitization on slide 19, could you just remind us about what sort of seasonality there it is in that, if there is any and just the mechanics of how that works together?

Sure. That account receivable securitization is in the U.S. and so it has a tendency to move up and down depending upon the percentage of our revenue that comes from the United States. In addition that receivable securitization has a limit on the amount of receivables that are pass through, so there is a calculation, as we disclose in our financial statements about the amount of eligible receivables, how that is calculated, it's based upon reviewing our pass through and our problem account is part of the calculation. So we have that disclosed that there is a limit on the amount of receivables, we're allowed to sell in there, but the primary determinant of the fluctuation in that securitization facility is in fact, the amount of business coming in from North America and it generally is the acceleration of collections on our U.S. receivables that have a normal 30 to 45 days payment term.

Thank you.

Thank you. And now moving on, we will take a question from Julie Santoriello with Morgan Stanley.

Thanks. Good morning.

Good morning.

Hi Joe, nice job on the margin improvement, very glad to see it, little disappointed about the Services revenue, not growing a bit faster. I understand you're not going to give guidance for the full year. I believe in the past you have spoken about a target for loosing a bit of revenue growth for the year. Does that still stand?

Julie, you talking about, from an overall business perspective.

Yes, total.

And so we have said that as we have gone through the year, we were looking and in a flat low single-digit type of outlook for the business. We have made that comment in the past. While the Systems Integration revenue continues to be weak, we are encouraged by the order outlook and we had not changed our perspective on the top line although the weakness in the Systems Integration could skew us to the lower end of that range.

Okay, okay. Can you talk generally about the sales strategy, the sales and marketing strategy now, instead of post Peter Blackmore? Have you seen any disruptions with his departure or do you expect any changes in strategy or turnover among the sales ranks?

It's a great question. It shows that in most of the programs that Peter was a champion, for he and I had a shared vision about, whether it was top 500 program or the revitalization of our sales organization. So we pretty much had a shared vision across all of those. Our own teams ask if anything would change since Peter left and nothing's really changed. We are just as committed to the top 500 program. We continue to accelerate a number of initiatives there, meaning, we staffed, for example, we call the top 50 as the blue print accounts. We are actually staffing them even stronger on a forward-looking basis and we have done. We made the same level of commitment around client business planning and those extra things and so I don't think you'll see any real changes. Peter added a lot of value while he was here, we wish him the best of luck with his new engagement, but the vast majority of the heavy listing he did was already in place by the time he left. Its unfortunate he left and we miss him but there will be no changes there.

And Joe, do you think you would replace someone... if someone else in that role or you did the sales management team at this point is going to be more distributed? And also as a follow-up, are there other, sort of high profile managerial positions that you filled recently or looking to fill?

As you might imagine, we can't answer that last part of this on the call like this. But the answer is what we really thought and was the single most important thing we needed to do was to revitalize our technology business. In Rich's case, we probably be complimented if he was listening in on the call. We have actually been pursuing him for sometime, it's probably close to a year because we thought he had the perfect insights of the kind of things we want to do. When he was at Hewlett-Packard he was probably one of the successful managers in moving really complicated programs like operating systems offshore to India, not to say we are going to move all our operating systems there. But he has managed very large complex operations and you know I hold him largely responsible for the resurgence of the high end of the HP business is around UNIX and Linux and their whole enterprise server group. So for us although our introduction to this has been said somewhat restrained, I think it's going to have a very positive impact on this business starting in the second half of the year and going forward. So that's probably our significant change. The other part of your question is, would we replace Peter with someone in precisely that same job and the answer is no. We've made changes around our company and we believe we have sufficient talent to fill each of these roles that he was playing in the past.

Okay and I'm sorry if I was unclear, I was just curious to see we're looking at recruiting some industry veteran types either in the consulting integration business or in the outsourcing business; you singled out the ranks there or not?

Without being specific there, we are like every other company. We are always looking to upgrade the talents that we have and what we sound is despite being in this restructuring, transformational effort, we've very good success in continuing to recruit other talents. So for example, over this past year, we've recruited significant talent to begin the rebuilding of our systems and technology sale force. And so this new head of worldwide sales in that business, who previously was with SAP, new head of North American business who was previously with Hewlett-Packard and so on. So we continue to recruit and some people would say, surprisingly strong talent considering we're in the middle of a transformation. And I think it's because people believe the story and are convinced that we're making the progress and will emerge on the other side a much, much stronger competitor.

Thanks. Just one more question for Janet on the CapEx spending. Janet, can you explain just a little bit further the nature of the investments there? It sounds like it's related to three specific outsourcing contracts. Wondering if these are just related to customer assets or if these are more akin to longer term investments where you think you can make some investments now and get some leverage down the road?

No these are actual customer engagements. They're in the outsourcing asset line on our statement of cash flows and on the balance sheet itself. They relate to 3 specific new client wins that we've had better in the start up phase. So you see, a higher CapEx spend in the first half of the year than we expect in the second half of the year, based upon my comment that we expect CapEx to come in around $300 million for the year. But these are 3 new specific wins that have required capital to start these projects up.

Okay, thank you.

And now Ashwin Shirvaikar will have the next question from Citigroup.

So, I keep coming back to this. You keep announcing strong order growth and combine that with not just weak but declining revenue growth? I am wondering how much of this is perhaps due to heavily discounted contract extensions.

Yes. Ashwin, this is Joe. But you have to look at that in the greater context of the mix. So for example, if we have strong order growth in outsourcing, you've seen us have the strong revenue growth in outsourcing. And so part of our challenge here is we have not had strong order growth in our Systems Integration and Consulting business, and we've paid the penalty for that, for the 3 past consecutive quarters. This is the first time we've seen a turnaround in order growth for the Systems Integration business and although we don't give specific numbers, its very aggressive double-digit order growth. And so for all of our upside that you are seeing in kind of the service line around outsourcing; remember we have secular decline in Core Maintenance, I am talking just Services now. And, we had a decline in Systems Integration as a result of weak order growth in Systems Integration. So I think you would expect to see the kinds of results that you saw on our business.

No, but Joe, here the thing is, your revenue growth in outsourcing is a full 400, 500 basis points weaker than industry in spite of what you claim for. And it's been December 2005 since you have claimed strong order growth in revenue. And if I take out the benefit of currency this quarter, you had minus 5% revenue growth. It's been 18, 19, 20 months.

Ashwin, this is Janet. Let me just make just a couple of comments and I'll turn it back over to Joe to talk about the business. You are right that when you take a look at our order growth that that has now translated into revenue increases in fact this quarter we had a revenue decline. If you go back during the time period, we've had the swing in the order growth happening from growth in orders, double-digit growth in orders to declines in orders, in some cases double-digit declines in orders. 5 of the last 7 quarters we've had increases in orders, but there were two quarters where we had declines in orders. If you look at our year-end backlog at December at the end of the year that was in the single-digit, mid single-digit increase in backlog which is a better determinant as to what you are going to go forward. The issue that we are having is as you look at that order comparison we are building multi-year backlog deal and that the areas of business that we have been struggling with the weakness is the area that goes from order to revenue in the quickest time period within the Services business and that's the System Integration business. And with that business being weak at both the order line and that translating into the revenue line, it is really causing this distortion. What we are trying to point out in the comments today is that we have seen significant improvement in the Systems Integration in the order size with some of the wins that Joe talked about like the Federal Reserve this quarter. Our challenge going forward is to translate that into the top line as... translate the orders into revenue as we go through. And so,…

Well it would be really nice if you guys do a real numbers that we could compare like all other companies do, but that, Janet thank you for the explanation. It does bring you to my next question, if you have good order growth now in System Integration, why should I expect the use of contract labor to be transitional?

Because my earlier comment it said that the trends... the increase in the contract labor was more in the annuity business not in the Systems Integration business.

Okay.

Also Ashwin, if you look, we spent... invest an awful lot of effort in money, in building the right base in India, China and other countries to be able to support this business going forward. And some of that business is on people, some of the piece of the business is via contractors and we are not counting that in our other discussion. And so, if you look at a lot of this new business, fair amount of this business because of what we do and how we separate architecture work from programming using 3-DVE, we can send a fair amount of what I will call commoditized programming to India and that's where we made these big investments over the past years to get a sufficient critical math both between ourselves and our partners in India, to absorb that type of work of this increased revenue growth. On... let me also come back to your extensions, your comment about gee, gee that you always, you would have to make compromises in reducing margins on extensions, that's not necessarily true. If you look at a lot of these contracts, one of the reasons that LA Leader was postponed is we have increased margins on the renewal of that contract. It became very controversial as you might imagine in the county increasing the revenue on that contract as we renewed it, same thing has been true in West Virginia and HIM. So, we renew a contract and we've actually got increased margins. That's how to save it sometimes they don't agree, sure they do. That's just the nature of the business, but we work just as hard on renewals to increase a combination of the scope of work and the margins going forward. So, it's not what you might have interpreted as kind of empty renewals or renewals that we trade things of. We have just as many that we actually enhance the type of work, the quality of work and prospectively the margins for ourselves.

No, I was looking at the Chicago contract you announced today, it used to be a five-year $75 million contract, now it's a six years $72 million contract, but that's just an example. But in my last question I don't want to take too much time here, but on the cash flow, in the first six months of the year, you've lost... you've burnt through close to $0.25 billion of free cash. Any thoughts on when that can turnaround? Is this going to be I guess, Janet you did have a comment that --

Right.

Second half was more skewed towards fourth quarter?

Well no, my comment on the second half was in the Technology business, where I talked about the fact that, we traditionally have a... in the ClearPath business, have a stronger second half than the first half. And my comment has being, as it's been previously, it is generally hard to call how those ClearPath transactions fall between the third and fourth quarter. As we look at it right now, those transactions seem more skewed to the fourth quarter than last year. So that was my comment with regards to the skewing. From a cash perspective, keep in mind that we do have restructuring payments that have been... that we've been making that are reflected in our cash from operations and we will continue our overall model that we're driving to in 2008 with 8% to 10% operating profit. Obviously that to translate into significantly improved cash flow and with management team make only worries about the top line, the bottom line and cash flow in getting this business to what we believe is the fully sustainable model going into 2008.

Okay. Thank you. I do wish you all the best going forward.

Thanks Ashwin.

We'll now take our final question from Julio Quinteros with Goldman Sachs.

Hi, good morning, thank you. Just wanted to check out quickly, when you look at the impact of the SI Consulting business specifically, and you look at this sort of the different things that are sort of happening in the shift to offshore, exposure to public services and... I mean do those pieces by themselves explain the weakness in SI Consulting? When I look across the space itself, we have seen pretty strong trends for some other competitors. So it might there must be something else going on here, beyond those issues, market share loses or anything along those lines, might allow a little bit more clarity on the SI consulting business?

Yes. Julio, this is Joe. I'll just give you a little more color on... we keep talking about payment disruption. But remember, as we want to the... what we call the high performance centers or pool delivery. That affected them more than anybody else, 80% of their resources are in these high performance centers and we moved 80% of their people over the course of this last 18 months or so. We also... they are the focus of the majority of our training around new programs. So a traditional person in outsourcing, if they break fix, they don't get trained. If your traditional call center person, you don't get trained. The people that we've made the biggest investments in training around open source, Microsoft security and so on are these same people. The same thing is about portfolio rationalization. We've gone from far too many small programs often regional in nature, different ones for retail banking in Latin America, North America, Asia Pacific and so on, to this much more concentrated core portfolio and a big change. So if you're moving up the old program to the new, you are disrupted and then customers moving from 4000 to 500, you'll recall, on these customers are now calling on these customers. The last piece is this group had the largest cost restructuring as a percentage of their population. So to get them from where they were, the traditional metric that you'd measure an SI Group's chargeability and regularization to get them from there fairly low prior chargeability, there is a combination of pooling, retraining and a fair amount of restructuring. And so it isn't until you're really done with all of those that there is enough stability that they can start working on these new efforts. So we would expect that.…

Okay and then are you adding heads to the SI Consulting business currently?

The only place we are adding head for their business with the exception of, we need more subject matter experts in some of our high growth areas security, open source and so on so. We are hiring architects and subject matter experts, security gurus in those businesses, but the majority of the programmers we're adding offshore.

Okay. And then finally, if you look at the expected cost savings and this has been one of the things I've been worried about over the course of the restructuring actions and the sort of benefits in the yield that you are expecting. At what point does the revenue declines that you guys are seeing in your business begin to crimp or sort of reduce the yield of the cost savings expected near not only for the second half of '07 but also into next year. In another words, if revenue continues to sort of at the current pace that we are seeing it decelerate, do you see a need to change the expected savings and the cost restructuring actions?

My... I actually have seen some of that already. So if looked at our Systems Integration decline, you'd see some impact on the current quarter. As that business turns, you are going to see it go the other direction, alright. So you are going to start to see some of the positive impacts of the heavy lifting we put in to the restructuring of that business in the second half, you've seen some of the penalties of the impact of it in the second quarter.

Okay great, thanks guys, good luck.

Okay, thanks Julio.

And in fact that will conclude our question-and-answer session. I will turn the call back over to our host for closing remarks.

Great. I want to thank all of you for staying close to us through this and your support and some of your tough questions. We are very bullish about our business going forward in terms of... if we can work through some these remaining challenges in Systems Integration and in contractors, I think we can have a strong second half as Janet mentioned. We see a very strong back ended technology business in the second half, so we are cautiously optimistic on the balance of this year. Thank you very much.

That will complete your conference for today. We do thank you for your participation. Everyone have a wonderful day.