Good afternoon and welcome to the Unisys Corporation First Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Courtney Holben, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone. This is Courtney Holben, Vice President of Investor Relations. Thank you for joining us. Earlier today, Unisys released its first quarter 2019 financial results. I'm joined this afternoon to discuss those results by Peter Altabef, our Chairman, President and CEO; and Mike Thomson, our Interim CFO. Before we begin, I'd like to cover a few details. First, today's conference call and the Q&A session are being webcast via the Unisys Investor website. Second, you can find the earnings press release and the presentation slides that we will be using this afternoon to guide our discussion as well as other information relating to our first quarter performance on our Investor website, which we encourage you to visit. Third, today's presentation which is complementary to the earnings press release includes some non-GAAP financial measures. The non-GAAP measures have been reconciled to the related GAAP measures and we've provided reconciliations within the presentation. Although appropriate under Generally Accepted Accounting Principles, the company's results reflect charges that the company believes are not indicative of its ongoing operations and that can make its profitability and liquidity results difficult to compare to prior periods, anticipated future periods or to its competitors' results. These items consist of pension, and cost reduction, and other expense. Management believes each of these items can distort the visibility of trends associated with the company's ongoing performance. Management also believes that the evaluation of the company's financial performance can be enhanced by use of supplemental presentation of its results that exclude the impact of these items in order to enhance consistency and comparativeness with prior or future period results. The following measures are often provided and utilized by the company's management, analysts, and investors, to enhance comparability of year-over-year results as well as to compare results…

Thank you, Courtney, and thank you all for joining us to review our first quarter financial results. Before I begin my remarks, I'd like to welcome Mike Thomson to the call today. Mike has been a key member of the team since he joined the company a little over 3 years ago. And we welcome him to his new role as Interim CFO, and look forward to his active participation in the discussion today. A key goal for the year has been to capitalize on our go-to-market momentum from 2018 by continuing to execute against our strategy of leveraging our IP and related solutions, while also using security to differentiate our offerings. We are pleased to report that we saw continued progress with this in the first quarter. First quarter revenue was $695.8 million versus $708.4 million from the prior year period. But that period reflected $53 million of additional revenue, recorded upon the adoption of a required accounting change that Mike will discuss in more detail. Total company non-GAAP adjusted revenue grew 5.9%. This is the highest quarterly rate we have seen since 2014. Services revenue grew 7.7% year-over-year and Services non-GAAP adjusted revenue grew 7.3%, marking the fourth consecutive quarter of growth for this segment and the highest quarterly growth since 2003. Revenue growth for both the total company and Services segment was even higher on a constant currency basis. And Mike will provide those details shortly. While we're also seeing momentum with contract signings in the U.S. federal sector, those signings included the largest two contracts the company signed in the first quarter. And we believe that sector is on target to see very strong revenue growth for the year. Additionally, although Technology revenue was down year-over-year as expected and reported margins were down due to the…

Thank you, Peter. Good afternoon, everyone and thank you for joining us today to discuss our first quarter results. In my comments I'll discuss both GAAP and non-GAAP results and provide color for our key business drivers. As a remainder, and as previously discussed in 2018, we've recognized an additional $53 million of Technology revenue upon the initial adoption of ASC 606 in the first quarter of 2018, which we've consistently excluded from our non-GAAP results. The recognition of this revenue not only increased total company and Technology GAAP revenue, but flow through to all other GAAP operating profit metrics, including total company and Technology gross margin and operating profit margin as well as total company EPS. But again, we've consistently excluded the impact from our non-GAAP results. In the first quarter of 2018, the initial adoption of ASC 606 had a positive impact of 1,700 basis points and 2,480 basis points on Technology gross and operating profit margin respectively. And $700 basis points on total company operating profit margin. Additionally, as we previously discussed 2018 revenue benefited from reimbursement of restructuring expenses at our check-processing joint venture, which continued during the first quarter of 2019. These 2018 and 2019 benefits are excluded from non-GAAP results. Please turn to Slide 7, which shows some of the key financial takeaways and I'll provide additional details throughout the rest of this discussion. We were pleased to see continued momentum on the go-to-market front for the total company and for Services as well as higher Technology contribution to margin than anticipated. GAAP revenue in the first quarter of this year was $695.8 million versus $708.4 million in the prior year period, reflective of the $53 million ASC 606 impact I just mentioned. However, even with the revenue uplift in the prior year period…

Mike, thank you very much. And with that, I think we'll open the call to Q&A. And operator, if you have anyone in the queue, we can go ahead and start.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Joseph Vafi with Loop Capital. Please go ahead.

Hey, guys, good afternoon, nice to see the Services business momentum. Peter, can you go back to that Brazil you were talking about on ClearPath and that renewal? And how is ClearPath renewals looking in terms of convincing these banks, especially these banks to step up again and maybe a little more color on the thought process of the Brazilian client. And then I have a follow-up.

Sure. Well, as Mike indicated, we think that the ClearPath business as a whole is relatively stable from 2019 compared to 2018. Renewal cycles vary from year to year. And they vary from quarter to quarter, because these are dependent on when they come in. With respect to the Brazilian bank in particular, we did mention that also in the press release, Joe, so you can get the specific name there. It's really a good example of the way we're approaching the business. So that is a bank that historically has used ClearPath Forward as an operating system for some of its applications, but not for all of its applications. And so, what we've done there is in addition to extending and renewing the license there, we're expanding it, because there are applications that can be put on to ClearPath Forward or ClearPath Forward related applications, they weren't taking advantage of. So specifically with respect to loan processing, you got a bevy of things that banks can do with their core processing. And so, we're actually expanding our footprint in that Brazilian bank. That's a little different from, let's say, using Elevate. So most of the ClearPath Forward, what we're talking about in that Brazilian situation is what I call a backend core banking system. The promise of Elevate, which we just announced a major new release this quarter, is really on the frontend. It's that omni-channel, which really faces the customer. And the idea behind the open banking system, which is our omni-channel approach to banking, is at this point banks really want best of breed. And there are a ton of fintechs out there that are really putting in some really interesting innovative ways. There is an article in the paper this morning. I think you saw that fintechs are finally striking at core banks. Well, by using Elevate, we're allowing banks to take advantage of these fintech innovations by actually kind of a plug-and-play approach. So that's kind of the yin and yang if you will of our financial sector, which is strengthening the core banking, the kind of behind the scenes large processing approach, while also being pretty innovative at allowing people to start doing customer facing banking, which Unisys historically has not been engaged.

Sure, that's helpful, Peter. And if you kind of - if you looked at that banking, that ClearPath installed base, say, versus a year ago and susceptibility to replacement by, let's call them, other platforms, if banks are moving away to ClearPath, how do you think you're doing on protecting that installed base? And…

I think we've been pretty - yeah, Joe, that's a great question. I think we've been pretty consistent for - I joined the company in 2015. And I think we did an evaluation even by the end of 2015. We have a very strong customer base in ClearPath Forward. There is always pricing pressure. In that, we have a very strong renewal rate. That said, we do expect ClearPath Forward licensing revenue to go down marginally year after year. The rate of decline has diminished substantially in the several years that I've been here and then Mike has been here. But we do still expect that ClearPath forward licensing revenue to decline somewhat year-over-year. Now, that is offset in our Technology sector, but other licensing revenue such as Stealth licensing revenue which we expect to increase. If we take a step back and look at ClearPath Forward in its totality, not just the licensing part, but the warranty work and especially the services work we do on top of ClearPath Forward. Over the past several years, the entirety of ClearPath Forward revenue has actually been increasing. And when we look at the entirety of ClearPath Forward revenue, we expect that to be relatively stable for certainly the mid-term. So it's very strong part of the company, it's an important part of the company, it's not a part of the company we count on as a growth driver.

Fair enough. That's good color, Peter. And then just so Stealth, is there any update there in terms of reaching out that product into perhaps larger distribution? It doesn't really seem to be that competitive with firewall, it's kind of complementary and just wondering if there's any updates that you can potentially provide us there.

Absolutely, Joe. And in fact, I alluded to a few of those in my remarks. Historically, as we think about Stealth, we've thought of it kind of with two legs of the stool. And what you're seeing now is us very assertively adding the third leg. And I'll explain why we're doing it now as well. So the first leg has really been Stealth as a standalone offering either from a license standpoint or built into services as a SaaS offering. We have Stealth in kind of a core as well as self-identity. The second leg of the stool is really the way that adding Stealth differentiates our overall offerings. So we have been able to sign much larger deals part of the momentum you're seeing in our TCV and ACV sales is that, in addition to an ordinary course world, we're putting Stealth into those bigger deals and it is being a very, very positive differentiator for us. So that's the second leg of the stool. The third leg of the stool is really starting, I want to say last quarter of 2018 on the promise of Stealth 4.0. So Stealth 4.0, which was launched only in the first quarter actually provides Stealth in much closer to a plug and play environment. It now plays very well with third parties. So you saw me actually referred to three efforts, more than efforts, I mean, wins, for us to expand what I call the distribution [pipe of Stealth] [ph]. So we now actively have Stealth engaged in the LogRhythm environment, in the Palo Alto Networks environment. And as of yesterday, in the Dell EMC environment. So these are big deals for us. And we think over time, this will really expand that distribution pipe for Stealth. So the question might…

That's great. Sounds very, very promising, Peter. That's great. And then maybe Mike, welcome on board. Maybe just one quick one, I know, you're not doing cash flow guidance at this point. I know you're continuing to see good strength in new contract awards that probably have upfront capital requirements are. Is this kind of run rate on capital additions and CapEx? Is this - do we kind of expect this cadence for the rest of the year? I know, you've got longer term goals, but just trying to get a sense of CapEx over the next few quarters. Thanks.

Well, thanks, Joe, for the kind of words upfront, and I guess, I would say to you that my remarks we talked about CapEx for the year and we know we've given that color at year-end and we are given it again that we think the full year value of CapEx should be in $170 million. The CapEx that you saw in Q1 was a little higher, not unexpectedly higher just really due to the kind of cadence in which the revenue or the seasonality of the revenue came into play versus the need on the CapEx. I did note too that we had some additional spend in Q1 related to some prepaid. So we prepaid for some CapEx on a large public deal, so we can get it out of discount, which should further help our margin expansion efforts. And we would expect again with the full year being at the 170 range and our total CapEx to be between 5.5% and 6.5% of total revenue.

And Joe, if I could just add a little more color to that as well. And Mike has been in the middle of this effort even before he moved into his new role. As you know there's the accounting side of CapEx is also the cash implications. And as we saw last year that we were becoming much more successful in signing new business, and sign some of that business was more cash intensive. In particular the public sector business. We began to revisit really hard, how we were financing some of this CapEx. So again there's a difference to what goes on your books and what doesn't go on your books. But from a cash standpoint, one of the efforts that we have underway for new deals is to bring in third-party cash financing much earlier in the process in a much we think more energetic way working with select partners to bring the cost of that cash down. And actually going back into some of those existing deals and refinancing some of the deals to be sold last year also to kind of increase cash flow. So, in addition to CapEx, where we're working really hard on the cash side.

Got it. That's good news. Thanks so much for the extra color. A lot of calls this evening. So apologize a little bit for some other redundancy. Thank for lot.

Thank you, Joe.

Thank you, Joe.

The next question come from Jon Tanwanteng with CJS Securities. Please go ahead.

Hi, Peter, nice quarter. And Mike, congrats on your first one in the CFO seat.

Thank you.

Thanks.

My first question is what when can we see the margins of the large products that you've taken on start to normalize and start to be accretive instead of to dilutive to your Service margin profile?

That's a great question. I would say, one, these are staggering, right? So these new comp - contracts are coming in over time. The first ones really came in very, very late in 2017. They came in throughout 2018, as you can see from our contracts, this quarter, we signed almost $990 million of new stuff this quarter. So one way to look at this and I think a more effective way is actually looking at it in that staggered way based of when the contract is signed. Often you will have contracts that in the first 12 months are frankly dilutive. They don't add anything to profitability. And then sometime in the 12 to 15 to 24 months they get more and more profitable. You would expect to close to profitable run rate by 24 months. And that's not scientific for every one of these. But you'd expect two years into this to be operating close to what you would expect to see at least as an average profitability over the term. And then, toward the end of the term, it would go above average. But that would counterbalance the below average in the beginning. So it's really more of a contract by contract approach rather than it is for - to look at the whole thing as a blob. Now, that is ameliorated in the U.S. Federal market, where you don't have as much of a negative in the front or as much of a positive in the back. The U.S. Federal profitability has some variability, but not nearly the amount we see in the non-U.S. work. Mike?

Yeah, no, I think you hit it spot on, Peter. It's really a matter of time and it's contract specific. And some implementations are more complex than others and the size of each deal has an impact on that as well. So as we noted in our prepared remarks that we think that we'll see some modest recovery throughout the year, in expansion of our margin. But I think the timeframes that Peter alluded to are spot on.

Great. Thanks so much for the color. And just regarding your comments on mid-teens growth in the federal market for this year, is that all of the projects and handed in the backlog? And are you really seeing that in Q2 or do you still have to actually win more projects to get to that rate?

Jon, that's a great question too. So, all of our sectors, whether it's federal, public, commercial or U.S. Federal, all have a blend of long-term work and short-term work. And if you go to the investor relations snapshot that we show, you can see - again, I would suggest the non-GAAP, because it's the cleanest. But if you go over there, you'll see that of our total revenues 73% are what we call recurring, 15% are nonrecurring services and 12% are technology, which is really - at this point, the vast majority of that is software licensing. But that 15% nonrecurring is really short-term project. And that short-term project work appears throughout our business, including U.S. Federal. So it'd be wrong to say we have all of that locked and signed, because we do expect and rely on that level of project work. But based on what we've already seen, we would not have given out that mid to upper teens numbers if we didn't have confidence in it. The real fly in that ointment would be if there's some kind of a government shutdown toward the end of the year or whether there are issues with respect to the federal budget. That's not foreseen and it's not in our estimate. But other than that, we feel good about that range of revenue in U.S. Federal. And again, that is all organic.

Okay, great.

I'd like to add one thing there, Jon, like we're expecting to see that federal growth start in Q2. I mean, so that's how confident we are those backlog and those signings.

Great, appreciate that color. And then, finally, just given your 6% growth in Q1 and your 2% to 5% guidance for the year, are you expecting any slowdowns or just difficult comps coming up? Is there any reason why you're a little bit more conservative given the run rate you've achieved in Q1, even with the federal slowdown?

Yeah. Well, I think consistent with the discussions that we've had today. It's really about the new business and the time it takes to ramp that new business up. So the take up on the revenue side, it's going to have a little bit of drag on the margin. So from our perspective, it's very consistent to what we've seen over 2018 and moving into 2019, so nothing in particular outside of that.

Okay. Thank you very much.

You're welcome. Thanks for the questions.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Peter Altabef for any closing remarks.

Okay. I'd like to thank everybody for joining. As I alluded to in the question that Jon just gave, we do have a bevy of materials available on the web for you, in the Investor Relations site, including that snapshot. And I offer all of that to you as well as our Investor Relations team, Courtney and Dan stand ready to have conversations with you, and Mike and I do as well. One of the items we have done over the past quarter, and I think you've seen some of them, is we've also had a series of blogs with that highlight different parts of the business, we think would be of interest to investors to really understand what we're doing at a deeper level. Those blogs are available. And I call them blogs, but technically, they're webinars. And so, those webinars are available from our Investor Relations site. There is now basically a library of them. And we really encourage you, if you want to deeper dive into parts of the business, to take a look at that as well. With that, we look forward to a continuing dialogue.

Thank you, sir. Conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.