Good afternoon, and welcome to the Unisys Corporation Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Courtney Holben, VP 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 third 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 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 third 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, debt exchange, 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 third quarter financial results. The third quarter reflects continued progress on a number of our key priorities, including total company revenue growth and margin expansion. Our focus on security and differentiated IP is resonating and helping us win contracts, and our U.S. Federal sector continues to see strong performance. In addition, cost management helped drive improved profitability and also helped drive improved adjusted free cash flow year-over-year. Non-GAAP adjusted revenue and non-GAAP adjusted Services revenue grew for the sixth consecutive quarter. Services non-GAAP adjusted operating profit margin also expanded. Technology revenue was up year-over-year in the quarter. In light of the overall revenue growth we have seen so far this year, as well as our expectations for the rest of the year, we are increasing our non-GAAP adjusted revenue guidance for the full year 2019 from 2% to 5% to 3% to 7%. Mike will provide more detail on this and on our financial results overall shortly, but first I wanted to provide some more insight into the business. At the segment level, as I noted, we saw continued growth in Services revenue. InteliServe and CloudForte have begun to differentiate our go-to-market efforts much as Stealth and Security have been doing. The productized nature of these solutions also allows us to bid contracts at more attractive margin profiles than otherwise would be possible. On last quarter's call, we discussed a number of recent wins involving CloudForte, so I'd like to spend a moment on two recent wins with InteliServe. During the third quarter, we signed a contract with Nutreco to expand the solutions we provide to include a secure, highly automated enterprise service management platform. The solution leverages InteliServe, as well as ServiceNow technology, to enable an…

Thank you, Peter. Good afternoon, everyone, and thank you for joining us today to discuss our third quarter results. In my comments, I will discuss both GAAP and non-GAAP results and provide color for our key business drivers. Reconciliations of GAAP to non-GAAP measures can be found within our earnings presentation. We are pleased to see continued progress in our financial results during the third quarter. Please turn to Slide 4, which shows some of the key metrics, each of which was up year-over-year and ahead of consensus estimates were available. You can see here the continued revenue growth and margin expansion that Peter mentioned earlier. Our go-to-market efforts continue to be differentiated through our focus on security, our new cloud offerings and digital workspace Services, and we again saw revenue growth for the total company, supported by revenue growth in both our Services and Technology segments. We have also continued our sharp focus on reducing our cost of delivery and saw expansion year-over-year and Services margins at both the growth and operating level. With respect to specific results, non-GAAP adjusted revenue grew 9.6% year-over-year to $750.8 million in the third quarter or 11.3% on a constant currency basis. This represents the sixth consecutive quarter of year-over-year non-GAAP adjusted revenue growth for the company. This was supported by continued strength in U.S. Federal. Non-GAAP adjusted revenue for this sector was up 54% year-over-year to $206 million, representing the highest growth rate we've seen for this sector in over 15 years. As with the company overall, the growth in our U.S. Federal sector was all organic. Non-GAAP operating profit margin expanded 100 basis points year-over-year to 8.7%, and adjusted EBITDA margin expanded 10 basis points year-over-year to 14.1%. Non-GAAP EPS was up 25.6% year-over-year to $0.49 per share. While not explicitly…

Thank you, Mike. Operator, we're ready to take questions.

[Operator Instructions] The first question will be from Jon Tanwanteng with CJS. Please go ahead.

My first one is, are those large state contracts that you signed last year now at their average lifetime margins, or is there still some way to go before you get there?

There is still somewhere to go, and you can see the changes in Mike's comments. When we talk about transition margins, I think we're down about 140 basis points because of transition margins that will diminish pretty quickly through the fourth quarter. We'll still have a remnant of that going into next year, but we're expecting some substantial improvement. Mike, any further color on?

Yes, that's exactly right. If you recall, John, in Q1 we were talking about that being roughly 180 bps drag, we've seen two sequential quarters of reductions on both of those and we expect by the end of the year that, essentially, we'll be done talking about that.

And then in terms of the pipeline going forwards, you mentioned being more selective in your margin profiles and probably on your ability to select projects that require less upfront cash investment. Can you comment on that compared to what you've been signing over the last year or 18 months or so, and if that really is improving by how much?

Yes, a little bit - it's a little bit like finding the porridge at exactly the right temperature. So, end of 2017 and through 2018, we signed some substantial state and local deals that have driven revenue, the ones we just talked about, Jon. They are a little more capital-intensive than some of the other work we do. So, we've been pretty careful this year, given our cash flow requirements that we not load up with those. We have been more selective. Going forward, we believe that we'll be able to expand a little more capital on deals, which is going to actually open up that pipe a little bit, but things have happened since then. So, InteliServe and CloudForte have now come online to give us much better applications, infrastructure, field services and service desk foundations. So, while we're going to open up that pipe a bit in 2020, we still expect to get a higher margin profile for the same dollars because of the new systems.

Yes, John, I would also maybe chime in there, we talked about this last quarter as well. But, over the last 18 months we've signed $2.1 billion of TCV in our federal business. As you recall, our federal business is a little less capital-intensive and the margins come online a little quicker than they do on the commercial side, because the federal business, typically you're building assets for the government, so the timeframe in which you're working on that is revenue recognized immediately. For those two reasons, I think that will give you some insight as to why we think that's going to happen.

And then just touching on the federal business, which you just mentioned conveniently. You've seen 20% growth in that segment this year. Given that most of these contracts were signed midway through the year, should we expect to see that momentum increasing or continue at least through 2020?

Yes, John, as we've talked about last quarter, we had 33% in last quarter, we're up 54% this quarter. So we've really been, as we've consistently said all year, hitting above our weight in that sector and we really see no curtailment from that right now. So, we're pretty bullish on it.

But again, as mentioned by Mike, it works a little differently than 73% of our business on enterprise. So you get that bump in revenue growth almost immediately with the federal deals. So, you would not expect numbers like the ones we put up this quarter to reoccur because we've already taken that bump.

And then finally, just going back on something you mentioned, Peter, the opening of the pipeline and using a little bit more capital in terms of deals, is that dependent on your ability to get this IFRS exemption, or you can do that without that?

We can do that without that. We can do more of it with it. So, I would say it's a question of degree and not an on-off switch.

Yes, John, I would also remind you too. If you recall, when we did those deals in '18, we had a lot more of them going on than we historically have. We may have been running twice as many deals. So, when we came into the year in '19, we had a lot of that CapEx committed. As we work through the transition of those, it frees up CapEx in 2020.

And one more, a final one. A couple of weeks ago you hosted a webinar on your security business and your technology platforms. ClearPath was one of the businesses that seemed very interesting to me and that you're investing to put it on the cloud and enable more developers to actually code on the platform. Is it possible for that business to become a growth business going forward, as opposed to the maintenance and recurring revenue stream that it is today?

You know, it's interesting, it kind of depends on how you look at that business. If you look at that business just as reflected in our technology segment, then it has been a slight decrease in revenue over time. If you open the aperture a bit and look at that business as including the warranty and maintenance work and including the services work we do for clients that have that platform over the past several years, it's actually been a modest growth business. So, it depends on the aperture. What we expect now that we are increasingly and we've been doing this for a while now and it takes a while to get it all over. But, we are increasingly putting ClearPath into a cloud environment, on a hybrid basis, and we are increasingly developing the language skills that can be used. By the end of this year, you're going to see a lot more emphasis on using Python, for instance, or I think what that's going to do immediately is allow existing clients to increase their workload using ClearPath and move more things into that workload. It's still unproven whether we're going to get new clients into ClearPath, we would like to do it, we just don't have a proof point yet. So, in terms of the pathway, our modeling is continuing to see slight decrease in the license revenue on ClearPath, made up really by the services and maintenance revenue, so overall, it's pretty much of a wash. If the hybrid platform and the new Python language skills really get momentum, that can turn into a positive.

The next question will come from Rod Bourgeois with DeepDive Equity Research. Please go ahead.

It's interesting, just to set the context for my question, it seems a year ago part of the worry was, your revenue growth efforts were having some margin trade-offs because the deal ramps. But now with the mix shifting to federal, you're having better revenue growth and expanding margins. I guess my question related to that is, are you able to take some of the lessons learned from your federal business and apply it to your other businesses, such that you have more ability to drive revenue growth and margin expansion from here?

Rod, this is Peter. That's a great question. We don't really give margin data by segment. We only give revenue data by segment. But, by segment, I mean between federal and enterprise solution, segment's a bad word, by go-to-market. But if you got into that and, if you noticed in my comments, I gave a shout out to the enterprise solutions business for driving profitability expansion year-over-year. So, the most significant increase in margins actually came from enterprise solutions not, from federal. The most significant increase in revenue came from federal, so what I guess I would say is we actually are already seeing some push in that enterprise solutions on higher margins. We do not think that we are where we need to be or will be eventually. So, we see that push continuing. But I would say, we are showing that we're on the path for increased margin on that enterprise solutions business in the services segment, which is a critical segment, we needed to grow it.

Yes. And, Rod, I would echo Peter's comments for sure. Clearly, whether that's through automation, whether it's through the continued work we've been talking about in transactional business. I mean, all of that is ES-related, and we continue to look forward to expanding that margin on ES side. It's not - your point is valid on federal, clearly the top-line is growing, but the margins are fairly consistent. So, it's driving absolute dollars for sure, but the margin profile is pretty consistent on the federal side.

And I don't want to ask for an outlook over the next year on margins, but what you're talking about these levers. I mean, you do have a headwind over time as your technology mix goes down, but it seems the leverage you're talking about on service margins, at least right now if are sufficient to offset the drag from the technology mix going down, is that a good way to think about the trajectory that you're on right now with the margin side?

This is Peter. I think it's an excellent way to think about the trajectory. And remember, I said that you are expecting slight decrease in technology, let's say in ClearPath Forward made up on the revenue side, by some of the ClearPath Forward services. But the ClearPath Forward services don't come with the same margin profile as a ClearPath Forward licensing. So, we do expect to make up for that with higher efficiencies and higher margin, but it takes a push to get net higher margin, especially when you're growing revenue.

And then one final check on the pension side, I know you're working on the IRS front. But you're also working on other pension-related matters, without asking you to go through the whole laundry list, are there other pension-related initiatives that you can give us an update on right now? And I know we'll probably learn more toward the end of the year, but are there any other pension initiatives that we should hear about right now?

Rod, I wouldn't say that there are more initiatives than we've discussed in our prior calls. I mean, clearly we're always looking to manage that pension obligation. We've talked originally about some bulk lump sum opportunities that we'd like to look at. You've mentioned the IRS waiver. Clearly any type of annuitization down the road looking at what we can do in our capital structure, I think we talked about in our prior call on capital structure that we've got a make whole provision coming due in April of next year that we're kind of looking at what we can do in our senior secured notes, and that might free up some opportunity for us to either upsize and refi those notes, kind of push that out of the window a little bit as far as the pension contributions are concerned and give us some more opportunity to deal with some of the upcoming pension contributions. I would tell you just in lieu of the common here, been having active discussions with the IRS and the PBGC in regards to the application, and although there is no specific date that the IRS will say, hey, this is when we will give you an answer, we did request expedited processing and we've had again some good conversations with both parties. And at this point, there are no open questions from my perspective that have not been answered to those parties. So we're anxiously awaiting their response.

The next question comes from Ishfaque Faruk with Sidoti & Company. Please go ahead.

A couple of questions from me. First of all, the Federal sector. It's going very fast. Is there anything in particular to read into that? Are you guys under-pricing contracts or something along those lines? And there has been obviously volume upticks associated with the large DISA contract, for example.

Well, it's a fair question, Ishfaque. The answer is no. It's certainly not knowingly. And the good thing about federal contracts they tend not to be large fixed price contract. So you tend not to get into too much trouble once you've modeled it correctly. What I would say is - I go back to my remarks and some of Mike's remarks. I think part of the reason we have been successful in growing that business organically is the solutions we're bringing to bear. So whether it's Stealth, whether its CloudForte, whether its InteliServe, we - that is - clearly those solutions around applications, cloud migrations, infrastructure security are resonating with the federal government. So I really think it's the solutions we're bringing to bear, and it's also the team. We've built that team for a number of years, and I will tell you we just have an extraordinary team in the federal government. So we're very fortunate to have both of those line up at the same time.

And just to follow up on that, on the public sector side; is the pricing similar or the profitability similar relative to the federal sector at this point? Because you guys mentioned earlier on the call that you will soon evaluate or bid for deals, some of the more capital intensive deals?

So the public sector is pretty different in that unlike U.S. Federal, whether it's international public or state and local public, there is more of a desire for governments in that context to have us bear some of the capital cost, and there is more of a appetite for fixed price deals. So you get large deals that have a transition period that start out with a relatively more marginal margin profile and have to grow that over time. You also have what we talk about land and expand. I referred to the Australian situation where although you can expand existing U.S. Federal contracts, your ability to expand state and local and international contracts tends to be a little more, and you sometimes make more of your profit margin on project expansion than you do the initial contract. So I'd actually say the profile's a little different, but I'd yield to Mike on that.

Yes. And look, I think everything Peter said is exactly right. I think if you look at the life of the contract, overall, the margins are similar. It's kind of the ramp-up time. And to Peter's point, it's the additional work and add-on work that you get without having to kind of go through a new government contract bidding cycle that gives you the upside that you don't potentially get on some of the U.S. Federal contracts.

And my last question with regards to pension, Mike, can you give us an update on the status of the IRS waiver? Any updates, your most recent discussions? And another part to that is you gave a illustrative example that having more fixed income assets in the pension assets is a very good hedge for rising rates. Can you - are you guys evaluating being more weighted towards more fixed income for a hedge?

Yes, Ishfaque. So thanks for the question. I'll just kind of reiterate the comment on the update from the IRS. Again, had several meetings, in fact had meetings last week with the PBGC. Had good in-person and calls with both parties. We've had several requests for information, which we've provided. We've asked for expedited processing and to date, there are no open items to be responded to from either party. So we're anxiously awaiting a response from the service on that. To your second point, the illustrative example, you're exactly right in the fact that the fixed income portfolio is a natural hedge to the decline in interest rate. If I said this, I didn't mean to, but we are not increasing our position in fixed income as far as the asset mix is concerned. That is the same as it's been historically. We're roughly 60/40 equities to fixed. It's just that it is a - the income - the fixed income portfolio just naturally hedges that because as the interest rate declines, that portfolio assets returns increase. So that's kind of where that natural hedge comes from and the real reason why you necessarily wouldn't move into more of that fixed is the return on assets being so important to the overall pension contributions, obviously moving more into fix would reduce the expected return on assets. So we monitor and measure that on a regular basis to make sure we have a good balance between returns and exposure to interest rates.

Next question comes from Doug Thomas with JET Equity Partners. Please go ahead.

Nice to see the stock respond. Peter, I guess my first question - I have three questions. My first question is you announced a really nice, meaningful financial services contract in the U.S. Most of the ones that you've announced in the recent past have been international and I'm - it makes me wonder - just if I could ask you - where does the financial services business stand in the States, especially as all of these new fintech type of companies develop? How is the momentum looking in that business for you guys?

I would say historically, actually financial services in the U.S. compared to our business outside the U.S. has been relatively challenged, and it's relatively challenged because it's so intensely competitive. It's not a question of weakness in the U.S., it's a question of everyone in financial services is in the U.S., and they're all here in strength. So we win our fair share, but it's a dog fight every single time. Yes, so we are encouraged that we're seeing some improvement in the U.S. We are signing some master service agreements with some very large top 10 global banks, including some in the U.S. Those are more hunting license arrangement than they are specific commitments for business, but it really shows our relevance in that space. So I would say we are bullish on the U.S., but we're also cautious that it's just a very competitive environment.

I mean, my first thought was given your reputation for safety and security in terms of breaches and packing and so forth, I would think you would be thought of as a top contender for a lot of those - for a lot of potential new business, notwithstanding the fact that as you said, it's a very competitive market.

So Doug, you're exactly right. I mean the win we announced this quarter was because of our security portfolio. The reason we're getting those, if you will, master agreements with large financial money center banks is because of the security. I mean that is how we're distinguishing ourselves. So there is not a question about that. We have some opportunities. It depends on how you define financial services. But when you get into organizations, we've already proven the case outside the U.S. that you can put Stealth into ATMs. You can put Stealth into automatic machines. You can do a lot at the periphery of the network on devices that are not necessarily as secure as core of the network by putting Stealth. And so as you do that, as those use cases get proved out, we expect to be able to increase their use in the U.S.

And then my second question is - and again, I don't really know - we've not really talked about this much, but the Microsoft win of the JEDI contract versus Amazon, I would assume that that would be a positive for Unisys. Am I wrong in thinking that? And if Amazon had won that contract, would it have been not so good for Unisys?

It would not have mattered. So our relationships with Microsoft and with AWS are both equally strong. So we don't have a particular horse in that race.

And then my third question is, I mentioned the stock was responding nicely this evening to a really good quarter. But it's a good quarter in. We've had a series are really good quarters I think five or six terrific quarters. Then I'm wondering, just back to last quarter when we saw the stock really tank and trade at Riddick just a ridiculous valuation as far as I'm concerned, $6 plus. Peter, I don't have the proxy in front of me, but I'm fairly confident the majority of your compensation over time it's going to come from equity-based components and I'm thinking that the majority of your options over time that you've been grant so far. Or if not underwater then pretty close to being underwater when you see the stock trade down to what we all think are fairly ridiculous levels which basically extended up until couple of hours ago, what do you think in terms of stocking. The management team and the Boards desire to buy stock for example in the open market or how do you view the stock price. No, really talks about the stock, but how do you view the stock versus the fundamentals of the company at this point?

Doug, I'm thinking, I need to bring you with Hess like compensation committee meeting next week. Look, we've been really clear, Mike and I have been very consistent on this and Eric Hutto and PV Puvvada who lead our go-to market as well. Our, we have to lead and drive operational performance. We think we've been doing that by the way, and we have to exceed what we're doing. The market ultimately will determine the price of the stock, and we have confidence that if we continue to perform the way we've been performing. The market will eventually react. We understand the issues around the underfunded pension and we understand that can create a drag from time to time. And we know necessarily control it. But we are doing everything we can, as you heard from Mike in terms of the IRS in the pension Guaranty Trust company to deal with the pension at the same time. So what I would tell you is we're working all of these levers and hopefully our shareholders will eventually be rewarded. That is something we look forward to.

Yes. And I guess I would echo that comment. And we just had an all-hands meeting last week and I gave a little update on just kind of moving in the stock price. And as you've noted, we've had six straight quarters of year-over-year kind of growth on the services side and the message to the team was simply less control what we can control, and let's keep executing against operations and closing out years. I mean we've raised guidance twice this year. So it gives you a good sense of where our head is at and we're trying to work on both fronts will continue to look for opportunities on the pension side to minimize some of that exposure. But most importantly it's continuing to deliver operationally and that's what we can control, and that's what we're focused on.

There is also an educational element in this. I mean, I think you have seen from Mike in the last two quarters, a real effort to make sure that our investment public understands the short-term and long-term importance of interest rates and the short-term and long-term importance of the asset valuation and how that affects both the contribution levels as well as the GAAP levels. You see a slide in our deck that we've ever had before, to try to illustratively explain how this goes back and forth. We do think that historically people have looked at interest rates only when they have evaluated us on pension side and we think it is more appropriate to look at a combination of both interest rates and asset value. So we're trying to really kind of get a perhaps a more full rounded view of our pension obligations out there, we think that will provide greater insight into how we're doing.

Well, listen, again, I appreciate all the hard work and I congratulate you on another solid quarter and I'll talk to you soon.

The next question comes from Bill Smith with William Smith & Company. Please go ahead.

Thank you, Peter and Mike and Courtney, congratulations again on another great quarter. You really - you have the progress and the momentum and that you keep building it every quarter. So it's really good to see it hasn't been easy, we all know that. Can you, speak to a breakdown maybe of your business in terms of percentage in federal and public and in the commercial business segments, the percentages that are reflected there?

Bill, I can take a lead on that. And Mike can follow up. If we look at our business through the business units, we have two business units. The enterprise solutions team led by Eric Hutto and the U.S. Federal led by PV. The U.S. federal is about 27% of our revenue, Enterprise solutions is about 73 of those 73 points, 29 of the 73 or what we would call commercial business, 20 points are financial services and 24 is our public business. The public business includes governments both in the U.S. and abroad. And when we look at our business from an overall revenue standpoint about 57% of our business is now in the U.S. and Canada and about 43% comes from abroad.

And so the 57% or I guess U.S., Canada whatever percentage of that is U.S., is that allow you to use some of those NOLs and then just the U.S. business alone or how are you able to use those?

Yes, absolutely.

To what extent can you use those?

Yes, there is really no restriction on use within the U.S and income. So we've talked a little bit about some increase here in federal those can be utilized as well. All of that is domestic. So really no restrictions on use of those NOLs and as the income increases in the U.S. and that's all available to us. When we talk about our tax provision in general, we tend to look at it through the lens of 3% to 5% of international revenue is kind of how you look at the provision and the reason we do that is because all of the income on the U.S. side of the house is basically shielded through those NOLs. I'd also point you Bill, on the slide material that we have out there. Slide 14 gives you all of the relevant breakdowns between sectors, regions, services and tech etcetera. So if you want to another focal point, you can see that mix there as well.

Great, I didn't see that. And then can you comment Peter about your third-party relationships at all and where you might be getting traction say the Dell, EMC relationship or you mentioned this year Palo Alto, some of the names that you've talked about in the past or are you getting any particular types of traction with any of those third-party partners?

Absolutely. Historically, those core partnerships for us have been with Microsoft with AWS with Dell Technologies and those have been the three most significant. And on the security side, you have Cylance you have logged rhythm and Palo Alto as well. What I would say to you is the - while all of those continue the Rising Star that is relatively new for us, not in the sense of a business relationship, but a really strong partnership is service now. And so we have really been elevated and we'll get a release out on this shortly actually, to a very, very high level in the service now universe. And we are really a core partner, they see us as a core partner and we see them. And so that's a new avenue for us. The historic cloud providers give us one set of clients but working with service now actually gives us a second set of clients. So Bill, it's a great question and I think I would single out service now not because it's ahead of AWS or Microsoft or Dell, but because it's joined those rents.

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.

Thanks very much. I like to thank everyone that joined us for this call. I want to refer you to our Investor Relations section of the website where Courtney has bunches of interesting data. There was a reference already during the call to our webinar series and we keep those active for a while. So there are several there that I would call your attention to, if you want to get more insight into the way the business actually operates. And then finally, we remain as always available between calls and welcome conversations and questions. So thanks very much and look forward to speaking with you on the next call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.