Welcome to the Unisys Corporation Fourth Quarter and Full Year 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, 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 full year 2019 and fourth quarter financial results. I'm joined this afternoon to discuss those results by Peter Altabef, our Chairman 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…

Thank you, Courtney, and thank you all for joining us to review our full year and fourth quarter financial results. 2019 was an exciting year for us, and we made significant progress on a number of our key priorities, including total company revenue growth and expansion of services profitability. Our focus on security and differentiated IP continues to resonate and help win us contracts. 2019 non-GAAP adjusted revenue and non-GAAP adjusted services revenue both grew year-over-year. In fact, the fourth quarter represented the seventh consecutive quarter for non-GAAP adjusted services revenue growth. Services non-GAAP adjusted operating profit also expanded year-over-year both in the fourth quarter and the full year 2019. As a result of this, along with lower capex, we saw a significant year-over-year improvement to adjusted free cash flow and we achieved our guidance ranges on all three provided metrics for the fourth consecutive year since we reinstituted providing guidance. Mike will provide more detail on our financial results. But first, I thought I'd speak a bit about the business. Throughout both Mike's and my commentary, we'll be largely referencing numbers based on the 2019 actual results, which include both US federal and enterprise solutions. But we will provide color in certain places on the expected impact of the US Federal transaction, including in our 2020 guidance which will exclude US Federal after the close of the transaction, we will have significantly enhanced capital structure flexibility. This should enable the pro forma business to have a more dedicated focus on driving growth, improve profitability and stronger free cash flow and an increased ability to invest both organically and inorganically to help achieve these goals. Mike and I will highlight a number of opportunities we see as a result of this transaction and we also look forward to providing more…

Thank you, Peter. Good afternoon, everyone, and thank you for joining us today to discuss our full year and fourth quarter financial results. In my comments, I'll 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 saw a number of significant accomplishments in 2019, including the highest annual non-GAAP adjusted revenue growth that we've seen since 1998 and the highest annual non-GAAP adjusted services revenue growth since 2003. We've seen continued year-over-year non-GAAP operating profit margin expansion and significant year-over-year improvement in adjusted free cash flow. We also achieved guidance on all guided metrics for the fourth consecutive year. Our go-to-market efforts continue to be differentiated through our focus on security, our new cloud offerings and digital workplace offerings. As a result, we saw our second consecutive year of growth in non-GAAP adjusted services revenue and non-GAAP adjusted technology revenue. During 2019, we continued our sharp focus on reducing our cost of delivery and saw year-over-year expansion in services margins at both the gross and operating level. With respect to specific results, you can see on Slide 4 that 2019 non-GAAP adjusted revenue grew 6.1% year-over-year to $2.93 billion or 8.6% on a constant currency basis. Non-GAAP operating profit margin expanded 10 basis points year-over-year to 9%. Adjusted EBITDA margin was 14.4%, also in line with the guided range. Non-GAAP EPS was $2.12 per diluted share, up 8.7% year-over-year and ahead of consensus estimates. The fourth quarter was slightly different this year given the technology revenue was more evenly distributed over the course of the year in 2019, and typically is the case. This had a number of implications across our reported metrics, including year-over-year compares on total revenue and profitability.…

Mike, that's very helpful and thanks very much. With that, operator, we'll open up the call to questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jon Tanwanteng with CJS Securities. Please go ahead.

Good afternoon, gentlemen. Thank you for taking my question. My first one is on the outlook. I was wondering what assumption for growth in services are you making for 2020, and what's the operating margin improvement associated with that on an organic basis?

Yeah. I mean, Jon, we're looking for some positive growth in both of those metrics for 2020 and increased growth in 2021.

Okay. In terms of percentages, can we think the low single digits like you've been targeting?

Yeah. Look, I mean, we've said our mid-term range for that growth is always between 2% and 4% as we indicated in the opening remarks, our expectations are 2020 will be a slight reset. But clearly we've given that range of negative 2 to positive 2 and we like to continue that momentum.

Okay. Great. And then, on the technology side, you mentioned a single-digit decline in year-over-year on renewals, and that makes sense. What is the operating margin hit associated with that kind of decline? And maybe just a further one on technology in general, what is the expected revenue from SAIC obviously included in the guidance?

Yes. So I don't know that we're ready to give specific numbers in regards to the SAIC portion of that. As you know John, the operating profit associated with our clear path forward business are pretty strong margins. And so somewhere between let's call it 60% and 80% impact of the decline is what we would expect to see flow through of the technology business for the slowdown in 2020, but just as a reminder, our renewal schedule in 2021 picks all of that backup.

Okay. Great. Just to be clear, you have put the -- I guess, the royalty or license from SAIC into your outlook?

Of course. Yes. But we don't know what else there's still right. There's $7 billion company.

Sure.

All we've included in our outlook is the amount that we know that we already have in the book of business that we sold to them. So we're hoping as a channel partner that that's going to expand.

Understood. That's helpful. Thank you. And then just one more question on cash flow and the color you gave was helpful too. Two things I wanted to ask. How much capex was pushed out from this year? And two, kind of what exceptional cash items do you expect either from restructuring or from the sales of outside business anything?

Yeah. So the push out was about $15 million John into 2020. And as far as the cash outlook, I mean outside of what we we've already talked in regards to the restructuring, right, and those two components, we don't have anything additional that we would add from a cash outlook perspective.

Okay.

So just to put a point on that we're calling for about $30 million of restructuring charges related to [indiscernible]. Just keep in mind that that $60 million of kind of run rate saved that we get for that $30 million output.

Excuse me. The next question is from Rod Bourgeois with DeepDive Equity Research. Please go ahead.

Hey, there. Hey. So, since you've announced the sale of the Federal business, I wanted to see if you could give us an update on the response you're getting from customers, from clients and from partners in the market such as your channel partners. Clearly this is a big change. There is a lot more flexibility on the balance sheet going forward. I know there was excitement about that, but can you give us an update on the response that you're getting from those key stakeholders?

Yeah. Ron, let me start and then Mike can give you some specific responses in particular from the investor group. So I'll start with the client group and in the marketplace. I think from a client standpoint, the response has been really uniformly positive. So I think everyone understands the transaction for what it is. We had as a company made really significant progress on two of our three challenges. The first challenge obviously has been a revenue growth. The company had not grown since 2003. We turned around last 9year and then we expanded the revenue growth this year. The second was on profitability. So that which allows us to reinvest profits into the company and solutions. We've gone from 6.2% adjusted operating profit in 2015 to 9% this year. But the third element that we had not been able to, let's say, do on our own was really to strike a substantial blow against the underfunded pension -- the underfunded pension situation. And what this does by giving us a $1.2 billion purchase price all of which will go effectively to reducing debt and pension is really move us from a company that had some challenges on a capital structure to a company that is frankly now advantaged on a capital structure. It puts us back into kind of the normal kind of pack in our industry and actually better than normal in terms of our ability to put money into investments in terms of our ability to do select M&A and in terms of us-our ability to really increased R&D where we think we need to do that. So, I would tell you from a client standpoint, we've always been a pretty transparent company. I would say very transparent that has stood us in good stead now. They knew the challenges we had on the underfunded pension and they also know what this transaction does to relieve those challenges. So I would say a pretty big deal and our clients get it. Right.

Yeah. And maybe one thing I'll add on the client side before hitting the other piece. I think there were deals we weren't even invited to because of our overall balance sheet and to Peter's point putting us in a sense of normalcy or actually better than normalcy when you talk about our net leverage ratio being beneath industry standards that actually gives us a leg up to compete on some other bids that we didn't have an opportunity. Clearly from the other two parties, whether it's the investor side and buy sell side on that and/or credit rating agencies that we've dealt with, all of has been overwhelmingly positive as you can imagine taking down our kind of net debt from $1.8 billion to roughly $800 million certainly delevers our balance sheet, we're two turns down from a net leverage perspective. We have good line of sight to improve the cash flow as early as 2021, and we've given you the number for 2020. So I think from the overall strength of the balance sheet and all of the things that Peter mentioned puts us in a really strong light, and it doesn't even talk to our ability from the pension side of the coin to really start going after the removal of some of that liability as opposed to just being able to make those contributions in advance.

Great. And then, any thoughts on how the customers, I mean, excuse me, your actual employees are reacting, is there excitement among the troops?

Yeah. So, Rod, this is one of those where I believe there is excitement in really both groups. So obviously we wanted to make sure that with respect to the US federal team that they were going to a place where they could their careers could thrive. Clearly that is the case at SAIC. As Mike mentioned, SAIC has a larger footprint in the federal government than Unisys did. And they're obviously paying a premium team, because they know the ability of that team and the ability to leverage that team inside their larger base. So, from a standpoint of the team going to SAIC, I think they understand the opportunities that they have. With respect to the team here, while no one is happy to see their colleagues from Federal leave because they were great bunch of folks, I think everybody also understands the financial flexibility that that has given the remaining associates. And those remaining associates are almost 20,000 of the 22,000. And I think, for all the reasons I mentioned around the ability to invest more or on the ability put more into our deals or on being invited to more deals about doing more R&D, about doing select acquisitions, this company has not done any acquisitions for 15 years, which is not to say that we're going to go whole hog on acquisitions, but there is a place for those in accelerating growth where you as a company has strategically aligned. So it really gives us a lot more opportunities. And with respect to capital structure, Mike alluded to it, we have so many more opportunities to lower our overall cost of capital. Now that we're above or we will be above 80% underfunded on the pension, we have opportunities that we did not have before to further decrease that pension obligation. So, there really is a host of things we can do and I think the team here gets it.

Okay. Great. And then, one final question here. You gave us good color on your technology revenues. I understand the issue there with the renewal cycle. If we hone in on the services revenue outlook, can you just talk to if there's upside to your plan on services, what are the primary sources of potential upside? And then, what are the risks that you have to navigate this year amid the transition? And I guess what I ultimately am trying to see into is, do you feel like you're in a better position for growth in 2021 in services after you've had some time to get the sale out of the way in some of these new investments in place. So just a little more color on the services revenue outlook sources of upside and potential risk?

So let me start with that, and then let Mike get a little more into detail on that. Obviously when you look at our overall guidance and you see negative 2 to positive 2, you're looking at a zero or a slight positive year in terms of overall revenue. To get underneath that right and then when you start splitting between services and technology, the first thing you see is a slight decrease in technology which would imply an increase in services. That's number one. Secondly, as I indicated in my comments and Mike indicated, you have 2% of services revenue, actually a little more than that, going away through the iPSL check joint venture. Remember, we only own 51% of that that is not a profit making venture in the first place, but we consolidate all of that revenue. So just to get even on services revenue let alone positive which we expect to be, you are already building in a 2% services revenue growth right there. So that's all in terms of what we've already built into the model on services. Now in terms of upside on services, both in 2020 and beyond, one of the things I talked about in my comments was Stealth's ability to do dynamic isolation and what we call always on. So, this is the idea -- this is the capability that we have now gone public with to dramatically reduce the amount of time once identified a bad player can roam around the system before we basically entomb it. And we believe we can do that within 10 seconds of identifying a bad player with Stealth capabilities. I have to tell you that's an enormous potential upside for this company. But we have to dramatically expand our distribution channel to get that market share on this capability. So Eric Hutto, who is you know is the President of Enterprise Solutions has really been personally leading an effort to expand that partner channel for us so that it is not just our direct sales team selling Stealth and selling the dynamic isolation, but lining up a whole host of partners to do that. How quickly that capability gets accepted and appreciated in the marketplace, I think is a significant unrealized potential upside in the model.

The next question is from Joe Vafi with Canaccord Genuity. Please go ahead.

Hi. This is Pallav Saini on for Joe. Thanks for taking our questions. My first question is on renewals in the Services segment. How are renewals affecting growth and margins there? Are there a lot of contracts coming up for renewals that aren't being renewed due to low pricing? And is that a headwind to top line and at the same time if they aren't being renewed, is this a tailwind to services margins going forward? Any any color here will be helpful.

Yeah. So, Pallav, thanks very much for the question, and please give Joe my best. What I would say to that is, we have been selective. So, it was very important for us to basically throw down the gauntlet and say, hey, we're growing revenues, which we did for the first time in 2018, which we expanded in 2019. One of the things though that we have done even while we have grown revenues is to be more selective around renewals. So there are absolutely situations in 2018 and in 2019 where we basically took the tack that we weren't going to tell our existing client we weren't going to renew with them, but we were going to tell an existing client what it was going to take to renew because some of those contracts were not as profitable as they need to be for us. Some of those clients reacted to that by saying, I get it, I'm on board, I want to renew. Other clients said, I just can't pay you that increased freight. And that's okay with us. So we really have been trying to balance a desire to increase revenue with a desire to make sure the mix of our clients goes more and more to the positive. And you're seeing our profitability increase as a result. Mike?

Look, I would say, we've given you some backlog statistics. We have a very healthy pipeline. To Peter's point, I think we've been a lot more selective about the deals that we're pursuing, which is helping our win rates in those pipelines. And the margin profile of those contracts are better, right. So, I think for all of those reasons that Peter alluded to, we feel pretty good about the profit side of the equation, and we're not going to fall back into perhaps what this company had done prior to this management team in '15 and earlier, it was just chasing top line growth. We want profitable top line growth. We've got, again, a blue chip client base. Frankly we've seen folks that thought they could go out somewhere else and do it cheaper and have come back to a subsequent to going out into the marketplace. So, we know we've got quality product and we know we've got a quality delivery team, and we've got the secure methodologies to support those infrastructures and so we think that's a real strength of ours.

Great. Thanks. Thanks for the color. And secondly, on the revenue guidance for 2020, what needs to happen for you to hit the high end of the range and what would push it toward the lower end? Any new additional color there will be helpful.

Well, I gave a partial answer to that already, which is, we are expecting substantial growth in our Stealth revenue for this year, but it could be higher. So that would be one. Secondly, the two new solutions that we outlined around CloudForte and InteliServe are getting much more visibility much faster. And so, the question will be, how quickly does that increase the visibility drive revenue. We have assumed good revenue growth in both InteliServe and CloudForte in the existing plan, but it can be higher in both cases. On the flip side, what could drive it lower? You could -- we mentioned the coronavirus, we mentioned China travel and transportation; that represents combined the global travel and transportation and China combined represent about 5% of our revenues. But I think we still are living in a world of uncertainty as to the health of that industry on a global basis as well as what will happen internally for our clients in China. So I think that's probably the most significant potential downside that I would see right now.

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

Hi. Good afternoon, guys. A few questions for me. First of all, Peter, you briefly touched on this in your last answer, and that is the Technology segment. It seems like it's still being mostly driven by ClearPath Forward, and you mentioned that Stealth is growing pretty well. Do you see a future where you break up Stealth as a separate line items because that's a question I often get from a lot of different investors?

We don't see that in the near-term because as I said, it is still growing, it grew 17% last year. I would tell you that we expect that growth to substantially increase as a percent of revenue this year. And -- but I think it's -- this is still a $2.3 billion to $2.4 billion organization after Federal, and I think we want to wait until that number becomes more material. That said, it continues to be a driver not only of its own but as an element of some really important larger sales. So, it's important to outsize just its revenue. With respect to the technology revenue in general, you're exactly right. The majority of that revenue continues to be ClearPath Forward. But I'd say, it continues not as a criticism. I mean, with all that we have done with that platform in terms of modernizing it, in terms of creating public and private cloud capabilities, in terms of modern language, all of the things I talked about, which are --- we are continuing. We've actually been at now for a couple of years. And that's in part why you're seeing the health of that platform. Those clients understand not only is it honestly the most secure platform in the planet, according to the NIST, but one that they can really have confidence in going forward. So, we're not apologetic at all for our ClearPath Forward revenue. We're very proud of it.

And Ishfaque, it's Mike. I just would add to Peter's comment in regards to, there are services revenue that's tied to that ClearPath base as well, right. There's maintenance revenue up in there. There's apps development work. So, it's not just a license revenue that that brings in when you talk about ClearPath Forward.

Yeah. And Peter, if I could just have a follow-up related to that, and that is that you briefly mentioned InteliServe and CloudForte. Are those the two leading industry applications that you have right now or would you call out any leader in that category maybe?

So, yes, I would say that respect to the platforms that are going to make up the majority of our growth going forward, we would call out CloudForte and InteliServe, and I know you are already familiar with what those are, as well as stuff. We continue to have other platforms that are interesting and that we have a lot of expectations for, so Elevate in financial services for instance, LineSight in border protection, but LineSight is an extraordinary platform, but at the end of the day, the number of clients it's ever going to get is fairly limited. There just aren't that many governments that are going to appreciate a solution like that, whereas both InteliServe and CloudForte span both government, financial services and commercial, and they really are applicable throughout our client base. So we think they're just more scaled there.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

I want to thank everybody again for joining the call. This really has been a very special year for this company, being able to hit all of our guided metrics, being able to hit the kind of growth that we have had, the kind of operating profit that we have had, are really all records in my tenure here and going back ways beyond my tenure. So, we're very proud of the success we have had. We're very proud of the US Federal team, and we think that the transaction with SAIC is going to enable Unisys to really hit the next level of its capabilities. So there's a lot of enthusiasm here for what's next. There's a lot of energy here. I hope you felt that during the call, and we look forward to an ongoing dialogue with all of you. As I mentioned, as then Mike mentioned, we do plan and we have currently penciled in April 29th in New York as our Investor Day, and so we look forward to seeing everyone there.

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