Good day and welcome to the Unisys Corporation First Quarter 2021 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] Please note that 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 2021 financial results. I am joined this afternoon to discuss those results by Peter Altabef, our Chair 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 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 post retirement, debt exchange and extinguishment 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 to other companies in our industry: non-GAAP operating profit, non-GAAP diluted earnings per share, free cash flow and adjusted free cash flow, EBITDA and adjusted EBITDA and constant currency. For more information regarding these metrics and related adjustments, please see our earnings release and our Form 10-Q. From time-to-time, Unisys may provide specific guidance or color regarding its expected future financial performance. Such information is effective only on the date given. Unisys generally will not update reaffirm or otherwise comment on any such information except as Unisys deems necessary and then only in a manner that complies with Regulation FD. And finally, I'd like to remind you that all forward-looking statements made during this conference call are subject to various risks and uncertainties that could cause the actual results to differ materially from our expectations. These factors are discussed more fully in the earnings release and in the company's SEC filings. Copies of those SEC reports are available from the SEC and along with the other materials I mentioned earlier on the Unisys investor website. And now I'd like to turn the call over to Peter.

Good afternoon, everyone and thank you for joining us to discuss our first quarter results. At our Investor Day in January 2021, we laid out goals related to further strengthening our balance sheet, transforming our organizational structure, improving margins and cash flow, enhancing and expanding our solution portfolio, growing revenue and enhancing our associate experience. During the first quarter, we made progress on each of these. I will provide some detail on the organization, our solutions and our associate experience and Mike will discuss the rest of these points, including the significant improvement to profitability and cash flow that we made during the quarter. During the first quarter of 2021, we transitioned to our new segment structure, which targets Digital Workplace Services or DWS, Cloud and Infrastructure or C&I and ClearPath Forward or CPF. This was a key step to implementing the strategy, we developed in 2020 and laid out in our Investor Day. We are now running the business and reporting our financials on this basis. We have also built out the leadership team of these businesses and the company overall. We hired Leon Gilbert, our new Head of DWS in February and brought on Gene Chao, our new Head of ClearPath Forward in April. Wendy Reynolds-Dobbs joined as our new DEI leader in March and she will also co-lead our ESG efforts. Dwayne Allen, our new Chief Technology Officer joined us in April and will partner with our business unit leaders to innovate new solutions that expand and enhance our portfolio. Finally last week, Maureen Sweeney our new Chief Revenue Officer came on board. Maureen will work across our businesses to leverage capabilities, identify key opportunities and help drive growth. More information on each of these leaders is available on our website. With the significant strengthening of our…

Thank you Peter, and good afternoon everyone. In my discussion today I'll refer to both GAAP and non-GAAP results. As a reminder reconciliations of these metrics are available in our earnings materials. As Peter highlighted, we made significant progress on both our strategic and financial goals during the first quarter. Peter discussed a number of items on the strategic front and so I'll focus more on the financial accomplishments including margin and cash flow improvements, positioning the company for improved revenue growth and strengthening our balance sheet. Starting first with margins. We saw significant improvements year-over-year in the quarter. Non-GAAP operating profit increased 75% year-over-year to $51 million and non-GAAP operating profit margin increased 440 basis points year-over-year to 10%. Gross margin improved in each of DWS, C&I and ClearPath Forward. DWS gross profit increased 157% year-over-year to $19 million with DWS gross margins up 860 basis points to 13%. C&I gross profit increased from a negative $3 million in the prior year period to a positive $12 million with C&I gross margin up 1,240 basis points to 10%. ClearPath Forward gross profit was up 3% year-over-year to $103 million with ClearPath Forward gross margins up 290 basis points year-over-year to 61%. The margin improvements were driven in part by progress against our previously outlined goals for efficiency improvements in 2021. We noted on our last call that we were targeting between $130 million and $160 million in run rate savings exiting 2021 and we have completed a significant portion of the actions required to achieve this with a total of approximately $100 million of run rate savings in place as of the end of the first quarter. We took additional charges related to these efforts in the first quarter of $8 million and we expect less than $10 million…

Thank you Mike, very much. And with that, we'll open-up the call to a discussion, as well as questions, so, Cole, if you would open up the call. And let's get to it.

Certainly, and we will now being the question-and-answer session. [Operator Instructions] Our first question today will come from Jon Tanwanteng with CJS Securities. Please go ahead.

Hi, good afternoon, guys. Thanks for taking my questions and nice quarter. Just wanted to clarify a couple of points. Mike, did you say you expect backlog to grow from here as in sequentially or is that just over the course of the year at some point?

Yes. We're looking – Jon, hey, thanks for the question. We're looking for growth in the second quarter, both in the quarter and the year-to-date and we're looking for backlog growth for the full year as well. So I guess the answer would be both in the quarter and the year Jon.

Got it. That's great to hear. And I was just wondering how sustainable the margin – the operating margin is in your services business as we go through the year? Are there any changes to the profile as you get through different projects or as revenue fluctuate? Any color on that would be helpful.

Yes. Look as you know Jon, the services margin aspect of our business is pretty solid right? So what plans that around a little bit is the technology aspect of that. So as I noted in my prepared remarks in the third quarter, we'll have a lighter tech quarter. But as far as the services margins go, we feel pretty strongly that they're very sustainable. I think you've seen from us over the last three quarters, consistent improvement in that and a big step-up in this quarter and we expect to maintain and continue to grow those services margins along the lines as what we discussed in January at the Investor Day.

Got it. And you usually give kind of like a ballpark percentage of revenue that you expect in technology per quarter or per half. Do you have that kind of clarity at this point in time?

Yes. So what we're calling for was 55% in the first half and 45% in the second half Jon with Q3 being the lowest quarter Q4 being the highest. From – and again it's 55% 45% and pretty flat for the year from a technology licensing perspective just the modeling purposes.

Okay. Got it. And then finally just high level. You benefited from the stimulus bill with the pensions. Is there any benefit for you coming in the potential infrastructure bill? I know there's funding going to a variety of end markets that you serve, I'm wondering if you have any insight as to whether that would flow to you guys at all?

Yes. Maybe I'll take that for a minute. And Jon I want to add my thanks to Mike and thanks for recognizing the quarter. We feel very good about the results we had this quarter and we're on track also this year as well as the plan that we rolled out in January. This infrastructure bill is – at least in its current form is defining infrastructure in a much broader way than in prior bills of itself. So cybersecurity, broadband access are all front and center in this bill as active integral parts. Given our focus in the United States on the public sector, which we define as state and local, anything other than federal, we see opportunities around cybersecurity around increased evolution to new platforms for state and local that we think that the infrastructure bill, if passed in a fulsome way would help us given our public sector visibility.

And Jon I know you didn't ask this aspect of it and Peter gave the infrastructure piece of it. But I just wanted to maybe throw in the tax piece of it as well, in case that's on your mind or on the mind of some of the other analysts here. We do not expect any negative issues in regards to any of the discussions from a tax perspective. As you know we've got quite a bit of DTAs. We have about $1 billion worth of DTAs that will shelter about $3.5 billion of income. So we're not expecting really any fallout from any of the items being discussed, whether it's the corporate tax rate, the GILTI tax rate or the dialogue on the B taxes [ph]. So I think we're – really no change in regard to that as well.

Got it. That's good to know. Maybe one final one if I could. The well-publicized supply chain issues on – just on technology and semiconductors and all of that. Is that limiting your ability to deliver hardware associated with your services at all, or is that not much of an issue – as much of an issue as it might have been just given the migration to the cloud and offloading that capacity?

Yes. That's exactly right, Jon. It is not as much of an issue for us. Obviously, certain sectors like the automobile sector are being hit very directly. We have not seen significant availability issues in the hardware that we're providing to clients. Some but nothing significant.

Okay. Great. Thank you.

Thank you.

And our next question will come from Joseph Vafi with Canaccord. Please go ahead.

Hey, guys. Good afternoon. Good results. I just – kind of looking at some of the segment performance in the quarter and kind of thinking about the strategy moving forward. And clearly C&I doing well and looks like it's kind of the emerging growth driver of the new segment reporting and – so how do you see kind of ROI on sales and marketing expense relative to the three segments now? And where you're prioritizing that? And then I'll have a follow-up. Thanks.

Yes. So Joe I'll probably take that to start. And thanks very much for congratulations again. We feel very – when we go back to our January strategy, the bulk of the revenue growth we expect will come from DWS, from Cloud and Infrastructure and from the services segment of ClearPath Forward. I will tell you that we feel very good about all three of those, a few months into this. So you see some reduction in Digital Workplace Services revenue year-to-year. We expect DWS revenue to pick up and we expect it to be positive for the full year. In fact we expect all three of those to be positive for the full year. Again relatively modest revenue but we expect to pick up the losses from DWS. We expect the pipeline for DWS to increase markedly over the course of the year. We have visibility of some large deals that will come out in the third and fourth quarter. We feel very good about our positioning for those. So I would tell you that piece of our strategy, which is that we really expect over time to have a larger and larger share of DWS very much in play. On Cloud and Infrastructure, we had a little bit of a head start in that compared to DWS. So Leon Gilbert, who is leading the DWS team joined us in February. Mike Morrison, who is leading Cloud and Infrastructure has been here for several years. And I think you're seeing a little more maturity in the Cloud and Infrastructure and particularly those cloud numbers, of course, this quarter. On ClearPath Forward, I would tell you, again, a new leader who I mentioned, Gene Chao started in March for us. Very, very interesting perspective on the CPF business. We have a good view from January about where to take the services revenue. And I think Gene is looking very hard at opportunities to increase the software revenue on a ClearPath Forward. Early days on that, but really like the vitality that he's bringing to that entire segment for us. So we really feel that we're on track Joe with where we expected to be at this point.

Got it. Thanks Peter. And then -- so if we think about kind of some of the ongoing restructurings and what that means to margin combined with -- I guess, it's kind of fair to say that there's $200 million that kind of "got freed up" relative to the congressional American Rescue Plan Act. How should we think about that cash deployment back in the business? It feels like M&A may be the right place, but would love to hear your thoughts.

Well, first of all, it is not burning a hole in our pocket. We do not feel any urgency to spend it because we have it. You're right with the passage of the Act as Mike laid out, we no longer expect to make the $200 million of contributions. And we're very grateful for that. So we really feel like, as I said in my comments, we can really act at all levers now. We have looked hard at the businesses that will change the most for us and that is DWS and the cloud piece of Cloud and Infrastructure over time. Some of the work we did last year with Mckenzie and then with AlixPartners really kind of look at how that business is -- or those two have to evolve over the next few years. We've been very specific in terms of that analysis. We actually have created bundles of offerings in both DWS and Cloud and we're looking at how we get to complete those bundles over the next couple of years. That is a classic build-by-partner analysis. And I can tell you that we expect to do all three. With respect to the buy analysis, if we look at current pricing and the multiples of the different kinds of businesses, I would tell you the pricing for DWS businesses is a little less aggressive than the pricing for some cloud businesses right now that would be very consistent with our strategy. We're seeing some of the players in the industry de-emphasizing that a little bit. We intend to rush into that void. It's a very good business for us. So I think you'll see us focus in DWS on specific acquisitions probably smaller acquisitions that really will fill specific niche solutions for us. But we think those solutions will have a multiplier effect on our ability to grow revenues and market share in DWS. So given that multiplier effect, we think we're in a very good shape to be an efficient acquirer. Situation is a little different in cloud in that the asking prices are a little higher. And again, it's a little more mature in terms of our next-generation offerings in cloud, but we do expect over time to make some cloud acquisitions. Those will largely be for filling in scale where we believe that we have subscale in some of our offerings, or some of our geography, or some of our advisory services. So I think that's the way we'll approach the cloud acquisitions.

Great. Thanks Peter. Yes, that makes sense. I could see Unisys really kind of becoming a big scale player in what you call DWS as perhaps that opportunity is one that others aren't focused on as much so. Thanks much for the color great results.

Thanks, Joe.

Okay. Thanks, Joe.

And our next question will come from Matthew Galinko with Sidoti. Please go ahead.

Hey, thanks for taking my question. Maybe just as a follow-up to the question around supply chain and component shortages. I realize we're still in the early days of that, but I'm curious if there's any macro push towards or extra macro push towards cloud migration from existing customers and whether that could be any catalyst for you in any segment? Thanks.

Yes, why don't I take that first Mike and then hand it over to you for your perspective as well if you don't mind. And it's one of several, right? So it's hard to imagine people need more push to the cloud at this point, right? So COVID-19 already accelerated people who really did not want to bear the cost or the people involved in managing their own data center. So that was a push. The work-from-home effort that came along with COVID also acted to push people more toward the cloud. The advances in what we're doing around Digital Workplace Services, which is making the employees of our clients at least as productive anywhere they are a lot of our DWS work, ultimately revolves around having capabilities for the client, which has to be available anywhere with very, very low latency around the world, and that largely means putting it into the cloud. So I think you've had a bunch of reasons why people were accelerating to the cloud already. Supply chain issues, I think do it on -- in two ways. First, obviously, you're not as concerned about the availability of servers, et cetera. And secondly is around security. There is obviously managing a secure environment that is being hosted by AWS or Azure or Google or someone else, you still need to manage it very carefully and we obviously do for our clients. But there's a second element of that which is kind of the core supply chain of are you buying hardware that has the right provenance? And how do you determine the right provenance of the hardware you buy. And of the software that needs to run it in a networked environment. And so I think what you're finding here is a willingness to let the big cloud public providers do that work. And especially, midsized companies not have to worry about that provenance. So I do agree that over time that's an added element especially around the security side of that. Mike your thoughts please?

Yes. And Matt thanks for the question. Look I think, Peter you covered the main elements there maybe the only other component that we didn't cover is just the cost of the materials themselves, right? We're seeing supply chain increases there from availability cost. Peter talked about security and the complexity. So look Matt, I mean, from our perspective, we've been pursuing a capital-light strategy for probably three years or four years now. And this really just plays into that when we're having discussions with clients that we're thinking about the cloud three years, five years out. Now those discussions are around one year out now or certainly in the near term. So I think all of the things that Peter mentioned in the prelude here are really just another catalyst to get folks on the cloud adoption or the digitization path. And as you know that fits very nicely into our strategy and our business plan.

And I would just add exactly to what Mike just said. Our -- back in 2016, we decided that we were going to cut our -- one of the things that makes Unisys distinctive is this area that we would have security built into all our solutions. Obviously, ClearPath Forward is the most secure operating environment. Stealth is a part of that security environment for us both internally as well as with clients directly. But it even goes beyond that. We really focus on making sure our clients have the most secure environment they have or they can have. As you're seeing ransomware become a pandemic, a plague whatever word you want to use, in the IT world it's hard to overstate where ransomware is going. It's affecting local governments and affecting state governments. It's affecting private organizations around the world. And so again, when you have a -- where does the buck stop having more of your environment in the public cloud doesn't protect you 100% from ransomware. We know that ransomware can affect data wherever it is, but it does allow individual companies to really focus on making sure that within the scope of their control they have the best possible most secure systems. They have backup, they have resiliency and they can really handle a ransomware attack. So I think again in the bigger cybersecurity claim and specifically about what Unisys brings to the table, I think, you are seeing folks say I'm going to put this in the cloud, I'm going to focus my ransomware capabilities on what I am retaining as well as making sure I have it protected in the cloud. That helps us and you're seeing some of that in the cloud growth that we showed this quarter.

Well, thanks for comprehensive answer and nice quarter.

Thanks, Matt.

Thank you, Matt.

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

Hi, guys. Hey, very nice progress on profitability. And I should also say that I'm liking the three new reporting segments it seems to lay out your trends in a clear way. And for me it just ties your financials better to how I look at Unisys in the marketplace. So nice work on the story there. I have a question about the growth revival plan in the digital workplace business. You mentioned rolling out some new material there and so on. Can you give us some flavor on the DWS messages that you're taking to the market to revive its growth? And clearly there's a plan to move to the end-user experience value proposition. Can you just talk about the messages that you're rolling out in the actual market?

Yes. It's a great question, Rod and thanks for being supportive of the segment. I agree with you. It's one of those things -- Mike and I talked about it for a long time last year. And it's one of those things and when you finally do it it's kind of obvious, right? But it wasn't obvious until you made the decision. But having done it -- it really looks pretty obvious. And I do believe it gives investors more clarity into how to look at the company especially as we become more normal as the pension obligation is further and further kind of in the rearview mirror. With respect to DWS as I mentioned earlier to Joe's question, it's a very important part of our future. We have -- we are -- one of the things you're seeing in the margin uplift is the efficiencies and economies that we have gotten -- that really show up this quarter but have not been a this quarter thing. We've been planning for those for a long time. And certainly a lot of the work we did last year was in preparation for the kind of numbers you're seeing. With respect to the revenue side of the house as I said we have really a very detailed map of exactly what capabilities. Now the market is changing and things a year from now are not going to be the same as they are now. But we do think we have a lot of industry understanding of the marketplace. We do expect to be a full leader in the marketplace both in -- both in fact of size as well as in geographic reach and as well as capabilities. So we feel very bullish about that space. I believe, as I mentioned also to Joe's question, you will begin to see us take a leader role in acquisitions in DWS, probably before we do it in cloud, just because we are so focused on exactly what we need to grow revenues over time. And there is a very good pipeline for cloud -- for DWS opportunities out there. So we think our timing is very fortuitous. But we're bullish about this space.

Got it. And – yes.

I was just going to add a couple of little elements there Rod and thanks so much for the question. You know how we feel about the space and, as Peter mentioned, we've got people exiting this space and we think it's really an opportunity for us to be a dominant player there. But maybe specifically to your question, we're talking about this messaging in the context of not only the EUS to EUX transition which we've talked about quite a bit, but it's really about the holistic view of where our clients can be a year from now, three years from now and us being able to take them on that journey. And it's about the deepening of our solutions whether that's in UCaaS or VDI or UEM type areas. But this is an area that we think is really ripe for the taking. And as you heard us say in the January Investor Day materials, we want to be the dominant player in this space and we're putting a lot of focus on that.

Got it. Very helpful. Hey, and a more general question about demand trends, are you seeing an uptick in add-on work at your existing accounts, particularly as we get through some of the COVID crisis challenges, are you just seeing a general uptick in add-ons? And I know you mentioned that the duration was down in the backlog, could additional add-on work be part of that, or is that a different dynamic that's driving the lower duration in the backlog?

Well, so I'll take that and start and then again, let Mike finish. Absolutely, it is. When you're talking, for instance, about the segment of ours that had the most growth this quarter, which was Cloud and Infrastructure and specifically cloud in Cloud and Infrastructure, a lot of that work came from existing clients. Some of that were migrating from private clouds to public clouds, some of them were setting up very vigorous hybrid clouds, but not all of it was new logo. So very much -- so those deep relationships that we think got stronger during COVID-19 are playing out very specifically in what you call add-on or extension work. And again, even in DWS to go back to that question Rod, the fact that we have such a strong base in what we would call end user services is a big advantage to us, not all of the end-user experience work has to come from new engagements. It can come from that installed base of clients. So when we think about seamless collaboration in UCaaS, workplace-as-a-service, intelligent workplace, modern device management, all of the things that are really integral to end-user experience, those are things that we're doing in some way when you're talking about end user services, but not to the same extent as where the market is going and where we are going. So we do think this idea of extending existing relationships is very much an integral part of our future.

Yes, Rod, and I would echo that and really just say, specifically within public sector within our Cloud and Infrastructure business, we've seen quite a bit of that add-on work, as you call it. In fact a lot of the contracts that we're getting are really unsolicited opportunities, right? And that's the beauty of the long-term relationships that we've got with blue chip clients. And you're there, you're walking the halls and they need other work done. So from our perspective, the more wholesome our solutions can be the more of that we think we'll get, right? And that's really been a core tenet to our strategy, really for a couple of years now, that's not necessarily new here. But as we expand and deepen our solutions, we think there's a lot more of that right, because they're paying others for it at this point. So it's a good opportunity for us to expand our wallet with existing clients as well.

Good stuff. Thanks, guys.

Thank you, Rod.

Thanks, Rod.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Peter for any closing remarks.

Thanks very much. I'd like to thank Courtney and Mike for joining me on the call today. We really appreciate the level of questions we've gotten. We think those help explain what's going on in the business beyond our prepared remarks. We also think that what helps explain the business is the refreshed Investor Relations website that we have put up, which actually went up after the investor call in February. So we hope that you spend some time on that. We think you'll find that helpful and increasingly transparent, which is one of our goals. We also are available to you by phone and obviously through Zoom calls and at some point in the year, through in-person meetings as well, which we also look forward to. So I'd like to thank everybody. And on behalf of Mike and Courtney, look forward to visiting with you again next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time and have a great day.