Good day and welcome to the Unisys Corporation Second Quarter 2022 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'd like to turn the conference over to Courtney Holben, Vice President Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. This is Courtney Holben, Vice President of Investor Relations. Thank you for joining us. Yesterday afternoon, Unisys released its second quarter 2022 financial results. I'm joined this morning to discuss those results by Peter Altabef, our Chair and CEO; Deb McCann, our CFO; and Mike Thomson who will participate in the Q&A session in his new role as COO. 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 morning to guide our discussion as well as other information relating to our second 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. I'd also like to remind you that all forward-looking statements made during this conference call including any references to guidance or color regarding expected future financial performance 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 the Company's SEC filings. Copies of those SEC reports are available from the SEC and along with other materials I mentioned earlier, on the Unisys Investor website. Unisys does not assume any obligation to update the information presented on this call except as Unisys deems necessary and then only in a manner that complies with Regulation FD. With that, I'd like to turn the call over to Peter.

Thank you, Courtney, and good morning, everyone, and thank you for joining us to discuss our second quarter results. In addition to exceeding consensus on all key metrics in the second quarter, we grew revenue in constant currency and grew ACV and TCV signings and pipeline. Perhaps most significantly we are showing momentum within our key focus areas of modern workplace within digital workplace solutions and digital platforms and applications within cloud applications and infrastructure solutions. I will explain all of those terms in a few minutes. And then Deb will provide detail on our financial results as we welcome her to her first earnings call with Unisys. But first I'll give some insight into the business. Starting with digital workplace solutions or DWS, our primary focus is in higher growth, higher margin solutions that help clients streamline and optimize collaboration, to maximize employee productivity and engagement, which we refer to as a Modern Workplace. Our focus on these proactive experience-based elements differentiates us in the market. We refer to DWS solutions, not included in Modern Workplace, as traditional workplace. Our DWS business is positioned to take market share as we shift our mix to Modern Workplace and we expect constant currency revenue and profitability for DWS to improve year-over-year and sequentially in the second half of the year. During the quarter, we expanded our Modern Workplace offerings through our relationship with 1E, a mobile device management software provider, which allows us to leverage their Tachyon platform for experience-based solutions and makes us a preferred consulting and managed services provider for 1E. Our client, Lenovo, recently honored us with an Award for Excellence in Premier Support in Asia Pacific. And we were also named as a finalist in six categories at the Help Desk Institute Awards, of which we won…

Thank you, Peter, and good morning, everyone. I am excited to be here today for my first earnings call since joining Unisys in May, and I look forward to getting to know our investors and analysts better in the coming quarters. In my discussion today, I will refer to both GAAP and non-GAAP results. As a reminder, reconciliations of these metrics are available in our earnings materials. Additionally, I will provide the total company revenue on an as-reported basis as well as constant currency and will provide segment level revenue on a constant currency basis. As Peter highlighted, our strategy continues to gain momentum. We are encouraged by the year-over-year increases in ACV, TCV and pipeline in the quarter and the fact that we grew revenue year-over-year in constant currency and beat consensus on all key metrics. That said, progress has been slower than expected, in part due to delays in contract signings, which has resulted in less opportunity for in-year revenue growth and margin expansion related to mix shifts as well as increased labor costs, which impacted profitability in parts of our business. Foreign exchange created an additional revenue headwind. None of these elements impact our long-term strategy. And we expect our contract signed to-date this year and anticipated second half signings, including ECS licenses will drive year-over-year in sequential revenue and profitability improvements in the second half. We also anticipate that our sales and marketing initiatives will further contribute to a year-over-year improvement in second half signings, and we still expect year-over-year improvement to free cash flow for the full year '22. With that as a backdrop, I'll provide more insight into our second quarter results. Total company revenue beat consensus growing 2.8% year-over-year in constant currency or flat as reported, and our focus areas of Modern Workplace…

Thank you, Deb. With that, I would note that for the Q&A session, in addition to Deb, we are joined today by Mike Thomson in his new role as Chief Operating Officer. We'll be happy to respond to any questions you may have. Operator, would you please open the call for questions.

[Operator Instructions] Our first question comes from Rod Bourgeois with DeepDive Equity Research.

So I'd like to ask about pension. I'm wondering if you can just give an update on your pension in light of the latest market conditions. Any kind of interim pension estimates would be helpful as we've definitely received a round of pension questions of late?

For calculations of both the GAAP accounting deficit as well as the cash contributions for our U.S. qualified -- defined benefit pension plan, we only perform this valuation analysis at the end of each year based on year-end data. International contributions are determined by tri-annual negotiations and are typically based more upon affordability than macroeconomic factors. Given the current market trends, we believe our accounting deficit with U.S. and international combined should improve from year-end '21 because calculations mark -- liabilities using higher discount rate due to rising interest rates, which we expect will more than offset the deterioration in asset value. However, as you probably know with, regarding U.S. cash contributions, a material deterioration in the value of our U.S. qualified defined benefit pension plan assets as well as any changes in pension legislation, discount rates or economic or demographic trends could require us to make cash contributions to these plans in the future. On our Q4 call early next year, once our valuation analysis is complete, we will update our expectations. But based on deterioration in both the equities and the fixed income markets this year, we may be required to make additional cash contributions to our U.S. qualified -- benefit pension plans in the future.

I want to dig into the causes of the signings delays. And I guess I wonder, is it possible that some of the signings delays are due to Unisys working carefully on contractual terms and pricing and to what extent our macro changes contributing to the signings delays. Some more color on that would be really helpful?

It's actually pretty hard to dissect inside specific contract negotiations because they're all relatively unique. We do a fair amount of our revenue is what we consider long-term. So 82% of our revenue are long-term contracts, only about 18% are project works. So on the macroeconomic side, when you have people who are not sure, are we in a recession, we're not in a recession, outside the U.S. still represents about 55% of our revenue. And particularly in Europe, there are more questions there. So I would say that some of the delays, as I'm going through in my head, the contracts that have been delayed. So I think certainly, macroeconomics plays a pretty big role there. I think that in terms of the pricing for those contracts, I'd actually turn it over to Mike, who has been more involved in exactly how we're pricing is.

I would really echo the comment that it's probably a lot more to do with the macroeconomic environment. We've done quite a bit of work in the analysis of our contract signings. As you know, we really spent a lot of time ensuring that we've got the right call, opposes and those types of things in our contracts. But I wouldn't -- our contracting process is not really elongating or delaying those signs. In fact we're trying to expedite those contracts signed by really breaking those contracts into various buckets, right? So you've got these large extended contracts, which clearly take a lot more time and effort to get through. But we also have plenty of these fast-track contracts that might be things like professional services, augmentation and things like that. So I would definitely concur with Peter in that it's a lot more to do with the uncertainty in the environment and probably thoughts around duration of contract than it is our processes.

The one item I would add to that, Rod, which isn't necessarily on your list. But as we think about those deals that we have, when we think -- when we go back to that sort of pipeline, our pipeline has grown significantly in both DWS and in CA&I, but most significantly in the focus areas right? So the pipeline has doubled in the focus areas of modern workplace and digital platforms and software. And so not to say that that's new, but as Deb talked about, that's a fast -- those are fast-growing focus areas for us. And so we're quickly making a name for ourselves in those areas. But I think it does take a little bit, especially when you're really moving into those higher growth areas to get all of that traction in a timely man. So I would say we're really happy with the ACV growth in those areas. We're very happy with the pipeline growth. I think some of that is going to go a little more slowly than some of the traditional solutions.

Our next question comes from Jon Tanwanteng with CJS Securities.

It's actually Lee Jagoda for Jon. So just starting -- appreciating that a lot of the contract signings delays are related to the macro. As you transition to higher growth, higher-margin type work, are you able to kind of give us some representative examples of some of the new stuff that you're signing, the target margins on that stuff versus the target margins you may have had one, two or three years ago? And then whether the current labor situation and inflation situation is able to be built into those new contracts to get you to those target margins? And then the last piece of my 19 part question here is, are you gaining, losing or maintaining share as a result of the new way that you're going after work?

Well, so I'll start, and then I'll hand it over to Mike for a little more detail on some of the sub questions. With respect to target margins, as I mentioned in my remarks, the target margins for the deals we're signing in the first quarter and in the second quarter are higher than the target margins of the period before. And part of the reason they're higher is because we are selling a higher mix of higher margin work and both in DWS, modern workplace and in cloud applications and infrastructure that digital platforms and software group are both higher margin. So as we sell more of those focused area items, we are going to get higher margins, and we expect to get those higher margins going forward. And I'll let Mike talk specifically about the pricing because we are dealing with inflation in several different ways, and it largely depends on what our client preferences are, but we are covering ourselves from inflationary pressure. Some of those are through call, opposes, and some of those are through expected adjustments in pricing over time. But I'll let Mike to deal with that.

Yes, look, I think Peter gave you the good highlights here. And one of the things I would note is when you look at our weighted average expected gross margin associated with contracts we signed in the quarter they're higher than the prior year period, right? So that tells us that we are getting the proper margin profile on a higher labor cost base, meaning clients are obviously paying the higher pricing that we're passing through in regards to the labor cost. Now we do have an increased labor cost year-over-year. We're looking at it being approximately $20 million of increased labor costs to support those, new contract work. But I think the important factor here, and we noted it a couple of times, is when you look at the pipeline growth and the ACV growth, -- it's more than doubled in both of our target focused areas. And so, I don't think you've seen actually the mix shift yet for those new signings at the higher margin because some of it is still in the pipeline. And some of it is new ACV and the labor costs have already hit us. So there is a bit of a timing mix between when the labor cost hits to when we see that pricing come through, and that's a little bit of the pressure that you're seeing now. The other thing I'd mention around pricing is we do a lot of public sector work, roughly 34% of the work that we do is in public sector. That is a little bit insulated from some of the macro-economic conditions because it's driven a little bit more by the budgets and they don't necessarily change in the short-term. So we have a little bit of prevention there. Peter mentioned that roughly 80% or more are of our revenue is returning and a lot is in backlog, I think that [Audio Gap] 75% in the next quarter, revenues already in backlog. So we would expect over time to see that margin profile continue to improve based on the multiples that we're seeing in the new business improvement.

Yes, so Lee, let me just tie though your question and Rod's question together and then make sure that Mike and I are being clear because I think I want to be clear because otherwise, we can lose some stuff in the scenes of all the answers. So when I go back to the first quarter and when Mike and I were having the discussion on the first quarter, I think everybody was expecting and seeing early indications of inflationary environment. Everybody was seeing indications of labor shortage, particularly in the IT field, right? So I think our clients were also seeing that, and our clients were, I would say, relatively receptive to the idea that we were putting in call, opposes, we were increasing prices because of inflation, et cetera. What's happened since, and this may be where you and Rod are coming from, so I want to recognize it because it is happening. What's happening since is two things. First, I think we all believe that, that labor market is loosened. So it's still inflationary pressure, not as much as it was back in April, right? A lot is happened between April and August. So the inflationary pressure has decreased a bit as people are going back into workforce [Audio Gap] I think people are a little more willing to work [Audio Gap] in addition, we have a potentially recessionary environment, which clients are a little less eager to help out their providers because they worry for themselves. So to answer your question and Rod's question and sure that [Audio Gap] covered part of the answer. Do we think that all of that mix of inflation changes, labor changes, recession changes, currency changes, we think that is affecting the timing of contracts, yes. That's what we said. It's part of that because there's a bit of a delay in getting clients to agree to the pricing. I think the answer to that is yes. But again, it's very hard to attribute motives to a client on a specific deal or any deal. But when you think about all of those things at once, it is actually quite likely that our efforts to maintain, pricing is causing some of the delay. We do not believe that, that's making us not competitive. So we're not seeing that in a decrease of win rates, but we are seeing that in a longer period of contract site Lee, I don't know if that helps. And Rod, I may have misunderstood your question, so I don't know if that helps you as well.

The next question comes from Joseph Vafi with Canaccord.

Congrats on the new role, Deb and Mike, maybe we'll just start first. I know you added the A to CA&I. Could you just kind of go into a little more detail on kind of how big applications is now kind of some of the -- I mean, perhaps the growth rates there. I know your cloud business is one of your faster-growing pieces overall and how it may stack up there? And then I have a quick follow-up?

I want to start with saying that you're exactly right. It is a name change only. So the segment that was formally cloud and infrastructure is now hold cloud applications and infrastructure. It's exactly the same stuff. We added the word applications because although we have always had applications revenue in there with the acquisition of CompuGain in December and with the changes in the marketplace. Frankly, we think that long-term, for IT solutions providers like ourselves, the infrastructure piece of the cloud will be large and will grow, but the applications side of the cloud will be larger and growing faster. So we really worked last year to make sure that we felt we had the right or enough scale on the application side, and that led with the acquisition of CompuGain. So what we have done is to say, okay, so within the larger segment of what we're now calling cloud applications and infrastructure -- what is the focus area there. And what we're doing there is we're not actually signaling out just applications, right? We've now created a focus area of called digital platforms and applications. So digital platforms and applications is broader than just applications because it is what we really consider kind of the pure cloud infrastructure piece of that as well as well as -- and I went through the definition of my remarks, some very, very higher growth elements of that of the overall space. So if we look -- so the answer to the question is we're not breaking out applications alone, but we are breaking out the revenue for you of DPA as a focus area of CA&I and going forward, I mean, we gave you some information on these focus areas. But as I said in my remarks, we're going to give more and more specifics because we really want all of you on the call to understand, we intend to beat market growth rates, but the market growth rates between modern workplace and traditional workplace are very different. In the modern -- and the growth rates in the market between DP&A and classic infrastructure are very different. So one of the insights that Deb brought to the Company was we really have to break this out for you guys. So because if you just aggregate all of DWS and all of CA&I, we're kind of missing the story, which is to show that we believe we're going to grow faster on both elements within those segments, but those elements are very different. So Deb, if we look at just DPA as a portion of CA&I and how that has grown, I think you gave a percent of what it is this quarter compared to a year ago, right?

Right, yes, that's true. This year, right now, it's about, for this quarter 29%. The revenue of the CA&I business and this time last year, it was 20%. So it's definitely growing, and we'll continue, as Peter mentioned in his script, as time goes on, we'll give even more metrics on that.

Right and the market growth of that area versus traditional infrastructure is so different. We just need to break it out for you.

Sure, sure that's great. And then just CapEx for the year I know you're continuing to work to bring some of the capital intensity down just kind of just wanted to get some further thoughts on that topic?

Right so yes, as I had mentioned CapEx, we plan on being about $90 million to $115 million for the year, which does put us more in that 5% of revenue area, which I think is more typical for our industry related to our peers. So I think in the past, it was higher, closer to 7% to 8%. So I think we're moving more in the range of where we should be and will most likely be going forward.

Our next question comes from Matthew Galinko with Maxim Group.

The new deals that you are getting through, is there anything distinguishing about the customers, the customer need or the mix of services that are getting them through versus the stuff in the pipeline that's being delayed? It sounds like by -- from your view, macro issues?

Matt, it's Mike. I'll take that one good to hear from you. I wouldn't say that there is a distinction in the demographic data of the customers, right? I guess the first thing I would say is that for the deals that are getting through and being signed, they are elongated and the ones that we've signed actually started a little earlier in the process. But the interesting thing, specifically when we talk about the elements in DWS or modern workplace, and I think Peter alluded to this in his prepared remarks, they're for the full stack, right? We've signed several deals where they've taken both sides of the coin, right? So you've got the traditional workplace as well as the modern workplace. And I think the demographic of the deals where we've had success, we're the ones where we can continue to illustrate the experience aspect of it, and they've actually been much richer and deeper contracts and more inclusive of everything that we have to offer. And I would say the ones that have been signed also across our segments, right? So we have a CA&I component and a DWS component. So I think strategically, that's what we wanted. And when we look at deals like that, we seem to have a quicker turnaround or more success rate on those particular deals. And our real focus is getting invited to more right? It's not a matter of whether we can facilitate it. It's how many more we can get invited to because our win rate has been pretty consistent in those areas, and we feel really good about the solutions, the offerings and the quantity and quality of what's being asked for and what we're providing. So I think it's a little bit more, Matt, tied into that full deal versus these one-off components that are driving the success rate in the modern workplace.

Yes, that was a great answer and hit on everything. So I appreciate that. I guess my follow-up is on the ECS pulling renewals a little earlier. Is that more from the second half of the year or is that pulling forward from beyond 2022?

Yes, Matt, so let's just get into the details on that. The answer is a little both. We don't control this. And depending on the needs of the clients, it's pretty obvious we can be fooled. And in this particular quarter, we had some renewals and extensions that we were anticipating signing this year. We even had some that we were not anticipating signing this year at all and signing in the future that we're -- that the client wanted to sign. So we are -- we hope we're very client responsive in all of our business. When it comes to ECS, given the size of those contracts and the importance we're especially client responsive. And that's what happened this quarter. Deb?

Yes, no I think that's right, Peter. Not too much more to add, but just as I mentioned in my remarks, just to reiterate, our expectation is for the full year that, that ECS will be down low single-digits year-over-year in constant currencies is our expectation. Now I think before we gave you a bigger decline, but because of the factors Peter mentioned, that's where we stand right now.

The other thing I would point out is, again as we are, I think, becoming a bit more sophisticated in the way we're looking at each of these segments. As I mentioned in ECS, it's not just about renewals of ClearPath Forward anymore. We've identified three future, if you will, revenue streams tied to specific offerings. We've talked in the past on these calls about what we call ECS services -- and those are the services that are associated with whether it's ClearPath Forward or other ECS proprietary applications, there's a big market for that. And we expect to take advantage of that and to serve customers in a more powerful way on the services side. Think of the applications that our clients have that sit on top of ClearPath Forward as an example. We're only doing a fraction of the modernization and maintenance of those applications. We think we can do more for our clients. And then we've talked in today about two more offerings and revenue streams. One is what we call those industry-specific applications. Now we've had those for a while, things like cargo, things like air traffic, things like financial services applications. And we're really looking at invigorating some of those and the revenue and market share that is attached to those. And then the third element of that is really around next-generation compute. There are a few organizations that are as capable as or well positioned as ours to really help our clients on the journey to quantum, both offensive and defensive to serverless technologies, et cetera. And so again, as we get further down the road here and start kind of isolating these growth areas as Deb is kind of restructuring this for us. You'll hear us talk about ECS in a lot broader way than just talking about Debra for renewals, and that's going to be an important part of our future.

Our next question comes from Anja Soderstrom with Sidoti.

Most of them have been addressed already. But I'm just curious you mentioned the talent availability has improved. Where do you see that coming from?

Well, so I would say it's really coming from almost all geographies. Some of it is, I think, macroeconomics and some of it is because of stuff we're doing. So on the macroeconomic stuff, I do think there's a realization in the marketplace that there are not -- the gap between the number of tech jobs that are available and the number of people who are qualified is actually shrinking. And that's because, as we all see in the paper, there are some organizations that are decreasing the hiring of people. So that's a macroeconomic event that is making life a little easier on us. It's not easy, but it's easier. As we think about our own attrition, our attrition continued to tick up this quarter on a sequential basis, but it picked up only a little bit, 60 basis points, and that is the smallest pickup we have had on a sequential basis since the first quarter of 2021. So we really are seeing kind of a leveling off of that. And then the flip side of that, it's not all about macroeconomics. Some of it is what we're doing. So we issued a press release earlier in the quarter about a program that we've had for 14 years called the Unisys innovation program in India that used to be called Unisys 2020. It's a remarkable program where we go out to students throughout India and get them involved in innovative processes and projects and then we have winners, and we give job offers. But it's not really so much about the job offers as it is about -- it's a very prestigious competition. Well this year, we had an almost 13% increase in the number of people submitting entries into that program. And so that's something we've had for a while, but I would say we're kind of putting that on steroids. And similarly, when we talk about our campus programs and our other outreach programs, I just think we're doing more internally as an organization to really be up our game in terms of recruiting as well as retention. 33% of our job openings were filled by internal candidates this quarter. That's the highest number I can remember. And it goes to the efforts I mentioned that we're really working hard at retraining people and positioning them for next-generation jobs as we get more clients doing that kind of work, we much rather retrain our people than hire from the outside. So it's a combination of macroeconomics, and I think what we're doing internally. I hope that helps. Mike, any other thoughts on that?

The only other element I would add is just the branding and the clear focus on attraction of talent and how we're positioning ourselves in the marketplace. But I think you covered every other element of it.

And on the branding piece, a good of that is to come. We talked about that as really kind of all the work is done, frankly. We know exactly what the branding campaign is going to look like. We held the statements we know whatever thing is going to visually be. We're now really setting up the, if you will, the Domino's to start that in the fourth quarter. But I would, following on what Mike said, just refer back to my remarks. As much as I talked in my remarks about how we believe that campaign will really kind of show our clients and particularly our prospective clients. What we do, we will also show prospective employees what we do. We don't see that branding campaign and only at prospective plans. It's kind of equally weighted to perspective. We call our employees associates, but that's a very important part of what we're doing, as Mike pointed out.

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

Thank you so much, operator. I really appreciate all the questions today. I want to thank Deb for joining us as Chief Financial Officer. I also want to thank Mike for using that opportunity to really excel as Chief Operating Officer. We have a pretty awesome leadership team. We will be available to our investors and shareholders on an ongoing basis as we always are. And I would like you to think a little bit more about those focus areas, what it means for us, how we're trying to show you the power of those focus areas. And as Deb and I both mentioned, we're going to give you more and more information about those in the future. With that, I want to thank everyone again for joining our call.

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