Unisys Corporation (UIS) Q3 2022 Earnings Report, Transcript and Summary

Welcome to Unisys Corporation Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode today. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded today. I would now like to turn the conference over to Ed [indiscernible], Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. Thank you for joining us. Yesterday afternoon Unisys released its third 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 our COO, who will participate in the Q&A session. 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 presentation slides that we will be using this morning to guide our discussion as well as other information relating to our third quarter performance on our Investor Relations 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 have 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, Ed. Good morning, everyone, and thank you for joining us to discuss our third quarter results. We continue to make progress in shifting our business to higher value solutions in the high demand focused areas of modern workplace and digital platforms and applications. Clients are seeing the value of our solutions in these focused areas as evidenced by revenue growth, of approximately at or above in both of them. Our focus area solutions are also higher margin an indicator of increased profitability over time. As we discussed last quarter, we are providing more visibility into our enterprise computing solutions segment, ECS, by differentiating our specialized services and next generation compute solutions for our licenses and support, which will allow us to highlight each of their unique strengths. Our transformation is beginning to take hold. It will soon be fortified by a new brand identity and marketing campaign, designed to increase awareness for our company and our key solutions. We believe this platform will influence consideration in the market and be a catalyst for growth. Deb will provide detail on our financial results at the total company and segment levels, but first, I'll give some insight into our transformation. Let's start with Digital Workplace Solutions or DWS. Our primary focus in DWS is on higher growth, higher margin solutions that help clients streamline, excuse me, and optimize collaboration to maximize employee productivity and engagement, and we refer to this as Modern Workplace. We believe the modern workplace market is an approximately $40 billion market growing at a three-year compound annual growth rate CAGR of approximately 12%. We said last quarter that we plan to grow faster than the market, and we did just that in the third quarter, driving revenue growth in excess of 50% year-over-year. We also accelerated our modern workplace momentum in the quarter by securing a year-over-year increase in total contract value or TCV of signings of more than 50% and a year-over-year increase in annual contract value, excuse me again, or ACV of signings of more than 50%. An example of success in Modern Workplace is the expansion of our work in the third quarter of a large financial institution that provides -- to provide digital workplace solutions. This contract will help improve communication and collaboration between teams regardless of location. We also signed more than 20 new logos in Modern Workplace for specific scope solutions, which in time can lead to full service relationships. Wins like these are helping shift our business mix toward Modern Workplace, which we expect to represent approximately 15% of DWS revenue in 2022 versus 7% for last year. We expect approximately half of our DWS revenues to be in Modern Workplace in 2025. As we look to the future, our pipeline for Modern Workplace is more than $400 million as of the end of the third quarter, more than doubling year-over-year. We expect the margin in Modern Workplace to be in the mid 20% range by 2025. The more we move our DWS portfolio to Modern Workplace, the more profitable we expect to become. We earned significant recognition in Modern Workplace from a leading industry analyst in the third quarter. ISG recognized Unisys as a global leader for Every Services Quadrant in its 2022 Future Of Work Provider Lens. 1E: Turning to Cloud Applications and Infrastructure Solutions or CA&I, we continue to shift the mix of our CA&I business towards solutions in hybrid and multi-cloud management, cybersecurity, application modernization, cloud native application development and data analytics and insights. We refer to this focus area as Digital Platforms and Applications or DP&A. This is a higher growth, higher value piece of our CA&I business. We believe the DP&A market is approximately $230 billion, growing at a three-year CAGR of approximately 19%. In general, we expect to grow this business as fast as the market over the next three years. From a revenue perspective in the third quarter, we saw year-over-year revenue growth for DP&A of 18%. We expect DP&A to represent approximately 30% of CA&I revenue in 2022 versus 20% for 2021. We expect approximately 40% of our CA&I revenue to be in DP&A in 2025. Clients are seeing the value of our DP&A solutions was also evidenced by more than 100% year-over-year growth in signings for ACV and more than 50% year-over-year growth in TCV signings for this focus area in the third quarter. Our DP&A pipeline is also growing. It was more than $800 million in the third quarter, a year-over-year increase of more than 50%. As a third quarter example of success in this area, we signed a DP&A contract with a current DWS client that engineers consumer product goods. This contract enables Unisys to deliver and support secure access through Microsoft Azure to the client's domain, including enterprise applications. An excellent example of what we call cross-selling. Regarding profitability, we anticipate our DP&A margin to be in the mid 20% range in 2025. Again, as with Modern Workplace, the more we move our CA&I portfolio to DP&A, the more profitable we expect to become. The up the market continues to recognize our leadership and momentum in this area as well. For example, during the quarter industry analyst firm, NelsonHall recognized us as a leader in its end-to-end Cloud Infrastructure Management Services 2022 Report. Unisys was named as a leader in each of the reports five focus areas; Microsoft Azure capabilities, cloud orchestration services, cloud management services, AWS capabilities, and overall capabilities. In addition, our CA&I team has just achieved the AWS migration competency designation. To earn this designation, one must demonstrate deep AWS technical experience and proven client success in specialized areas across industries, use cases, and workloads. AWS validates candidates against a high bar to achieve this designation, and we expect it will accelerate our momentum in DP&A. As we did with DWS and CA&I last quarter, we are introducing a new focus area for ECS this quarter in order to provide additional insight into our business. We call it Specialized Services and Next Generation Compute or SS&C. This focus area covers managed application services, managed services, industry solutions, and overall compute capabilities in each instance where we have significant intellectual property. One area we are excited about within SS&C is our air cargo industry solution. We continue to provide comprehensive and robust air cargo management to our clients as we have for many years. We expect to enhance value for existing clients and attract new clients through the deployment of richer data analytics capabilities to further improve efficiency in cargo operations. SS&C is already a $200 million annual revenue business. This represents approximately 30% of ECS revenue, but this percentage is more likely to fluctuate based on the size of the license and support business in any given quarter. We expect to grow the SS&C business between mid-and-high single digits annually through 2025. Our margin in SS&C can also fluctuate depending on the mix of what we sell, but we expect it to be typically in the low-to-mid 30% range. The remaining portion of ECS is licenses and support or L&S, which is the part of our business that consists of ClearPath Forward and some other IP related licenses and support. This is the portion of this segment that typically gets more attention in conversations with you because it's larger, but given its dependence on the timing of renewal schedules, it is more variable quarter-to-quarter and even year-to-year. The market for our L&S business is unchanged and we do not expect significant growth. While it is possible that new capabilities and solutions could be classified and commercialized in a more traditional licensing model, we believe it is much more likely that we will drive growth in a services or as a service model as part of SS&C. In the third quarter, L&S revenue was down 12.7% due to the timing of license renewals. Given the heavily weighted renewal schedule we saw in 2020 and in 2021, coupled with some client driven early renewals in 2022 that were scheduled for 2023, we expect 2023 revenue will be down approximately 25% year-over-year. Based on the current renewal schedule, we expect 2024 to grow in the low single digits, with 2025 to grow low double digits. With 2020 as its base, we expect a five-year CAGR of approximately negative 3.5%. On the profit side, the margin percentage for L&S will fluctuate based on the volume, because of a relatively fixed cost base. We expect margin in the mid 70% this year, approximately in the mid 60% in the next two years, and then returning to the low 70% by 2025. It is clear that SS&C and L&S have unique strengths and we're pleased to be able to highlight them for you going forward. Both are important for our business. Moving to our brand identity, we expect the launch will occur in the fourth quarter of this year. Brand is the last mile of our transformation and the new brand will bring our solutions to life in a meaningful, compelling way. We believe our new marketing campaign will increase market awareness, which in turn will help drive key sales metrics such as leads, pipeline, wins, and ultimately revenue and margin. The new identity addresses how we help clients meet the changing needs of the market, while also serving as a key influential factor in our ability to retain, attract, and inspire talent. This is the most significant brand transformation for the company since 1986. We are very excited about it and we believe the market will be too. The Unisys transformation is taking hold. At the same time, we experienced some unexpected challenges since the last earnings call that have led us to lower our revenue and profitability guidance for the year, which Deb will provide color on in her remarks. With that, I'll turn the call over to Deb to discuss our financial results.

Thank you Peter, and good morning everyone. 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 total company revenue on an as reported basis, as well as in constant currency. I will provide segment level revenue on a constant currency basis. I will now provide insight into our third quarter results. I will also highlight the changes in our guidance and providing update on our defined benefit pension plans. As we look across the company, the transformation of our solution portfolio and go-to-market approach drove improvement in leading revenue indicators in the third quarter. Qualified pipeline is approximately $6 billion, representing growth of 25% year-over-year. Annual contract value or ACV in the quarter was up 20% year-over-year, primarily driven by new business ACV growth of 41%. As we mentioned before, we believe ACV remains a more informative metric than TCV for our business, given the reduction in average length of contracts and client's preferences to move to SaaS based offerings that we have seen in our industry. Total contract value in the quarter was up 31% year-over-year. Backlog was down 1.9% sequentially, but up 2% excluding foreign exchange. Total company revenue was $461 million in the quarter. This is down 5.5% year-over-year and up 0.3% in constant currency. Foreign exchange had a 5.8% negative impact on our revenue this quarter. The constant currency growth was primarily driven by revenue in our focus areas of Modern Workplace and Digital Platforms and Applications and partially offset by the impact of non-strategic traditional workplace contracts exited in 2021 as part of the transformation that Peter described. Excluding the impact of these non-strategic contracts, total company revenue grew 4.7% in constant currency. Now I will move to our segments starting with Digital Workplace Solutions. DWS revenue declined 4% primarily due to an approximately $20 million impact from non-strategic contracts exited in 2021. Excluding these, DWS grew 12.2%. The exited contracts will impact the fourth quarter by approximately $12 million. Revenue grew 5.4% sequentially, which demonstrated continued progress in the DWS business. We expect to see continued sequential growth in Q4. We are encouraged that we continue signing new logo contracts for our Modern Workplace Solutions, as it highlights our ability to shift to the higher growth, higher aspect of the industry. CA&I revenue in the third quarter grew 8.1% year-over-year driven by growth in DP&A. We expect to see constant currency growth both year-over-year and sequentially for the fourth quarter. For ECS the third quarter was a light ClearPath Forward license renewal quarter, which drove a 3% year-over-year decline. As a reminder, the majority of ECS revenue timing depends on the number and size of contracts up for renewal each quarter as opposed to renewal rates themselves, which remain over 95%. Q4 will realize more license renewals resulting in positive year-over-year growth in that quarter. We still anticipate full year 2020 revenue to be down low single digits year-over-year for total ECS. I will now discuss the changes in our revenue guidance. Despite seeing positive momentum and encouraging leading indicators in our key focus areas this quarter, we also experienced some unexpected challenges since the last earnings call. A majority of these challenges were macroeconomic in nature, including foreign exchange and existing client budget constraints and economic impacts that caused some renewal delays or in some cases reduction in scope. Two of these challenges were client specific, one for the modification of scope for a client project and another for an existing client that shifted its new scope expansion to a SaaS contract, which provides a more steady stream of revenue over time, but less upfront revenue in 2022 than we had anticipated. Similar to the challenges in our existing client base, we are experiencing an impact in our revenue estimations related to new logo signing delays. These have led us to lower our revenue growth guidance for the year to negative 1% to positive 1% growth on a constant currency basis, or from negative 5.5% to negative 3.5% as reported. Moving to profitability, total company gross profit margin was down 340 basis points year-over-year to 22.6% versus 26% in the prior year period, primarily because we had more ClearPath Forward license renewals in the third quarter of last year versus this year. Now moving to the segment level, again starting with DWS, our efforts to drive productivity expanded DWS margin by 270 basis points year-over-year from 12.4% to 15.1%. This was an improvement of 210 basis points sequentially. We expect productivity improvements to continue and more efficient staffing models, stabilizing cost of labor and our ongoing mix shift to drive improvement in DWS margin both year-over-year and sequentially in the fourth quarter. Moving to CA&I margin was 5.6% versus 5.9% in the prior year period. As we increase awareness of our capabilities in CA&I we expect profitability upside both year-over-year and sequentially for the fourth quarter as we continue to execute labor and asset productivity improvements. ECS margin was down 650 basis points year-over-year primarily because we had more ClearPath renewals in Q3 last year versus this year. As a reminder, ECS costs are relatively fixed both year-to-year and throughout the year, given that the key components of costs are labor to support the platform and the amortization of software development costs, so the timing of license renewals has an impact on profitability. Total company non-GAAP operating profit margin was 3.1%, down 260 basis points year-over-year, primarily because we had more ClearPath Forward renewals than Q3 last year versus this year. Adjusted EBITDA margin was 11.4%, down 390 basis points year-over-year. We expect non-GAAP operating profit and adjusted EBITDA margin to be up year-over-year in the fourth quarter driven by automation and labor productivity improvements and higher ECS license revenue. Based on the revised guidance and ongoing economic pressures, the revised revenue guidance, I'm sorry, and ongoing economic pressures, we are revising our full year non-GAAP operating profit margin guidance to 6% to 8% and adjusted EBITDA margin guidance to 14.5% to 16.5%. We reported a net loss of $40.1 million or $0.59 per diluted share versus a net loss of $18.7 million or $0.28 per diluted share in the prior year period, primarily driven by timing of ClearPath Forward renewals. One-time charges related to cost reduction activities and other nonrecurring expenses in part offset by a tax benefit due to the partial reversal of valuation allowances. Non-GAAP net income of $3.1 million or $0.05 per diluted share versus $6.9 million or $0.10 per diluted share in the prior year period. With regards to fourth quarter expectations, we plan to implement a cost reduction program to further improve our cost structure, continue to right size our real estate footprint to accommodate our hybrid working environment, and write off certain assets, for which we expect to take a pre-tax charge between $50 million and $60 million in the fourth quarter. Turning to cash flow, third quarter free cash flow was $23.8 million, down $15.6 million year-over-year impacted by lower adjusted EBITDA and changes in working capital. We continue to expect to be free cash flow positive this year. We now anticipate a range of $5 million to $25 million for the full year. Also, we expect capital expenditures to be between $85 million and $95 million. For the fourth quarter free cash flow is highly dependent on the timing of ECS license renewals, which earn revenue and typically collect cash in the same quarter. We had a cash balance of $351 million as of the end of the third quarter, which is above our working capital needs. And we'll now turn to our defined benefit pension plan. During each year end Unisys reports its estimated U.S. qualified defined benefit pension plan cash contributions based on expected asset returns and funding discount rates as of that year end, while noting that the future funding requirements are likely to change based on among other items market conditions and changes in discount rates. We reported during our full year 2021 earnings call that we did not anticipate required contributions to our qualified U.S. defined benefit pension plans for at least the next 10 years. However, given the material deterioration in the capital market since December 31, 2021, we are providing you with an interim estimate based on the September 30, 2022 market conditions as it has become increasingly likely that contributions to the U.S. qualified defined benefit pension plans will be required during this tenure period. Our current estimates are based upon updated plan assets and estimated discount rates as of September 30, 2022, but do not incorporate updates to any of the actuarial assumptions such as expected return on assets, projected future interest rates or mortality, along with several other actuarial assumptions which are updated only at year end. While no contributions are expected in 2023 or 2024 to the U.S. qualified benefit pension plans, we currently estimate cash contributions to these plans will be required beginning in 2025. The markets can significantly change between now and 2025 when payments are expected to begin and continue through 2032 the end of our estimate period. However, for the U.S. qualified defined benefit plans, we estimate that starting in 2025 annual contributions for each of the subsequent eight years will average approximately $100 million for these plans. Please note that these contributions are in addition to the other defined benefit plan funding requirements which are still estimated to average approximately $30 million per year for each of the next 10 years. As we always do, we continue to work closely with our actuaries to assess pension liability reduction transaction opportunities. Now let's turn to GAAP defined benefit pension plan liabilities. Rising interest rates result in lower GAAP defined benefit pension plan liabilities. Accordingly, the U.S. GAAP estimated defined benefit pension deficit this year-to-date has narrowed as the increase in interest rates reduced our estimate of the defined benefit pension liability to a greater degree than the decline in assets. We estimate a total GAAP deficit liability reduction of almost $100 million from the $750 million deficit reported at the end of 2021. At the year end, we'll provide an update to all these estimates based on final asset values and actuarial estimates at that time, and we plan to return to our annual update cadence thereafter. 12b: Importantly, we do not expect the investigation to result in any changes to the results in the financial statements we released yesterday or any previous financial statements. We are working to complete these processes as soon as possible, but do not expect to be in a position to file the Form 10-Q within five calendar days of the prescribed due date. As Peter noted up front, despite setbacks primarily driven by macroeconomic conditions, we continue to make progress in shifting revenue through our higher value solutions in the high demand focus areas of Modern Workplace and Digital Platforms and Applications that we introduced last quarter. Clients are seeing the value of our solutions in these focus areas as evidenced by revenue growth approximately at or above market in each of them. Our focus area solutions are higher margin and indicator of increased profitability over time. With that, I'll turn the call back over to Peter. Peter? 25: Importantly, we do not expect the investigation to result in any changes to the results in the financial statements we released yesterday or any previous financial statements. We are working to complete these processes as soon as possible, but do not expect to be in a position to file the Form 10-Q within five calendar days of the prescribed due date. As Peter noted up front, despite setbacks primarily driven by macroeconomic conditions, we continue to make progress in shifting revenue through our higher value solutions in the high demand focus areas of Modern Workplace and Digital Platforms and Applications that we introduced last quarter. Clients are seeing the value of our solutions in these focus areas as evidenced by revenue growth approximately at or above market in each of them. Our focus area solutions are higher margin and indicator of increased profitability over time. With that, I'll turn the call back over to Peter. Peter?

Importantly, we do not expect the investigation to result in any changes to the results in the financial statements we released yesterday or any previous financial statements. We are working to complete these processes as soon as possible, but do not expect to be in a position to file the Form 10-Q within five calendar days of the prescribed due date. As Peter noted up front, despite setbacks primarily driven by macroeconomic conditions, we continue to make progress in shifting revenue through our higher value solutions in the high demand focus areas of Modern Workplace and Digital Platforms and Applications that we introduced last quarter. Clients are seeing the value of our solutions in these focus areas as evidenced by revenue growth approximately at or above market in each of them. Our focus area solutions are higher margin and indicator of increased profitability over time. With that, I'll turn the call back over to Peter. Peter?

Importantly, we do not expect the investigation to result in any changes to the results in the financial statements we released yesterday or any previous financial statements. We are working to complete these processes as soon as possible, but do not expect to be in a position to file the Form 10-Q within five calendar days of the prescribed due date. As Peter noted up front, despite setbacks primarily driven by macroeconomic conditions, we continue to make progress in shifting revenue through our higher value solutions in the high demand focus areas of Modern Workplace and Digital Platforms and Applications that we introduced last quarter. Clients are seeing the value of our solutions in these focus areas as evidenced by revenue growth approximately at or above market in each of them. Our focus area solutions are higher margin and indicator of increased profitability over time. With that, I'll turn the call back over to Peter. Peter?

Importantly, we do not expect the investigation to result in any changes to the results in the financial statements we released yesterday or any previous financial statements. We are working to complete these processes as soon as possible, but do not expect to be in a position to file the Form 10-Q within five calendar days of the prescribed due date. As Peter noted up front, despite setbacks primarily driven by macroeconomic conditions, we continue to make progress in shifting revenue through our higher value solutions in the high demand focus areas of Modern Workplace and Digital Platforms and Applications that we introduced last quarter. Clients are seeing the value of our solutions in these focus areas as evidenced by revenue growth approximately at or above market in each of them. Our focus area solutions are higher margin and indicator of increased profitability over time. With that, I'll turn the call back over to Peter. Peter? 12b: Importantly, we do not expect the investigation to result in any changes to the results in the financial statements we released yesterday or any previous financial statements. We are working to complete these processes as soon as possible, but do not expect to be in a position to file the Form 10-Q within five calendar days of the prescribed due date. As Peter noted up front, despite setbacks primarily driven by macroeconomic conditions, we continue to make progress in shifting revenue through our higher value solutions in the high demand focus areas of Modern Workplace and Digital Platforms and Applications that we introduced last quarter. Clients are seeing the value of our solutions in these focus areas as evidenced by revenue growth approximately at or above market in each of them. Our focus area solutions are higher margin and indicator of increased profitability over time. With that, I'll turn the call back over to Peter. Peter? 25: Importantly, we do not expect the investigation to result in any changes to the results in the financial statements we released yesterday or any previous financial statements. We are working to complete these processes as soon as possible, but do not expect to be in a position to file the Form 10-Q within five calendar days of the prescribed due date. As Peter noted up front, despite setbacks primarily driven by macroeconomic conditions, we continue to make progress in shifting revenue through our higher value solutions in the high demand focus areas of Modern Workplace and Digital Platforms and Applications that we introduced last quarter. Clients are seeing the value of our solutions in these focus areas as evidenced by revenue growth approximately at or above market in each of them. Our focus area solutions are higher margin and indicator of increased profitability over time. With that, I'll turn the call back over to Peter. Peter?

Thank you, Deb. I would note that for the Q&A session, in addition to Deb and myself, we are joined today by Chief Operating Officer Mike Thomson. The three of us will be pleased to respond to any questions you may have. Joe, would you please open the call for questions?

[Operator Instructions] Our first question here will come from Anja Soderstrom with Sidoti. Please go ahead.

Hi, and thank you for taking my questions. So first I'm just curious about the slowdown in the revenue guidance. Are you seeing the customers delaying contracts or are they rather taking smaller contracts or what are you seeing there?

So, Anja, let me answer that and obviously Deb and Mike can join in. It's a little bit of both. We have seen some contracts. We saw one contract which we expected to sign in the third quarter, we now expect it to sign in the fourth quarter. So that's a slippage. We've seen some contracts that really, I think because of the economic uncertainty out there have come in a little smaller than we expected, and we've actually seen the makeup of some contracts change. So, for instance, Deb mentioned a contract, which actually we thought was going to be a licensed contract and instead working with the client and what the client really wanted to get out of that, it has become more of a SaaS contract. So that will be paid over time and will recognize the revenue over time instead of recognizing the revenue up front. So it's a little bit about all of that. I'll defer to Mike for a little more answer there.

Yes, no, Peter, I think you've hit all of the pertinent points there. I'd say Anja that from a market facing perspective, we've been very happy with the engagement of the client base. And in general, I think it's probably, I would characterize it as more of a deferral than anything else. The pipeline remains strong. The conversations continue. And as Peter mentioned, with the exception of a couple contracts where the scope was de-scoped slightly we've seen others that actually increased their scope, right? So I think there's a good mix out there and I really think it's a lot more macroeconomic concerns than it is anything to do with solutions.

Anja, thank you for the question.

Okay. And also just curious, how much of the guidance is due to currency versus you know this contract thing?

Yes. So thank you for the question. The foreign exchange had about a 100 basis point impact on the as reported revenue guidance.

Okay. Thank you. And can you also talk to the verticals? Where do you see most challenges or if any, are there any standout there or I mean, verticals that are holding up better than others?

I'm sorry, can you repeat the question? I couldn't hear what you were asking?

Is there anything based on the verticals, verticals that are holding up better than others?

Oh verticals are you saying? I'm sorry…

End market, yes.

Okay.

Yes. What I would say there is, you know, none come to mind as specifically either higher or lower than expectations. Mike, anything there?

Yes. No, look, I don't see any differentiation, frankly Anja in the verticals. I think the demand and the margin profile that we've been able to maintain actually and improve has been pretty consistent. So I wouldn't say any anyone stands out to be honest.

Okay. Thank you. That was all from me.

Thanks, Anja.

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

Hey guys. So it makes sense that macro is having impact on some of your deal activity and your pipeline commentary sounds good. You seem encouraged about what you're seeing in the pipe and also even in your recent signings. But I want to ask, in the pipeline, has the pipeline become more ripe in terms of the deals that are immediately in front of you in the upcoming months or is the pipe becoming more back loaded or any other noteworthy changes in the composition of the pipe as you're wrestling with some of these macro things?

Hey, Rod, it's Mike. I'll take that one. Thanks for the question. No, I would say, Rod, the pipeline is actually more ripe. We're really encouraged, as you mentioned about the increase in TCV and in backlog and in pipeline in general. And again, I think in actually both of our focus areas, we had significant growth. And so not only is it ripe in the sense of volume, I think it's ripe in the sense of the types of deals that we want to pursue. And I think the client expectations of us, which is great, we're having the dialogues we want to have, which is about Modern Workplace and about DP&A. So, not only ripe in volume, but I think rich in the quality of what's in there.

Okay. And then you mentioned cost reduction plan for the fourth quarter. And I guess I'm wondering is, can you talk a little more about the latest cost reduction plan? Is that plan overall more aggressive today than it would have been three months ago due to the macro challenges that you're seeing or are there other factors that are causing you to sort of update your cost reduction plan?

Yep. Now thanks for the question. I mean, as you know, we're always evaluating opportunities to further reduce our cost structure. But you're right in that, there is some impact from the macro as well, but we are always looking at that. As far as the impact, about 35%, about a third is related to real estate right sizing, about 40% asset retirement, and then the balance to workforce actions.

Okay, got it. And just a final one on the clarification side, it was helpful that you provided some outlooks, even in terms of some of the growth opportunities and the mix changes through 2025. In your ECS business, I think you mentioned your ClearPath Forward licensing model, and I just want to ask, are there, about any changes that you've considered to your licensing model and any color on that would be very helpful?

Yes. So Rod, this is Peter. Again, thanks for all of the questions. You know, so as we have segmented those two areas between SS&C and L&S, L&S is licensing and support. So that licensing model is in the L&S piece of that segment. Historically much of the ClearPath Forward revenue has come from licenses and support. It's always possible and we're always open to clients moving to a more as a service model. As they move to a more, as a service model, you could see revenue moving out of L&S, which is a type of contract to SS&C, which is where we have the as a service. I don't think, and that's been true for years and years. The nature of our clients as such, you think about large banks, think about governments, they are sensitive to the time value of money, which means that they tend to have lower cost of capital than we do, which means they're not too interested in deferring always in the way a commercial client might be to get to more of a SAS pricing model. That doesn't mean it can't happen. Government changes and financial services change. So we're always open to that. It's part of our offering set, has been for a long time. And so I guess we'll have to see if much of that changes over time.

Got it. Thank you.

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

Hey guys. Good morning and thanks for the extra segment color. Just a thought maybe turning to your or your rebranding or your reinvigorated brand campaign, are there any thoughts there on perhaps delaying that given the macro or how did the macro play into the, or play into your decision here to keep moving forward because obviously there's a cost there too? And then I have a follow up.

Now, with respect to your specific question about timing, we have worked throughout really the last, we've run this for I think 15 months. And we have been working on when the right timing would be. I mentioned in my remarks that we expect to launch in the fourth quarter. That is still our expectation. You know, whether we might change that or not, is up to us, but as we sit here, we're still expecting to launch in the fourth quarter. Mike, any thoughts on that?

Now, with respect to your specific question about timing, we have worked throughout really the last, we've run this for I think 15 months. And we have been working on when the right timing would be. I mentioned in my remarks that we expect to launch in the fourth quarter. That is still our expectation. You know, whether we might change that or not, is up to us, but as we sit here, we're still expecting to launch in the fourth quarter. Mike, any thoughts on that?

Yes. Hey, Joe, thanks for the question. I would, I mean, I'm in the camp of not delaying and it's not so much about the cost aspect of it, Joe, but as Peter mentioned, this has been part of our strategy really since early 2021. The connection to the selling, the connection to the industry analyst, the connection to the third party advisors, all of that is intertwined here, right? So we've been prepping this for a long time. It is a catalyst for continued growth and granted the macroeconomic conditions are what they are, but the services that we provide actually provide benefits to our clients that we think will help in the macroeconomic scenario that we're in. So, to me it's all hands forward here. I think it is a real important aspect of our strategy and as Peter mentioned, kind of the last mile to pull all this together. And I know from an internal perspective, we're super excited about it.

Yes. And just to add one more comment onto that, if I could, Joe. You know, and I mentioned in my remarks, there are two elements to this. One element is all of the stuff that Mike just covered, clients' perspective, clients, third party advisors, analysts, industry experts, we think that this will appeal to them. The other aspect of this is people and by that I mean people who currently work at the company, people who would be attracted to work at the company. We really think that this will enhance the value of Unisys as a place to work. And that, people who are considering whether to join the company will be more likely to, and people who are at the company will frankly be more likely to stay. So, there is a people element to this that we're also very excited about. And as Mike said, we've been previewing this with some focus area groups both internally and externally. And I got to tell you, the reaction has been incredibly positive, so we're looking forward to it.

Yes, that's great. I'm looking forward to seeing it myself. And then may be just one followup. I know you've exited some contracts that you deemed not profitable enough to continue last year. Is there any risk that perhaps the macro kind of results in more of those types of contracts evolving here or popping their head up on some renewals as you look into next year if the macro is still a tough environment? Thanks guys.

Sure. Hey, thanks Joe. Look, we obviously look very closely at our renewal schedule. There are only two contracts of that ilk coming up in the remainder of this year. As far as renewal schedule is concerned, both are extremely positive dialogues right now. So we expect no impact of anything like that. Looking out a year to the entire renewal schedule for next year, again nothing on the horizon, Joe, that gives us concern in regards to those contracts. So pricing power has been steady and we've been comfortable with the relationships that we've got in that area. So I would say at least for the next 12 to 16 months or so in that renewal cycle, we're not seeing anything that gives us concern.

Great. Thanks Mike. Thanks everyone for taking my questions.

Thank you, Joe.

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

Hi, good morning. Thanks for taking my questions. I was wondering if you could talk about the headwinds to your growth expectations in, in DWS and CA&I a little bit more. How much of that I guess weaker uptake is slower than expected ramp on contracts that have already been signed? You obviously had strong ACV over the past couple of quarters. I'm just wondering what the disconnect is there?

Yes, Jon, how are you doing it? It's Mike. I wouldn't say you used the term uptake, I don't think it's really much to do with contracts already signed. The volumes that we see for the contracts we're working has really been no different. In fact, we've seen some increases. What we're seeing is kind of new logo contracts being delayed and pushed out to another quarter, right? So I think it's more a deferral of decision making or what we're seeing is even on the renewal cycle, instead of necessarily renewing for the full-term of three or five years, maybe it's a one year extension on the backs of a contract we already have. And in that case, perhaps even a little bit of de-scoping. But I mean, if you think about our strategy in general, we're actually bringing to market solutions that are providing value to the client. And so our, our dialogue is about how they can actually end up paying even a higher margin in saving money because of ultimately what we're doing from a productivity perspective through the experience play specifically in DWS. So I wouldn't say it's anything to do with uptake on the existing base, more a deferral of decision making and again, I think that's something we're seeing industry wide.

Okay, understood. And are the margins on the new signings where you want them today?

Yes. We've been pleased with the margins we're getting, especially as we are moving more towards those higher value Modern Workplace and DP&A.

Got it. One last one, just any thoughts on your long-term targets and your ability to drive free cash flow and earnings, just especially with the new, I guess, preliminary expectations for the pension and contributions that you need to make?

Yes, so that's, that's a great question, Jon. This is Peter. What we tried to do in these remarks was to really highlight kind of our growth expectations around those focus areas. And now we have three, right? We told you last quarter we were going to add one from ECS, and now we have. So we've kind of highlighted our expectation through 2025 of those focus areas. We've tried to highlight what we expect in terms of margin as well as revenue in those focus areas. We do expect in the first quarter of next year to have a full Investor Day. And so we do expect to go beyond just talking about those three focus areas and really giving our view of the company as a whole going out three years or so. So you can put that on your calendar for some time in the first quarter of 2023.

Okay, great. Thank you. I'll jump back in the queue.

Thanks, Jon.

[Operator Instructions] Our next question here will come from Matthew Galinko with Maxim Group. Please go ahead.

Hey, good morning. Thanks for taking my questions. Can we start with, I think you touched on the labor environment, but can you go a little bit more into the depth of how you see that rolling into your plans and expectations for 2023?

Yes, Matt, thanks very much for the question. So our voluntary attrition is down slightly in the third quarter. So our voluntary attrition in the third quarter is 18.9%. That's down about 0.3% sequentially and that's down really across the board in geographies. I don't think there's any geography that is significantly moving up while the rest is going down. So the geographies are a little different, but they're all kind of moving slightly down. I think it's a combination of a couple of things. First there has been an inflationary development in our sector that has affected our margins. But that does appear to be hitting a contrary act right now. And that contrary act is our view of a recessionary environment both in geographies, in -- across industries, and particularly in the tech industry. So, rather than earlier this year where there was just kind of one force, which was inflation, that's kind of a push me-pull you now, and you kind of have two different forces going against each other. And I think that that is a more -- and the result of that is you're seeing a decrease in attrition. You're seeing a decrease in some of the wage pressure. You're seeing an increased understanding about the value of actually staying with the company. And so, we're seeing a modest decrease in attrition because of that. Outside those macro environments, we have been very focused as a company at really increasing our sense of community and belonging. We've really worked pretty hard, not just this year, but I'd say over the past couple of years of really creating an identity of what it means to be part of Unisys, why you would want to join, why you would want to stay. You notice in the question about branding, I was very quick to say this is not just about clients and prospective clients, although it is, and it is not just about third party administrators or advisors and analysts, although it is, it's also about our people. It's about making our people really feel part of something they're excited about. And we think that the new branding and marketing will help that. And again, that's not overnight, that's been in the works for a long time, so we're working all angles of that. I hope Matt, that that's helpful for you. It's certainly important to us.

Yes Peter, thank you. That was very helpful. I guess my follow up question would be, I think you talked about one cross sale or sizable cross sale. I think that went from DWS to CA&I. But can you go back and maybe cover what the genesis of the cross sell was, how you identify opportunities to cross sell and what the pipeline looks like for those sorts of deals?

Hey, Matt, it's Mike. I'll take that one. Thank you for the question. Look, I think in general, if we talk about cross sell, we're really talking about across BU embedded, and it's primarily between CA&I and DWS. If I look at the data set, roughly about 30% of our business is already in a cross sell arena. So when we look at our client base and we look at whitespace opportunities, clearly if I'm looking at the whitespace on an existing DWS client, the cross sell opportunity is in CA&I. So and we specifically have I'll say early entry offerings in either of those scenarios, right? So if you're an existing CA&I client, we have early entry offerings in DWS and vice versa. So the targeted approach is really generated at the client level through white-space, looking at what we're doing well and what the entry, I'll say offering is for the cross sell opportunity. As you well know that that cross sell opportunity creates a better margin profile, a stickier client and a happier client, right? So there's a tremendous amount of opportunity embedded in our current client base to continue doing that, considering we've only got 30% penetration that way today. So we think that's a big part of our strategy going forward.

Yes, and what I would add to that is, we've been aware of that for a while. We've obviously been attempting for a while to get clients to use more than one of our business units. We do find in general, at least the last time we did this analysis that clients and it was a few years ago that we did it, the clients that have more than one business unit tend to be more profitable and tend to be stickier, if you will. But the work we have done this year really has taken that to a new level. And underneath what Mike is talking about, and you saw him really rush to answer that question because he's been so involved in that. So Mike, do you want to give just a little more update on kind of exactly what we've done really this year, because you say it better than I, about how we really are focusing on that whitespace?

Yes, yes. I definitely will. Matt, I want to just give one other color point first. The whitespace analysis that we've been talking about here is in our existing base. The interesting thing is the new logos that we've been signing throughout the year are coming in multi BU. I would say at least on top of mind, the last four or five significant ones have all had a piece of those two BUs embedded in them and some even to a third BU. So it, it's really interesting to the way we're going to market and the connectivity between our solutions on the new logo side are almost naturally tied. So you get a multi BU relationship, and then it's the deeper focus in the whitespace analysis for the existing base. And as I mentioned, I think, if you look at something like a cybersecurity offering that is locating rogue assets, that's an easy entry way into an existing DWS client that we want to begin to bring our CA&I offering into, right? So, there's a real strategy there. It's tailored to the client and what they already have, and also tailored to whatever their renewal schedule looks like and how we want our entry into that client to look like. So, it's a big focus of our selling team. It's a big focus of our client executives and our client delivery executives, and we've got all of those components aligned at this point, right? So we're really excited about what that can bring for 2023.

Thanks for the question.

Thank you.

And our next question is a follow up from Jon Tanwanteng with CJS Securities. Please go ahead.

Hi guys. I was just wondering about the ECS segment. You mentioned that the license renewals are coming down over the next couple years. I was wondering how much pricing power you have there just because it seems essential to their businesses on the system. Just help me understand how you set the pricing every year for this?

Yes, just to be clear, and I'm going to defer to Deb on this. I think we are expecting lower L&S revenue next year, but then slightly higher L&S revenue in 2024 and 2025.

Yes, that's right.

And I think Deb gave you some specific numbers on that. It really is tied to the expected license renewal cycle, and I want to underline the word expected. We don't always know how that's going to work. There are, as we've had this year, some clients that we thought were going to renew next year that are renewing this year, there are so many variables that go into that. We cannot understand all of those in advance, but it's the best we can do. With respect to pricing power, I think I'll defer that one to Mike. I will say that it is complicated. And we think we know the clients pretty well. We think we know the value of what we're bringing to them pretty well. And many of these clients have been our clients for a very long time and we want them to stay our clients for a very long time and we really treat them like an extended relationship. It's not a transactional relationship. But Mike?

Yes look, and Jon, I would say that the pricing has held for sure. In fact in some cases we've been able to drive some of that pricing up. But I think what Peter just closed there with is, this is not a let's gouge the client and go that route. We're actually looking at the penetration to those ClearPath Forward clients in another way. So not only are we able to maintain the pricing related to the licensing, but we're using that as an entry to talk about application modernization, managed services of applications that are modernized, managed services related to the ClearPath Forward ecosystem, right? So there's a lot of other opportunity that we can grow that relationship, again make it stickier and not have to just deal with it from a perspective of we need to increase price every time. So I think we've been pretty consistent with the pricing model. We get our normal, I'll say cost of living increased type of thing and again, we're really looking at ancillary services as a means to continue to grow that base.

Got it. That's helpful. Did you say what your expectations were that were for that application and services side, just in terms of growth rates?

We did and Deb said it was a low single digits in 2024 and I think double digits in 2025 is the comeback.

I think it was, go ahead, the second one.

Yes, for revenue we said we expect may be about 40% of revenue in 2025. I don't know if we gave out a revenue growth rate as much.

We did, and so that…

Oh yes, well we gave Q3 revenue…

Let me pull that math within my remarks. I just want to make sure that I give it to you eExactly.

It's okay. We can follow up.

Where you said the margin was mid 20% range.

Hold on. Anybody have that? It's…

Yes, we said the three-year CAGR was approximately 19% and we expect to grow as fast as…

I'm sorry, that's DP&A.

I thought he asked DP&A.

Yes Matt, just a quick clarification. Are you asking for the SS&C part of ECS? I thought that's what your question was.

The non-licensed part?

Yes.

Oh, okay.

I'm sorry. I thought you just [indiscernible].

And so for that, as I'm pulling my data out…

We said we expected to grow mid and high single digits annually through 2025.

There we go. That's right.

I apologize.

Got it. Thank you. Sorry for the hard question.

Not at all. There's a lot of, you know…

Yes, we gave a lot of numbers. We gave more insight.

We did and again, we were hopeful that by breaking this out and really giving some very specific information on the three focus areas, that really gives you a good indication of where we are focusing on the company and how we're driving. But it does mean we've got a lot of numbers and so, I apologize in advance for that, but that is an effort to really provide more information to you.

No worries. Good call. Thank you. And this concludes our question-and-answer session. I would like to turn the conference back over to Peter Altabef for any closing remarks.

I'd like to thank everyone for joining the call. I'd like to thank particularly the folks who asked questions that I thought helped us enlighten everybody about the business and how the business is evolving. And I want to welcome everyone to the next call in advance. And as always, we have a bunch of information on our Investor Relations Website and really on our website in general, we put a lot of information on that website. And I will tell you that as we launch the new branding effort and campaign, you will see changes in that website and I think you'll be very inspired by the level of change and the way we're telling our story and some of the information we put on there. So I hope you pay some attention to that and you'll know it when you see it. Thanks again for joining us today.

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