Good morning, and welcome to the Unisys Corporation First Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Michaela Pewarski, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone. Thank you for joining us. Yesterday afternoon, Unisys released its first quarter 2023 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'll be using this morning to guide our discussion as well as other information relating to our first 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 financial measures have been reconciled to the related GAAP measures, and we have provided reconciliations within the presentation. I would also like to remind you that all forward-looking statements made during this conference call, including any references to guidance or expected future financial performance, are subject to various risks and uncertainties that could cause 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 along with other materials I mentioned earlier on 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 FDs. With that, I'd like to turn the call over to Peter.

Thank you, Michaela. Good morning and thank you for joining us to discuss Unisys' 2023 first quarter results. We had a strong start to the year with a solid quarter of revenue growth and margin expansion, putting us on track to meet our full year financial guidance. Unisys is continuing to focus on our next-generation solutions, and we are also seeing more interest from our clients in areas of growing importance to them, such as artificial intelligence, cybersecurity, and data analytics. These conversations are leading to new growth opportunities, including land and expand opportunities with the next-generation solutions, which saw sequential pipeline growth of more than 30%. We expect these higher margin opportunities to contribute to TCV in the back half of the year and set the stage for future growth and margin improvements in our solutions outside of license and support, which we call ex-L&S solutions. Macroeconomic uncertainty persisted during the quarter with some clients being incrementally cautious of new investments and our financial services clients being cautious in general, although we are not seeing any impact to our L&S financial sector business. Overall, our revenue base is resilient as our solutions are largely supportive of our clients' mission critical systems. Our renewable rates remain strong and our revenue is benefiting from strong signings in the back half of 2022. We also saw an increased volume of small and mid-sized new logo opportunities with faster sales cycles and ramps to revenue and healthy new scope signings with our existing clients. Similar to last quarter, I will focus on total company and ex-L&S performance and provide an update on our next-generation solutions and portfolio initiatives, after which Deb will provide a more detailed discussion of our financial performance. Looking more closely at our first quarter performance, total company revenue versus…

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 supplemental earnings materials posted on our investor relations site. I will also provide information both including and excluding license and support solutions to allow investors to isolate the portion of ECS [ph], which includes lumpy revenue recognition based on the timing of license renewals to evaluate the progress we are making in the business outside of this arena. My commentary will continue to discuss our segments of Digital Workplace Solutions, Cloud Applications and Infrastructure Solutions and Enterprise Computing Solutions. As Peter mentioned, it was a solid start to the year driven by strong renewal rates and revenue growth from new business secured during 2022, and price increase is secured within our Ex-L&S solutions as we continue to strengthen the Unisys value proposition for our clients. While client sentiment is mixed largely due to macroeconomic uncertainty, we are seeing solid sentiment in DWS and increased engagement around certain solutions such as cyber and integrations work within CA&I. Our pipeline remains healthy and we are seeing solid new scope TCV and ACV with existing clients, which will convert to revenue as we move through the year. For the first quarter, company revenue totaled $516 million, an 18.9% increase on a constant currency basis and 15.6% as reported. The double digit growth was largely driven by the timing of license renewals within L&S, which was expected to have a high concentration in the first quarter. Excluding L&S revenue, constant currency revenue growth for the first quarter was 4.6% and 1.7% as reported, driven by high single digit growth in DWS and the specialized service and next-gen compute portion of ECS. Now for…

Thank you, Deb. In closing, we are making progress on our key strategic portfolio, go-to-market and cost efficiency initiatives, and are successfully navigating the current market environment. We look forward to discussing our longer term strategy and the opportunities we see for the company to grow revenue and expand our margins at our upcoming Investor Day on June 15th in New York City. Operator, would you please open the call for questions? Thank you.

We'll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Rod Bourgeois from DeepDive Equity Research. Please go ahead.

Okay, thank you. Hi, so congrats on the front loaded progress toward the full year targets. I want to start by asking about your license renewal pattern. You clearly had early license renewals in Q4 and you've now also reported a year-over-year surge and licenses in Q1. So is Unisys in an extended period of early renewals? Or was the Q1 licensing activity somewhat more in line with what you had expected? So I'm just looking for any color on the latest licensing patterns, which would be really helpful. Thanks.

Rod, this is Peter. Thanks very much for the question. I guess the answer is yes and yes. So we had a slightly better quarter than we expected on the L&S renewals, but it was largely in line with what we did expect. So as we went through last quarter discussing about what the L&S progress was going to be over the year, we knew it was going to be lumpy. We knew the first quarter was in fact going to be our best quarter, and it was our best quarter. It was a little better than we thought, but not marginally so. That's why Deb is being very careful to set expectations for the rest of the year. We do not think that the L&S revenue as a whole is going to be any larger than what we laid out at the end of the last quarter for all of 2023. In terms of the rest of the business and we really are working in a concerted way to kind of separate L&S from what we call Ex-L&S. And the reason for that is the – just the lumpiness of L&S. As you could tell, we had a little better quarter than we expected this year. We had a little better year in 2022 on L&S than we expected. We simply don't have a control over those items. And so, they're going to be lumpy from year-to-year. They're going to be lumpy from quarter-to-quarter. We have some view. We have a view that 2024 from L&S will be better than 2023, and we have a view that 2025 from L&S will be better than 2024. But it is still somewhat outside of our control. Ex-L&S is the rest of the business. And the driver in Ex-L&S for us is what we call those next-gen solutions. We had a good quarter in next-gen solutions, but we actually expect better next-gen solution performance as the year gets stronger. So just to give you an example, when we think about pipeline, total pipeline growth for the company was up 6% year-on-year and 15% sequentially. That's very good for us. But next-gen pipeline was not up 6% for – on year-on-year, it was up 16% year-on-year. And next-gen pipeline was not up 15% sequentially, it was up 34% sequentially. So we really do believe that an important way to look at the company is through that Ex-L&S and we expect to make continuous progress on that year-over-year, quarters can still be a little lumpy, but that is where we think we will make the steady advance with the company. And within Ex-L&S the growth effort is really within the next-generation piece. So, Rod, hope that helps answering the question.

Yes, yes, definitely. And so, my follow up is kind of a longer term question, which probably is also a fitting topic for the Analyst Day, but I want to ask given that your outlook is saying the next three quarters are expected to have soft license revenues just due to the timing and lumpiness there, will you, during that time, be making special efforts to kind of lay groundwork for fundamental improvements for Unisys after 2023? So just any color on what you're doing in terms of longer term building up of the fundamentals.

Yes, so that's a great question too, Rod. I'm going to turn that over to Mike, who is really working with all of our business teams to do exactly that.

Great. Thanks Rod for the question and good to speak with you again. Yes, as you know, I mean, this is something that we've been working on for a multitude of years and continue to work on. I think we really have the underpinning laid and we are expecting to see continual improvement in margin, frankly, not only just over the remaining portion of 2023, but beyond 2023. Some of the major efforts there, as we've talked about in some previous quarters, is the continual development of AI and ML and the efficiency of delivery, we continue to work on right-shoring and low cost locations and support of the organization. We continue to clean up and fix, I'll say, legacy contracts and improve their margin profile. And we continue, as you know, to push to higher mix shift from a revenue point of view, which has knock on impact on the margin side. Deb and I are partnering on SG&A reductions. So, all of those things in my mind are core tenants to the continual improvement of the business fundamentals. And we certainly will have some more dialogue and give a little better and more detailed picture in Investor Day of how we plan to do that because it is a little bit different per business unit and the company overall, but that has been the plan, it continues to be the plan

Okay, great. Hey, and just one final, hopefully a quicker, quicker one. The 15% sequential pipeline growth, I'm just looking at that number – also knowing that there has been some macro impacts in the last several months in the industry. What's driving that sequential pipeline growth in the – over the last three months?

Rod, that's another great question. When I look at our performance and talk to both Deb and Mike and to our leaders and you kind of get into that pipeline growth, the area of our pipeline growth that has been most accelerated is modern workplace. And interestingly that is the area where we had the most revenue uptick in the Ex-L&S business. So DWS driven by modern workplace clearly has the most pipeline growth for us. Now, somewhat – you might say somewhat disappointingly, when you look at the profitability of DWS, the gross profit of DWS actually went down year-on-year. And while that is a bit of a disappointment, it is very understandable. Revenue for that team increased over 7% year-on-year. Whenever you have revenue increasing, you always have a little bit of a short-term head to profit. But I think even more than the revenue, we are really gearing up for that very, very large increase in pipeline. So we're staffing up. We want to – we are a little bit getting out of – in front of our headlights on that because honestly we think we need to do that to get to the revenue portfolio that we're showing. So I would say to you, it is – that growth is in next-gen solutions and within next-gen solutions modern workplace looks very promising for us and it is already showing that in the revenue growth in the first quarter.

And, Rod, if I could add a couple things to that, I guess the first word I would say is volume, right? We're not looking at situation where there is some anomalous thing where there's this one big deal driving that pipeline, right? That is pretty consistent volume across all of our businesses. And we are starting to see some real penetration from a cross-cell perspective. We have talked historically about our cross-cell penetration being in about a third bucket. At this quarter, we're actually closer to about 40%. So we are starting to see that penetration, which is driving expansion and new scope and in some cases, as Peter just mentioned, highly focused on modern workplace. So it's been pretty good. And as you know, it's kind of on the tail end of a lot of the marketing efforts that we've done. We've launched our branding at the end of Q4, a lot of marketing campaigns going on. And the reality is they take a little while to take root right and start to see the benefits of those enhanced efforts. So we're thinking we're aligned pretty nicely to our strategy and continue to press forward there.

Very helpful, thanks.

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

Good morning. This is Pallav Saini on for Joe. Thanks for taking our questions and thanks for all the color. It's really helpful. Maybe I can start on the macro. Clearly, macro remains tough. Clients may not be doing full renewals or taking on piecemeal work. Have you noticed any shift in how your clients are thinking about their investing in their business today versus, let's say, one or two quarters ago? Any sort of shift in their approach there?

Yes. This is Peter again. I'm going to turn that over to Deb to work through the numbers on that a little bit with you, but let me give you my perspective. There are some changes and I'm just trying to categorize those. By industry as we look at the numbers and we think about how our clients are acting, I would say we had what we think is a perceptible decrease in client volume and actually in mine share in the first quarter in financial services outside of our L&S business. So L&S does a good amount of financial services work and that's running financial services back office, to some extent front office, and that did not change. But when we're talking about the project work around financial services, it was later in the quarter, but it was pretty perceptive that that whole industry has been distracted by whether it's First Republic or SVB or others. And so I don't think it was a surprise to see our pipeline and level of activity somewhat distracted. We expect it to come back and we expect it to come back quickly, but it was distracted. When we look at our business as a whole stepping out of that one piece of a sector, I would say that the big change over the past six months and what you hear more of in our discussion, in mine and in Deb's, is really a strengthening interest around data analytics and AI. And you see us talking about data analytics and AI, but it shouldn't surprise anybody. So every one of our next-gen solutions has a good amount of data analytics and AI embedded in it. That's what makes them next-gen solutions. So it's not as if we are new to that, but I would tell you that clients want to hear about that more. And so we are focusing on it from a – if you will, from a marketing standpoint more, you're going to see about more of that on our website. You're also going to see somewhat more focused concentration on that as we go forward. But again it's not as if we don't do it today and haven't done a lot of it. But I would say that's probably the biggest change is really kind of a more and more of an emphasis on data analytics and AI, but that's a change for like all of us as we read the paper every day. Deb?

Yes, no, I think, Peter covered it. I mean, I think, in my remarks, what I had mentioned, the CA&I probably saw the biggest impact where we saw that decline, 1.4%. And again, I think that was – as we said, largely driven by some caution in volumes and cloud investments so – and particularly, as Peter mentioned, with financial services clients, which for CA&I are about 15% of that segment's revenue. So I think, we are seeing that, but we're – I think Peter sums it up.

Yes. Pallav, I think that was a really great question, and thank you for asking it.

Thanks. Thanks for the color Peter in that. And maybe I can follow-up on the next-gen solutions. It’s clearly very good strong pipeline growth there. And if I heard it correctly deals may be moving through the pipeline at a faster pace. What do you think is driving this faster sales cycle here?

Yes, I’m going to let Mike take that. Just a couple quick comments. We – I said that and it does appear that’s the case. I will tell you, I think Mike has led a brilliant effort on our team to get this to happen. And the work he’s done on the process back office of just how we push through deals, how we evaluate them sooner, how we make decisions on them sooner is really strengthening the company. And then of course, to some extent, the deals as you can see, are a little smaller. And that means they have to go faster. But Mike, over to you.

Thanks Pallav for the question. Very helpful. So yes, I think from a perspective of velocity through, we’ve done quite a bit in the back office to establish kind of a rapid pricing. But if you think about it, it’s really more about not having to have the level of variability in all of the clients, right. So a little bit more of a standardized offering now that our portfolio has kind of evolved a bit, right. We’re able to leverage more of that and obviously that helps with our pricing. The other thing is a lot of our penetration, especially as I mentioned, the increase in cross sell and the dip into some of the new logos are smaller based solutions, and they typically come to revenue sooner. And there are point of spear types of solutions. So if we talk about penetration in cybersecurity as an example that is something where we can price it very quickly. A lot of them are time and material based. They go to revenue in a sooner cycle. And our goal is really about landing and expanding, right. So getting in, dealing with some apps, modernization or migration as an example in the cloud space, and then broadening that expansion into managed services and the rest of the infrastructure. So I think it’s a little bit of what we’ve done in the back office. It’s a little bit about our portfolios in general and their maturity. It’s a little bit about the size of the deals and the types of things that we’re actually pursuing in next-gen just come to market quicker and the contract terms are a little shorter.

Got it. Thanks. Thanks for all the color, Mike and Peter, and good luck this quarter.

Thanks, Pallav.

The next question comes from Anja Soderstrom from Sidoti. Please go ahead.

Hi, thank you for taking my questions. So I have follow-up on that commentary around the increase in the small to mid-size opportunities. Is that something you deliberately are going after because they may have a faster decision cycle within their organizations? And did you also say that those contracts are normal at the shorter term than larger deals?

Yes, Anja, thanks for that question. It’s a phenomenon that we have been remarking on for years. And it just continues. So and that is that, as we measure contracts, new contract signings, the average duration of the new contracts is shorter than the ones that had preceded it. Now, there’s a lot to take away from that. So in part that’s an average number and you’re dealing with a lot of contracts. So averages can be a little deceiving. But what is underlying that, which I don’t think is deceiving, is that our offerings have become more of the moment, our offerings are more important to drive current revenue and current margin for our clients. And that means our clients need them more urgently. So it’s not a question of putting in a deal and doing it for three or five years. Those are fine, but it’s like, hey, I want this done within a year and I want to be able to see the results. And then if I like it, I’ll renew it. And that’s a challenge we’re ready to live up to. So Mike, over to you on that.

Yes, look, I think it is intentional, Anja for sure. When we think about the types and size of the deals that we’re looking at for penetration purposes, we’ve had a renewed focus in mid-market as an example, which are companies from our perspective are the $2 billion to $5 billion range. It’s quicker decision making, it’s smaller type projects that get to revenue sooner. And those are areas where we can ultimately provide kind of full stack solutions to clients in that space. So I think it has been very intentional and to a large degree, some of these services are SaaS-based models, right? So they typically move into annual cycles as opposed to the historic models that were three to five years, as Peter alluded to in their signing. So some of it’s the behavior of the client and some of it is intentional in our next-gen solutions.

Okay, thank you. I’m sorry if I missed this. Maybe you commented on it already, but the gross margin was held by the L&S this quarter. So how should we think about the gross margin in the coming quarters?

Yes. So hi Anja, it’s Deb. The coming quarters, because you’re right, L&S because it was a strong L&S renewal quarter that drove a lot of the strength. So what we – the guidance we gave for Q2 is non-GAAP operating loss, negative $5 million to negative $10 million for Q2. And then, in total, we talked about that the Ex-L&S the margin, the gross margin we’re expecting to grow 250 basis points. So there will be improvement kind of in that Ex-L&S over time. But the L&S you’re right, will be driving some of the lumpiness in that profit over the next three quarters.

And that’s why we’ve done…

Okay, thank you. Very helpful.

Yes, you’re welcome, Anja. And that’s why we’ve done such a focused work really starting last year at giving you data that is both L&S and Ex-L&S as well as total company because we want everybody to see how the pieces are put together. But we also want everybody to see that L&S number increases and decreases almost in unexpected ways, although we have a general view as to how it will play out. So – but most of our focus on growth and focus on margin expansion is in the Ex-L&S space.

Yes. And I should clarify the 250 basis point improvement is CA&I and DWS, because there’s that SS&C part that already has higher margins.

That’s right.

Just to clarify.

We just want more of it.

Not more. Correct. Exactly.

Okay. Thanks for that clarification.

Yes.

The next question comes from Matthew Galinko from Maxim Group. Please go ahead.

Hey, good morning. Thanks for taking my questions. Can you talk about any expectation for attrition from legacy lower margin contracts that are coming up in 2023? I know we had the material impact a couple years ago. But particularly in the environment we’re in today, is there potential for more of those to just be sunset and create a material headwind for Unisys revenue or is that something that you’re not concerned with this year?

Hey, Matt, it’s Mike. Good to speak with you again. Look, I’ll sum it up quickly and I’ll give you a little bit of color. It is something that we are not overly concerned about for this year or frankly in future years. A, for this year because we really don’t have any contracts that are up this year of the magnitude that would be a concern. But more importantly, what we’ve actually seen over the course of the fourth quarter and the first quarter is our ability to get price increases on the contracts that we were concerned about. And I think a lot of that has to do with the quality of service that we’ve been providing for these clients for decades, right. So it’s a heck of a lot easier of a negotiation from a price increase point of view when you’re delivering gold glove service for multiple decades. So we’ve not had problem from a pricing perspective in increasing those. We don’t have any eminent ones that are coming due that we’re concerned about. And that’s actually an area of land and expand for us. And we’ve seen that in a couple instances already. So I think we’re in pretty good shape, unlike, what we went through in 2021 with the carryover of those exits in 2020.

Perfect. Thanks. And my follow up is on the marketing investments and campaign, I guess what should we be looking for as a gauge or indicator that those are having its desired impact? And I guess what timeframe should we be looking at to be able to gauge some sort of impact whether this year or next year?

Yes, so Matt, that’s a great question. I think there’s really almost two different ways to look at it. From our perspective in terms of operationally, we are looking at how many people are coming to the site and how often they’re staying. But when you look at it just kind of an operationally it’s doing really well. I think people are saying, I think the that is almost four times as long and we’re getting twice as many people who are either we think clients or prospects. So operationally we’re really making progress there. When you think about how should you look at it, it’s pretty clear, is it helping us get the revenue? Is it helping us get the margin? Is it helping us develop pipeline and getting to win rates? So, I think, the proof is in the pudding as far as our shareholders are concerned and those have to get to revenue and profit. But from our standpoint, we really are – we’re seeing some success. Mike, any thoughts of that?

Yes, no, Matt, it’s a great question. And look, the easiest answer is the front load of that is the pipeline, which we’ve already seen some expansion on that has to turn into TCV and ACV based on higher win rates. So we’re seeing not only the length of time people are spending on the site, but actually who is spending time on that site. We’ve put in a new lead generation program on the back of that which helps us further qualify some of those leads. We have some third party, what you would almost consider inside sales as a backend of that to qualify those leads even further. And so from our point of view, it’s really the conversion of those leads. The second piece of your question was time. The other thing there is we have to be a little bit of – have some patience here, right? That is not the type of thing where you put some new information on your website and that turns into a lead in a week or a month or a quarter, right? So it takes a little bit of time for that to happen. But I will tell you I speak to clients all the time, prospective and current. The view on the brand, the view on our ability to generate breakthroughs and experience breakthroughs, the dialogue around the market awareness of our solutions, the number of people participating on our sites, the increase in pipeline, those are all attributes from our point of view that says it’s moving in the right direction.

And just, I found some of the data there just again, March was the single highest month of web traffic we’ve ever had. We’ve had in the first quarter, four times more clients and prospects visit our website than a year ago. And those clients and prospects are staying longer. So again, from, I think from Deb and Mike and my perspective, that’s a lot of progress. From your perspective, it has to show up in new sales and new revenue and increasing win rates.

Terrific. Thank you.

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

I want to thank everybody for joining us, again, between now and the next quarter, we will have our Investor Day, June 15 in New York City. We are sending out invitations to people. But if you don’t get an invitation, that is an oversight. So please reach out to Michaela Pewarski and she will get you invited. So we’re looking forward to seeing you all on June 15 in New York. And thanks very much.

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