Good day, and welcome to the Unisys Corporation Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference call over to Ms. Michaela Pewarski, Vice President of Investor Relations. Ms. Pewarski, the floor is yours, ma'am.

Thank you, operator. Good morning, everyone. This is Michaela Pewarski, Vice President of Investor Relations. Thank you for joining us. Yesterday afternoon, Unisys released its second quarter 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 President and COO, who will participate in the Q&A session. Certain statements in today's conference call contain estimates and other forward-looking statements within the meaning of the securities laws. We wish to caution listeners of this call that the current expectations, assumptions and beliefs forming the basis for our forward-looking statements include many factors that are beyond our ability to control or estimate precisely. This could cause results to materially differ from our expectations. These items can also be found in the forward-looking statements section of today's earnings release furnished on Form 8-K and in our most recent Forms 10-K and 10-Q as filed with the SEC. We do not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events. We will also be referring to certain non-GAAP financial measures such as non-GAAP operating profit or adjusted EBITDA that excludes certain items such as post retirement expense and cost reduction activities and other expenses, the company believes are not indicative of its ongoing operations as they may be unusual or nonrecurring. We believe these measures provide a more complete understanding of our financial performance. However, these non-GAAP measures are not intended to be a substitute for GAAP. The non-GAAP measures have been reconciled to the related GAAP measures, and we have provided these reconciliations within the presentation. The slides accompanying today's presentation are available on our website and were furnished on our Form 8-K filed this morning. 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' second quarter 2023 results. We had another quarter of better-than-expected revenue and profit, positioning us well as we enter into the second half of the year. Excluding our license and support solutions, which fluctuate based on renewal timing inside the year and between years, we experienced year-over-year revenue growth and margin expansion. Revenue and pipeline continue to expand in our next-generation solutions, which includes Modern Workplace, Digital Platforms & Applications or DP&A, Specialized Services & Next-Gen Compute or SS&C and certain micro market solutions. Second quarter revenue and the higher growth in margin solutions grew approximately 14% year-over-year. Our next-gen pipeline is 55% larger than a year ago, providing a strong foundation for future growth. We're seeing a growing number of opportunities and proof of concepts involving generative AI. Hyperscalers and enterprise software companies are continuing to release new tools and technologies, which our teams are adapting to enhance our next-generation AI solutions development. Looking more closely at second quarter performance. Total company revenue was $477 million, a decline of 7.4% as reported and 6.3% in constant currency. Decline, which was expected, was driven by lower L&S revenue within our Enterprise Computing Solutions or ECS segment due to the timing of ClearPath Forward license renewals. This was partially offset by better-than-expected performance in the rest of the business, which we call our Ex-L&S solutions and includes our Digital Workplace Solutions segment, or DWS, our Cloud Application and Infrastructure segment, or CA&I, as well as the SS&C portion of ECS and our business process solutions. Second quarter ex-L&S revenue was $396 million, a strong year-over-year increase of 6.5% in constant currency. We achieved year-over-year constant currency revenue growth of 7.7% in DWS and 2.6% in CA&I, with…

Thank you, Peter, and good morning, everyone. My discussion today will include certain non-GAAP financial metrics. As a reminder, reconciliations of those metrics are available in our supplemental earnings materials posted on our Investor Relations site. Unless otherwise stated, all figures are as reported, except for segment revenue growth, which we discuss in constant currency. I will also provide information, both including and excluding L&S solutions to allow investors to isolate the portion of ECS, which includes uneven revenue based on the timing of license renewals to evaluate the progress we are making in the business outside of this area. As Peter highlighted, it was another quarter of results that exceeded our expectations. We are continuing to advance our Next-Gen Solutions, improve Ex-L&S revenue and margins and build awareness for our generative AI capabilities. The solutions innovation and go-to-market initiatives we showcased at our June Investor and Analyst Advisors Days are also building momentum in our pipeline, which is a positive sign for our future growth. For the second quarter, company revenue totaled $477 million, a decline of 7.4% year-over-year or a 6.3% decline in constant currency. This was driven by license renewals in our ECS segment as expected and the variability of those renewals inside a year and from year-to-year. Year-to-date revenue totaled $993 million, a 3.3% year-over-year increase or 5.3% increase in constant currency, driven by improving performance in our Ex-L&S solutions and the weighting of L&S renewals in the first quarter. Excluding L&S, second quarter revenue grew 4.9% and 6.5% in constant currency, while year-to-date revenue grew 3.3% and 5.6% in constant currency. I will now provide second quarter detail by segment. Please note that as I speak about segments, I'll discuss revenue growth rates in constant currency terms. DWS segment revenue grew 7.7% year-over-year in the…

Thank you, Deb. Before we open up for Q&A, I wanted to share that over the past few months, as our leadership team has been meeting with and having conversations with clients, our positive momentum has never been more evident. Our clients are exhibiting more openness to expanding their relationships with Unisys and are eager to discuss how we are innovating across our portfolio. With that, operator, please open up the line for questions.

[Operator Instructions]. The first question we have will come from Rod Bourgeois of DeepDive Equity Research.

Yes. All right, guys. So at the June Analyst Day, you shared some helpful updates on the business and laid out some longer-term financial projections. Based on your latest results and the prospects that you're seeing at this point, I wanted to ask if there are any changes in how you're thinking about your longer-term financial projections?

Rod, this is Peter. Thanks very much for the question and I sympathize your last name and my last name, both can be challenging. But it's actually a trickier question than it appears for a different reason. So -- and the reason is because it's really hard for companies to have long-term numbers out there and then put the burden on them to update them over time. And we have always maintained a position that we don't update those numbers over time. That said, we just had the Investor Day in June. And I can tell you, we don't have anything since that number. Those were really set as long-term numbers and long-term estimates. And they haven't changed. As I said in my remarks, as we look at the quarter, the first 2 months of the quarter were kind of similar to the beginning of the year. But we did see some pickup in activity in conferences, in dialogue or just across the board with our clients. That activity has really kind of continued in July. But none of that changes our long-term perspective. So I hope that's helpful.

Yes, definitely helpful. I'm going to ask a question on your last point, though, about the pickup in activity. And you did mention earlier that the new logo activity, I think, picked up in June after it had earlier been impacted by macro obstacles. I just wanted to see if you could expand on that pickup in activity, more color or some dimensioning to how much pickup is occurring and whether that's maybe a little bit of a green shoot on the macro front?

Yes, I'll cover that and then hand it over to Mike for kind of a more detailed answer. I think some of that is us. Some of that is the industry. And some of that is really kind of the way we're kind of organized internally. So let's take each of those separately. So on us, I think that we benefit from the fact that we have a long tenure at many of our clients. We mentioned -- I mentioned in my discussion the California State University has been a client for 15 years. That puts it in the junior category of clients among our top 50 because our tenure is longer than an average of 15 years. That trust and that relationship when you have a period like we're having now, a real dramatic change in the way people are thinking about technology, and here I'm referring to AI and specifically generative AI. We don't necessarily have the right to win any particular deal, and we certainly don't take that for granted. The relationships we have with our clients get an audience, and we have kind of earned an audience. So I think that's a big advantage for us. So it allows us to put our best foot forward, make sure we have put our best foot forward. But in a time of change, that's an advantage. With respect to the industry as a whole, a lot of change going on. Hesitancy in some areas, especially around willingness to enter into long-term contracts. You see some the TCV number is slightly down at negative 2% and negative 4%, but that is related more than anything else for us to the renewal cycle of some of our larger deals. But when it comes to our organization and how we're approaching business, I'll really turn it over to Mike because under his leadership, and the sales teams, both new clients and existing clients, I think we've made some pretty big changes, but I think we are going to position us well and you see it in the pipeline. Now, adding $1 billion of pipeline for us is a big deal. That's a big number for us. And we've done that in the last quarter. And so Mike, if you could talk about some of the things we're doing and some of the things we're seeing.

Yes. Great. Thanks, Peter. And Rod, thanks for the question. Good to talk to you. Look, I think Peter nailed it in his last comment there, really looking at the increase in pipeline over $1 billion in a quarter is a big deal for us. The bulk of that is all in our Next-Gen solutions, right? So I think, Rod, from our perspective, the go-to-market activities have been very strong. The interest has been strong. We talked about the Analyst and Advisor Day, and the feedback from that analyst adviser community about inviting Unisys to more and more opportunities. I think the awareness take-up has been strong as well. As you know, we really just launched that branding initiative at the tail end of Q4 last year in November. And a lot of these contracts take 6 to 12 months in their cycle. And so I think what you're really seeing now is just that activity starting to come through from that increased pipeline. As you know, that qualified pipeline is vetted, right? So we feel pretty good about not only the growth in the pipeline, but the fact that, that pipeline has some level of analysis to it, right, before it gets in the pipeline. And we expect that we'll continue to see enhanced win rates. Our Next-Gen solutions are certainly resonating in the market and the activity continues to pick up. So I feel like it's kind of the evolution of what we started maybe 6 to 12 months ago. And we're starting to get into that cycle where we're seeing the benefit of that come through. You're also seeing the impact of deals we won in the back half of last year where we're kind of getting to know those clients in a better way and they're expanding their relationship with us. So I think it's really just the proof point, Rod, that the strategy is starting to take hold.

Nice. And if I can ask one more on labor productivity. In your year-end 2022 earnings report, I think you noted labor costs had declined by 50 basis points, but you're now citing much bigger labor productivity increases sequentially and year-to-year. And so can you share more on the main cause in the labor productivity jump that you've experienced? And how much room is now left on that front?

Yes. Rod, I'll let Mike do that one as well. I will say that that's a major area of emphasis for ours. You heard me talk about our HR statistics. And getting the attrition rate down helps productivity because you don't have to retrain as many new people come in the door. But beyond -- by getting attritional rate down, the work that Mike and our teams have done around labor is ongoing. So you're seeing that in the middle of the cycle. There are ups and downs from quarter-to-quarter. But it is a long-term effort to take where we are and continue to improve it. Mike?

Yes. Thanks, Peter. Again, Rod, thanks for the question. So look, I'll say it from the point of view is we've talked about the kind of talent marketplace and the talent mobility platforms that we've put into place over the course of the -- again, the last 6 to 12 months. And you noted and Peter noted in his commentary, there was about a 4.4 points of improvement in that labor number and 3.5 points sequentially, right? So there's a whole host of things that make that up. Peter mentioned their hiring and the attrition, and that's a big part of it. But look, the other aspects of that have to do with continual automation, continual kind of right shoring, continual re-skilling. And you're right, they are very significant movements. And I don't think that we're at the end of the aspect of that, right? I know 4.5 points is a pretty big jump year-over-year. But there's still opportunity there. It's ongoing. It will be continually a part of our DNA. And I think they have mentioned that we're still calling for about 2.5 points of improvement overall from a company perspective in relation to the full year numbers. So still opportunity to go, still working through that and embedding that in our DNA, but we've seen some significant marked improvement. And then the key is obviously maintaining that run rate and continuing to enhance that gross margin profile.

The next question we have will come from Joseph Vafi of Canaccord.

Nice to see that Ex-L&S constant currency growth in the quarter. We just -- can you just remind us again on -- if you look at your Next-Gen portfolio broadly, the margin -- the gross margin profile on the Next-Gen portfolio versus the traditional portfolio? And then I have a couple of follow-ups.

Peter, did you want to...

No, I was going to hand it over to you, Deb.

Yes. So the Next-Gen margins are higher, and that's why it's a big focus for us. So we haven't been talking as much about in actuals that we did lay out at the Investor Day, and it's still that we're targeting for those Next-Gen margins in that 25% range is what we're looking for. And to get to that expanding, we have set about 50 basis points of expansion a year to get to that by 2026.

Got it. And then what about the capital intensity of that Next-Gen portfolio versus some of the others?

Yes. So we don't necessarily expect -- we still expect to run about 5% of -- for CapEx as a percentage of revenue. A big focus on kind of a CapEx-light strategy that we've been having for the past few years to try to reduce the amount of capital related to clients and just being extra cautious with our capital while still ensuring that we're investing in the business. So we don't see that changing with the Next-Gen solutions.

Got it. And then just maybe one more in terms of -- on the renewals, the macro does add a little bit of extra. It doesn't help, obviously, on the renewal cycle. But are we -- if you look at some of the renewals that are -- that may be out there, I know a couple of years ago, there were some renewals that you just decided weren't worth renewing for a variety of reasons. Is there any of that out there at this point in terms of renewals that just may not economically work at this point? And that's my last question.

Deb, I'll take that one if you'd like. Joe, thanks for the question. The short answer is no. There are no renewals out there like that, that you're talking about some of the contracts that we walked away from in some of our legacy business just based on their margin profile. I would say what's left in the portfolio is quality work either on the traditional side, et cetera, where we're happy with the work effort that's going on. We see it as a gateway to Next-Gen, the margin profile on those contracts are -- is fine. And I think I mentioned on our last call that we've been very successful from a pricing point of view in renegotiation where we had concerns about the margin profile. So just a tidbit on the renewals as well. I mean the back half of this year just happens to have more renewals in it than the back half of last year or said differently, the front half was a little higher this year. And Deb mentioned in her prepared remarks, we still have over a 95% renewal rate. So A, we're happy with what's out there. B, we think it's a gateway to the future. C, we're having good pricing power in regards to those renewals. And D, the back half of the year has a larger set of those renewals coming into play, which should help our TCV and then ultimately help our backlog and book-to-bill as well.

And next, we have Anja Soderstrom of Sidoti.

Most of them have been addressed already. But how should we think about the timing of technology collections in regards to forecasting the free cash flow?

Hi, Anja. As far as the free cash flow, as you know, this quarter, it was positive 25, 1st quarter negative 7.5. And so year-to-date, it's 17, our free cash flow. And as we mentioned, we're still holding to that. The full year, what we're saying is that free cash flow will be similar to 2022, which was negative. So as far as specifics exactly on technology collections, that's -- a lot of that is driven by the timing of technology collections. And so as you can foresee, right, in order to get to that negative that we're expecting to be similar in '22, those timing collections are really what has skewed the timing of where we're going to see free cash flow in the next quarters.

Anja, this is Peter. I would add to that, if I could. As you know from the June Investor Day, we're very focused on free cash flow. And we're very focused on building free cash flow into a healthy positive number as we extend multiple years, especially in light of the pension obligations in the future. So I would tell you that is a major effort and focus of us. Joe Vafi's question mentioned CapEx. And I think that Deb's answer, obviously, is right that we don't expect an increase in CapEx costs because of the focus on Next-Gen solutions. To some extent, we expect it to decrease because when you think about what's not in Next-Gen solutions, it is that traditional L&S business and it is a traditional infrastructure business, both of which, even though we kind of have a lower capital version of those, it can still be higher CapEx than next-generation solutions. So we're really focused quite intently on cash flow. And so you can expect, as we discussed in June, to see us working long term on improving that.

Okay. And did I hear you right when you said that the activity that picked up towards the end of the quarter has continued into the third quarter?

Yes. Again, that activity is a broad word. We obviously do not have July numbers, and we're not suggesting we have July results. But in terms of the level of dialogue and in terms of, I would say, the interest in our clients and our prospects to have really good discussions with us. And obviously, you're seeing the pipeline grew last quarter. And now the question for us is how do we take that pipeline through the funnel and work the pipeline to get closer. So I would say that we feel good about what we're seeing in June and that is continuing.

The next question we have will come from Arun Seshadri of BNP Paribas.

Just maybe one clarification for Deb. For free cash flow guidance, I think you reiterated the -- your free cash flow guidance, and I noticed you didn't exactly say there was a path for upside like you saw in the revenue and EBITDA line. Any sort of additional commentary you can provide on that?

Not so much. So I think we -- there's lots of puts and takes within that number, but pretty similar to what we've laid out typically that makes up that free cash flow number. So I think -- and I think it's a little more -- the precision of the free cash flow is a little more challenging to predict versus the revenue and margin. So -- although we're able to say that on the revenue and margin, it's a little more challenging on the free cash flow, given the timing of some of these collections and not being able to completely anticipate when they're going to come in. But you're right, we are seeing momentum on the revenue and margin side. And the goal is that eventually that will drive the improvement in the free cash flow with the success we're having in our Next-Gen solutions, which are higher margin and create higher free cash flow, that is the ultimate -- the goal that we -- that we've laid out at Investor Day and that we're pushing for from a long-term perspective. As Peter laid out, free cash flow is a very big priority for us.

Got it. And then broadly on Ex-L&S gross margin, very nice jump this quarter. Just wanted to understand was there anything at all sort of that you consider onetime or nonrecurring in that sort of gross margin jump? And sort of how do you -- how should we expect to see the ex-L&S gross margin trend for the balance of the year?

Right. So yes, as we did mention in the commentary, there were some elevated expenses due to some troubled contracts that we had last second quarter that led to some of the higher basis point increase. But we do -- that number of the Ex-L&S gross margin of the 16%, it should be similar to what we're seeing. I think -- it's not necessarily a sequential, right? There's not huge numbers we're talking about, right? So $1 million here and there can really shift that number. So I'm not necessarily saying it's going to be fully linear. But I think we are making a lot of those efficiency improvements looking at price and our improvement in contracting and the improvement in more Next-Gen solutions, which are improving those margins and all of that combined is where we're leading. But like I said, it doesn't mean each quarter is going to be up. Sometimes, there can be some puts and takes. But I think the goal is still that total company operating margin that we laid out is where you can look at and see kind of where we're going.

Got it. And then lastly for me, the Ex-L&S TCV, I just wanted to make sure I understood the mechanics of that decline. It sounds like there's just -- there was just less traditional business renewing in the quarter. Is that the main takeaway there?

Yes. This is Peter. Again, the number is not huge, right? So the Ex-L&S TCV was 4% if you look at that year-on-year and 2% quarter-on-quarter. So not a huge number, not really statistically significant, although I'm not using that in a technical term. And again, I think that's somewhat based on a renewal cycle. And when you look at the kinds of deals that we got last year, and it's somewhat based on -- I think, as we have said, there has been some hesitancy in the industry, I think, across the board around signing. But again, for us, it's really a relatively modest change.

Peter, if I can just add to that too, Arun. So I think your comment is pretty much spot on to the front half of the year from a renewal perspective, had about 12% more TCV in it, and we're expecting that to be in the back half of this year just based on those renewal cycles. So again, the renewal rate is excess or north of 95%. And it's just heavier in the back half of this year.

And next, we have a question from Matthew Galinko of Maxim Group.

Just wanted to -- I think you mentioned managed services wins and ClearPath Forward. So I just wanted to ask for a little more color on those? Were they competitive takeaways? How -- just anything you could add to those wins that you referenced?

And again, I'll defer to Mike for a little more specifics on that. But managed services around ClearPath Forward, much of that is in our SS&C line of ECS. And so it has been actually a focus for several years now to make sure that not only are we providing the software and support, which tends to be through a license section, but that we're also looking really hard at how do we provide a more broad-based managed services around our applications. And that is one of the areas of emphasis in SS&C. So we have seen some progress on that, and we expect that to grow. Mike?

Matt, it's Mike. Thanks for the question. I think when Peter was talking about managed services growth in ECS, it was really due to some of our industry solutions, not necessarily driven by ClearPath Forward. And some of that growth can be kind of expanding those relationships, right? So I don't want to give you the impression that there was a takeaway of a managed service component within ECS, that's what you heard from that. I don't believe that's what the intention was, that it was the managed services related to industry solutions, which I think you're aware, we have both in travel and transportation and financial services and some other areas where we have deep industry experience as well as some kind of volume-based things on the CTF side. So hopefully, that answers your question.

Yes. And Matt, just to be clear, those industry solutions can be sit on top of ClearPath Forward or they can be independent of ClearPath Forward. The ECS team is not only focused on ClearPath Forward. But the ECS team really specializes in our solutions and if you will, proprietary things that we lead with as opposed to the CA&I team, which is more about creating solutions on behalf of our clients. And that's one way to think about these two different teams. There are managed services opportunities on both sides of CA&I as well as ECS. The ECS managed services opportunities tend to be around our solutions, whether those be more generic ClearPath Forward, which deals with many industries or the specific industry solutions that we have some on top of ClearPath Forward and some independent.

[Operator Instructions]. It appears that we have no further questions at this time. We will go ahead and conclude our question-and-answer session. At this time, I would like to turn the conference call back over to Mr. Peter Altabef for any closing remarks. Sir?

Yes. Thanks, Mike, very much. I'd like to thank everybody for participating on this call and many of you also participated in our June Analyst Day call. And I really want to thank you for your involvement in that. We mentioned the industry analyst call in my remarks. And of course, as you all know, we also had investor analyst call. Like the industry analyst call, the investor analyst call was very well attended. And both the questions and the level of engagement we really, really appreciate. So we continue to be available to each of you and really appreciate the dialogue that we have and continue to develop. So thank you very much on behalf of our team.

And we thank you, sir, for your time also and to the rest of the management team. The conference call is now concluded. At this time, you may disconnect your lines. Thank you, again, everyone. Take care, and have a wonderful day.