Good day, and welcome to the Unisys Corporation First Quarter 2024 Earnings Conference Call. [Operator Instructions] 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 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. As a reminder, certain statements in today's conference call contain estimates and other forward-looking statements within the meaning of the securities laws. We caution listeners 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 differ materially 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 postretirement expense, cost reduction activities and other expenses the company believes are not indicative of its ongoing operations, as they may be unusual or non-recurring. We believe these measures provide a more complete understanding of our financial performance. However, they 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 reconciliations within the presentation. The slides accompanying today's presentation are available on our Investor website. And with that, I turn the call over to Peter.

Thank you, Michaela. Good morning, and thank you all for joining us to discuss the company's first quarter results. We had a solid start to the year with revenue and profit slightly ahead of expectations, keeping us on track to meet our full year financial guidance, and we are continuing to make progress towards our long-term cash flow objectives. Growing Ex-L&S solutions and expanding our Ex-L&S gross margin are important elements of our strategy to enhance profitability and cash generation. We showed improvement on both fronts during this quarter. Ex-L&S revenue grew 4% year-over-year, and we expect growth to accelerate in the second half of the year, as revenue ramps from Ex-L&S new business signed over the past several quarters and based on the accelerated cadence of project work in our pipeline. First quarter Ex-L&S gross margin expanded year-over-year, as we continued to deliver on additional efficiencies, while making near-term investments to achieve future delivery cost savings. During the quarter, we saw continued momentum in new logo and next-generation client signings, which is a positive signal of growing market demand for our solutions and bodes well for future Ex-L&S revenue growth and profitability. We also believe we have the potential to accelerate growth through offerings that expand our addressable markets, such as Unisys Logistics Optimization. In addition to improving Ex-L&S performance, increasing operational efficiency is another important element of enhancing our free cash flow. During the quarter, we continued to streamline our general and administrative costs, and we are working towards a meaningful reduction in SG&A, as a percentage of revenue over the next few years. Beginning next year, we also anticipate improving free cash flow conversion in part, as legal and environmental payments are expected to decline. Looking more closely at first quarter client signings, total company TCV declined…

Thank you, Peter, and good morning, everyone. My discussion today will reference slides from the supplemental presentation posted on our website. I will refer to revenue as reported and in constant currency, but with segment revenue growth discussed in constant currency only. I will also provide information, excluding license and support revenue for Ex-L&S to allow investors to assess progress we are making outside the portion of ECS, where revenue and profit recognition is tied to license renewal timing, which can be uneven year-to-year and between quarters. As Peter discussed, the company has come a long way in transforming our portfolio, building market awareness for our digital capabilities and opening up new addressable markets with innovations such as Unisys Logistics Optimization. Our profitability is moving in the right direction as well. We are maintaining our strong L&S gross margin, while improving Ex-L&S gross margin through delivery efficiency and solution mix. We are also streamlining SG&A and working towards lower legal and environmental costs and payments beginning next year, which will improve free cash flow conversion going forward. Continuing to improve and execute in these areas will increase our ability to achieve enhanced cash flow generation. Looking at our results in more detail, you can see on Slide 4 of our presentation, total company revenue of $488 million was down 5.5% year-over-year and 7.1% in constant currency due to the expected cadence of L&S renewals over time. First quarter Ex-L&S revenue was $395 million, an increase of 4% and 3% in constant currency. As a reminder, components of Ex-L&S solutions are our Digital Workplace Solutions and our Cloud Applications and Infrastructure segments in addition to specialized services and next-gen compute solutions with ECS and business process solutions reported within all other. DWS revenue was $132 million were flat to the prior…

Thank you, Deb. While we have shared a lot of information with you today, there are 3 important points I want to emphasize. First, we are continuing to improve performance of our Ex-L&S solutions, and the momentum in our new logo signings is an important sign that recognition for our portfolio is growing in the market. Second, we have a number of opportunities to accelerate our growth by building on the success we're achieving with higher-margin solutions such as application development and modernization in CA&I and ECS, intelligent device refresh in DWS and with newer quantum and AI-infused industry solutions such as Unisys Logistics Optimization. And third, we're on track to achieve our long-term targets, and we're continuing to progress toward enhancing our free cash flow generation, especially as we expect to see declining environmental and legal payments and improved profitability in markets where we have significant tax assets. With that, operator, you may open the line for questions.

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

All right, guys. Good to connect here. It's encouraging to hear the update and the emphasis on lowering your environmental and legal costs. I wanted to see if you could elaborate on the potential magnitude of your plans to reduce those costs, especially as you move into 2025?

Yes. Rod, this is Peter. Thanks very much for the question, and thanks for attending the call. Deb kind of quantified both in part. On the legal side, I would say that, by far, the most significant legal expense we've had is an ongoing lawsuit, where we are the plaintiff and that is around IP defense work. And we -- the trial date is not currently set, but we expect that in 2024. So we expect that -- those legal expenses, which do represent the predominant amount of our outside legal expenses will basically tail off after 2024. So that's going to increase the remaining cash allowance that we have going forward. And then really 2 things on environmental. We have one environmental cleanup situation, where the majority of our current and expected costs are being incurred in 2023 and 2024. So again, from a cash flow standpoint, we expect that not to be the case starting in 2025. And as Deb mentioned, it's actually going to reverse because we expect that we'll receive a partial reimbursement for that and the expenses that we're paying up to about $30 million. We're not sure exactly when that will happen, but we're thinking that may happen in 2026. So I hope that helps, Rod.

Yes. Definitely helpful. And then I wanted to go back to L&S and the consumption volume in L&S climbed last year. Are you seeing follow-through on that trend in heightened L&S volumes? And I wonder if that contributed some upside to your expectations in the quarter that you just reported.

Yes. Rod, it's another great question. I'll defer to Mike on that one. But in general, you can -- we have really been encouraged by L&S. As you will recall, we had more L&S revenue than we expected last year. We have a slight increase in L&S revenue this quarter versus expectations. Most of that was due to the timing of an L&S transaction. But in addition, we have this consumption issue. So Mike, thought about that, please?

Sure. Thanks, Peter, and Rod, good to talk to you. As you know, I think over the course of the last several years, we've seen kind of the increased consumption. And just as a reminder, typically, when we see early renewal, it's a byproduct of consumption, right? So the client is ultimately trying to extend their contractual life because the consumption is higher than anticipated. I would say, Rod, just in general, for our larger clients, we've seen fairly consistent increase for consumption basis. And I can't think of a client over the course at least of the last couple of years that upon renewal, where we actually saw reductions in that. So I think it's been pretty consistent. I think it's pretty consistent in what's going on in the world today with just larger data elements out there and that having a knock-on impact to consumption. But again, fairly consistent over the last couple of years and the primary reason for early renewals.

Yes. And just to follow up on Mike's comment...

[indiscernible].

Just to follow up on Mike's comment. Thanks, Deb. The -- last year, as I said, our L&S revenue was higher than expected. And as we thought about that consumption question that you're asking, Rod, one of the things we did was take another hard look at the 3 years beginning this year, where we had expected an average L&S revenue of about [ $360 ] million. We increased that to $370 million, as an average for the 3-year period, even in the face of a higher revenue number last year than we expected. For 2024, we're currently expecting about $375 million, so a little bit above the 3-year average. But all of that is, frankly, very encouraging. Deb, I'm sorry, I spoke over to you.

No. I was going to say similarly that we're still holding to that because Q1 was mostly [indiscernible] a timing thing, and we're holding to that $375 million for the year and the $370 million 3-year average. That's all -- that's what I was going to say.

And the next question comes from Arun Seshadri with BNP Paribas.

Just -- so I guess, in terms of being able to quantify how much the legal and environmental payments would decline? I guess, at this point, you're not willing to do that, but like do you think it's more than a half reduction of that expense over the next couple of years?

So this is Peter. If you're talking about external legal expense, obviously, we have our own internal legal function and also talking about environmental, Deb, I don't know if we can quantify that. I would expect it, by the way, to be less than half. But Deb, you may or may not be in a position to quantify that more than I just did.

Right. I think that's probably about right. We haven't given the exact quantification just because there are still some uncertain things. So that's probably in the ballpark.

And that -- and one of the reasons we're bringing -- yes, one of the reasons -- it's a great question. One of the reasons we're bringing it up is because as we look at cash flow and as cash flow changes over time, one of the, if you will, things that we've had to deal with is that lawsuit, where we're the plaintiff, as well as those environmental costs. And so, as those things fall away and decrease very significantly, that just increases our cash flow without increasing revenue or business or without other cost initiatives. We are planning to do all 3 of those things. But losing that cash flow drain because of the lawsuit and because of environmental is almost automatic.

Thank you for that, Peter. And then just in terms of the 2 add backs for adjusted EBITDA for this quarter, the other expense and net adjustment and the cost reduction linked together, they represented something like $24 million or so. Is that -- how should we see that trend for the balance of the year?

Deb, do you want to speak to that?

Sure. So for the EBITDA add backs, I think it's the Q1, I think, is a little higher for the cost reduction. I don't think that should continue to be that high. And then for the other expense as well, there was something more of a onetime. So I think those are a little elevated, but we haven't given out those exact numbers. But I would say those 2 are higher than you would expect for the remainder of the year.

And then broadly, in terms of the business itself, the Ex-L&S TCV was, I think, excluding renewals was down about 2%, and you're expecting more back half weighting in project revenue. So would you say that, broadly speaking, what would you say is affecting it? Is it just a broader slowdown you think, in terms of just -- in terms of just customers taking a little bit longer? Or is it just all mechanical and related to renewals and just opportunities to actually to convert into managed services. Just wanted to understand if there's any sort of change in sort of trend line you're seeing? Or this is -- this is all just mechanical and it's just the signings, the lack of signings in 2023 and just the timing of managed services ramp in '24?

Yes. It's a great question. Let me take the beginning of that and then turn it over to Mike for the second half of that question. We're really happy with the new business signings, as well as the new business pipeline. So new business for us is extensions, it's expansions and new scope of existing clients, and it's also new logo. And last year, we did well on the expansion, extension, and new scope work with existing clients. But one of the things we are very, very focused on is making sure that the new logo component of that picks up and increasingly becomes a bigger part of our new business mix. That happened to a fairly well in the first quarter, and we expect that to continue over the course of the year. So the negative 2% is really not significant one way or the other and largely due to timing. But the more important number is more than doubling -- at least we think the more important number is the more than doubling of new logos. And we expect to have a very strong full year this year on new logos compared to last year. That we think is a really good harbinger for our ability to, if you land and expand and create more and increasing revenue over time. Mike, over to you for more detail on that.

Great. Thanks, Peter, and Arun, thanks for the question. I think Peter answered it pretty well, but I'll maybe just add a little bit of color there. For starters, not necessarily any negative trends that we're seeing. I do think you're right, Arun, that there is a little bit of a pause from a market perspective. I think you're seeing that in the industry, certainly, what we're seeing in general. But I think it's a little bit more to do with the mechanics of the deal signing. The pipeline is extremely encouraging. As we've talked about, we have increased significantly our new logo signings year-on-year and sequential. We expect that new logo signing to continue to enhance throughout the year. And that has kind of a knock-on impact, right, because the new logos [ being add ], it gives us another opportunity to expand and pick up the new scope, and we traditionally see that after a new logo signing. So first, it's the transition time to get to revenue. Typically, if they're taking on work for incumbents, it's a 3 to 6 months to get to transition into revenue, which is why we're expecting some of the back half revenue improvements for the new logo signs that we had at the tail end of last year. But again, very encouraged with market reception and looking forward to an accelerated back half, both in signings and picking up some growth in the business.

[Operator Instructions] And the next question comes from Anja Soderstrom with Sidoti.

Some of them have been addressed already. But have you given any sort of targets for the gross margins for the new businesses, the Workplace solutions and CA&I?

Yes. Thanks. This is Peter. Great question. Again, I'll defer actually to Deb on this one after I do a little start to that. When we rolled out our multi-year plan last year, one of the things that we stressed and you just hit on it, is really an expansion of gross margin, and that's really going to come in 2 ways. One is where we expect the gross margin dollars to expand because we expect growth in, if you will, in Ex-L&S business; and the second because we expect that business to become more profitable. We're very encouraged by what we saw this quarter with that business becoming more profitable, specifically on the majority of that business, which is in DWS and within CA&I. The second element of that, which is also important, and it's a little bit like the decreasing amount that we expect on the external legal fees and on the environmental. Some of this stuff is, again, built into our model, which we showed last year, but relatively automatic. And that -- what I mean by that is as that business grows, it has more profit dollars. And as that business becomes more profitable, so they are more profit dollars per revenue, the majority of that revenue is in the U.S. and Canada and in EMEA at least historically. In fact, we have 77% of our revenue in those 2 areas. And as you look at our tax situation and Deb referred to our tax asset, we have very significant net loss carryforwards in both the U.S. and Canada and in certain countries in EMEA. That is also detailed in a chart in the materials that we provided you. So not only do we expect that profitability of the business to increase, but as we think about modeling, and we do not expect to pay a typical, if you will, cash taxes on that increased profit because of the value of our NOLs. And so, we think that -- again, it's relatively automatic because those NOLs exist. So we expect that to help us, as well in the model going forward. Deb, and -- any further comments on that?

No, I just think -- I think Anja, you had asked also about the target, have we given an explicit gross margin target. I think you had maybe mentioned. I think we haven't given specifically by the segments, but we did say overall, Ex-L&S about 150 basis points to 200 basis points this year is what we're saying. And I think you're seeing the progress of that with this quarter, DWS margin up 250 basis points and CA&I at 360 basis points. So all of the cost actions we're taking within those businesses are definitely taking hold, and we're showing progress.

Yes. Anja, if I could -- just to tie on to Deb's point, if you recall from Investor Day, we had talked about a targeted gross margin in our next-gen solution being in the 25% range. And so, I think if you're looking from a modeling perspective, of course, we have internal targets for all of our solutions, as we take them to market. But I think that's probably -- well, a, we've already given it and b, fairly consistent in that range at approximately 25% gross margin on the next-gen solutions consistent with what we talked about at Investor Day.

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 comments.

Thanks very much, operator, and I'd like to thank everybody for joining us. As I hope that Deb and Mike and I [ made ] clear in both the opening remarks that Deb and I gave, and as well as the Q&A responses we are -- we thought this was a good quarter. We're slightly ahead of expectations on revenue and profit. We're making very substantial headway in new logo TCV, and we are reaffirming our guidance for the year. You will find more information about the company on our investor website. We actively encourage any questions from our investor base. We had a shareholder meeting that was taped a little while ago, and that is available as well for your review, for those of you, who are not able to do it. I did a company report [ doing ] that of 2023 performance, So with that, I want to thank everyone for joining us and look forward to the next call.

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