Good morning, and welcome to the Unisys Corporation Fourth Quarter and Full Year 2024 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I 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 fourth quarter and full year 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 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 exclude certain items such as post-retirement 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 call are available on our investor website. With that, I'd like to turn the call over to Peter.

Thank you, Michaela. Good morning, everyone and thank you for joining us to discuss the company's fourth quarter and full year 2024 results. Our fourth quarter results were solid, with 10% sequential revenue growth both as reported and in constant currency, and our non-GAAP operating margin was a strong 11.6%. Full year non-GAAP operating profit was $176 million representing an 8.8% margin, up 180 basis points year-over-year and above the top end of our upwardly revised guidance range. We exceeded our initial free cash flow outlook and are delivering on our goal to improve cash conversion with lower aggregate legal, environmental and cost reduction payments. Pre pension free cash flow nearly doubled to $82 million in 2024. Our 2025 outlook continues to advance us toward our long-term goal of expansion in pre pension free cash flow with approximately $100 million expected in 2025. Our outlook reflects continued execution of our ongoing strategy to improve revenue growth and profitability of our Ex-L&S solutions, enhance our high margin L&S revenue, streamline corporate costs and improve cash conversion. With the growth and margin of our new business signings in 2024 and our investments to improve delivery and optimize our workforce, we expect to provide an underpinning for another step up in Ex-L&S profitability in 2025. We are also raising our L&S revenue expectations to approximately $390 million in 2025 and $400 million in 2026 at an average expected gross margin of approximately 70%. This $395 million average L&S revenue for '25 and '26 is a $25 million annual revenue increase to our previous expectation of $370 million on average for the next two years. This is the latest in a string of positive revisions that reflect the success of our ClearPath Forward 2050 strategy and further support the longevity and inherent value of…

Thank you, Peter, and good morning, everyone. As a reminder, my discussion today will reference the supplemental slides posted on our website. I will discuss total revenue growth both as reported and in constant currency and segment growth in constant currency only. I will also provide information excluding license and support revenue or EX-L&S to allow investors to assess the progress we are making outside the portion of ECS for revenue and profit recognition is tied to license renewal timing which can be uneven between quarters and years. As Peter mentioned, we are pleased with the improvement in our non-GAAP operating margin and the strong year-over-year free cash flow growth we were able to achieve. The operational improvements we have made in our segments are leading to sustained Ex-L&S gross margin expansion which is being enhanced by stronger L&S performance as clients continue to commit to and increase usage of our operating system. The resolution of several legal matters in 2024 eliminates the future headwind to cash from legal costs related to these matters. We also continue to expect higher conversion in 2025 and 2026 as environmental and cost reduction payments decline. Looking at our results in more detail, you can see on slide 4 that fourth quarter revenue was $545 million, down 2.2% year-over-year as reported and 1.5% in constant currency. During the quarter, L&S revenue came in stronger than our already increased expectations while Ex-L&S revenue declined 4.7% as reported and 4.8% in constant currency. For the full year, revenue was $2 billion, down 0.3% on both a reported and constant currency basis and within our guidance range. Excluding license and support, full year revenue was $1.58 billion, down 0.6% year-over-year both as reported and in constant currency caused by certain headwinds we view as temporary. We remain…

Before we open the call to our Q&A session, I want to thank you for all of your attention to our company. For several years I have been joined by both Deb and Mike Thomson, our President and Chief Operating Officer, in the Q&A session of our earnings calls. We announced in December 2024 that effective April 1, 2025, Mike will become our CEO and I will continue as Chair of the Unisys Board of Directors. Thank you also for your support of Mike. Given that change, I'm asking Mike to take the lead on this Q&A session and working with Deb on the earnings calls going forward. Operator, please open the call to comments and questions. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. The first question comes from Rod Bourgeois with DeepDive Equity Research. Please go ahead.

Great. Great. And I also want to just give my kudos to Peter and to Mike for this transition. You guys are both class acts and I wish you guys the best. Just to jump into the first question here. Given the low growth exit rate in the Ex-L&S business as you exit 2024, you've got a pretty significant growth rebound expected during 2025. And I know some of that is coming from the strong new TCV bookings that you've had, but can you give us some more visibility into how you're looking at that growth trajectory in Ex-L&S? I mean, how much of your confidence in that growth inflection point is coming out of work that's already booked in the backlog where you have visibility into the ramp up? Because I'm also wondering if you have any assumption that these weak client volumes are going to come back or is all of the assumption based on what you're seeing in the backlog? Thank you.

Hey Rod, thanks for the question and your opening comment there. Much appreciated. And you know, obviously thanks for the following, the company, et cetera, your viewpoints here are always insightful and we appreciate the time following us. Your question has a couple parts to it, so I'll try to break it down into those. I think in general, as you know, from an industry perspective, we did fairly well in relation to the peers in 2024, but clearly we were behind in our expectations in Ex-L&S revenue growth. You're exactly right that we're, you know, we're looking at that inflection in '25. We're calling for, as Deb alluded to 1% to 5% growth in Ex-L&S on constant currency basis. And I think that comes from really probably three component pieces. And I'll break those down to give you a little bit more color. The first, as you've alluded to at the end of your question, was in relation to the backlog conversion. Clearly, we had very strong new business signings in both CA&I and DWS from a new business TCV perspective, both of which were roughly 40% increases, I think we called 29% year-over-year in new business signings. So, we've got this I'll say lapping component of new business that we've signed in the back half of '24 that we're going to see the benefit of in '25. And a reminder that those new business signings are also kind of our new solution components which are higher margin elements to that. So that's number one. Number two, when you look at, you know, what happened in '24 specifically with kind of the low volume components of our field services work, specifically PC oriented, you're seeing, you know, from an industry perspective, we're all expecting an uptick in that PC…

Yes, super helpful commentary there. And so, my follow up is really about your ability to continue to drive the improvement in free pension, free cash flow, the reversal in the environmental, legal and restructuring bucket which had been very large in 2023. The reversal there is super encouraging and I appreciate the color that you guys have provided on that already. So now I want to focus on the margin levers that you have. And what I'm hearing is you have gross margin levers and you're also continuing to do work on the SG&A front, although there are some investments in SG&A as well. So just to clarify you clearly are citing gross margin improvement from here. Are you also expecting SG&A benefit to your overall operating margin? And then just a specific thing within gross margin, can you give us a sense for how much of the gross margin improvement confidence is coming from cost takeout and productivity versus pricing and mix shift? Because it does sound like you have opportunities on the productivity side, but also on the mix shift and on the pricing side. And can you let us give us a sense of the balance of those two buckets in your gross margin trajectory? Thank you.

Yes, sure. And again, thanks, Rod, for the question and the clarity here. So, you're really right on all accounts here. Right. So, if we just talk about the gross margin, I'll stay on the operations side for a minute and then I'll flip over to SG&A and maybe ask Deb to comment on the SG&A component as well. But if you think about the gross margin improvement in the business, you're seeing what we're calling in '25 has two components. It has the L&S step up in top line. That is also an increase in gross margin as that top line pulls through. And you'll note that when Deb gave the commentary around the L&S gross margin for 2024 was a higher mix of hardware components in that and in general was sitting at probably the low to mid 60% gross margin rates. Here we've got a step up in both top-line primarily based on consumption. And so, this 2050 program has been helpful in driving additional gross margin dollars. We're also talked about that being in the approximately 70% range. So, there is a pickup to your point on the top line from an L&S perspective. If I shift to Ex-L&S, we've got really two things at play. One, as you've just alluded to, there is a top line benefit to gross margin because we're selling our solutions at a higher margin from the start and they're more valued solutions. Right. So, it's not. The whole point of our strategy shift was to kind of move up that stack. And we're seeing some, some of the benefit of that coming through and we see this continued workforce modernization. So, Peter alluded to that in his opening remarks and gave three elements of that as it pertains to the shifting of the workforce, the upskilling and right skilling of the workforce, as well as the efficiency and utilization play. So, I would think from an operational perspective, we're calling for about a point and a half on the aggregate in Ex-L&S margin improvement. And I would Say, you know, if I look at that proportionally it's, it's probably about a half a point or so pull through top line and a point from efficiency in the workforce. Right. And it's also just the efficiency in how we're delivering our solutions. Rod, when you talk about the application of AI and AIOps and orchestration, et cetera. Right. That just being able to deliver that in a more efficient way is where a good chunk of that comes from. You're right in that we're also expecting continue improvements in SG&A as well. Deb mentioned a couple components of that. And Deb, I'll ask that if you want to weigh in here on the SG&A components for 2025.

Great, thank you and thanks Rod for your question. The, you know, we definitely are making progress executing what we had laid out at Investor Day in '23. Our SG&A initiatives were streamlining corporate functions, rationalizing real estate and centralizing technology. And we're, you know, we've made a lot of progress at that. To your point you had made, we are also reinvesting some back into our go to market and our portfolio. But we still will see, you know, a portion of our operating profit improvement in '25 will be from that continued SG&A reduction and progress we're making.

And I would say Rod, just to close that out, I mean obviously our focus is on pre pension cash flow and kind of continual step up in that. You've seen that number almost double in '24. Deb talked about that being in $100 million-ish range in '25 and you know the path to the $150 million-ish range in '26 which you know, gets the comfort level that the contributions that need to be made in those out years are covered and we're not tapping, you know, into our cash balances to do that. So I think that's kind of the name of the game here.

Great. Thank you, guys, and thank you to Peter. You will, you will be missed. Talk to you guys later.

Thanks very much. The next question comes from Joseph Vafi. Excuse me. With Canaccord. Please go ahead.

Hey everyone. Good morning. Nice to see progress in the business and you know, yes, big congratulations to Peter and the team for everything they've accomplished over the last few years. And with Mike at the helm, I'm looking forward to more progress in the business moving forward. So maybe we just drill down on L&S a little bit more. It's obviously a big lever moving forward. You know we did see a step up in the guide after Q3 you exceeded that. And then we have another step up here. We drill down a little bit on where those, where that uptick is coming from. Is it broad based as a function of the new release of software AI, is it or verticals, any color there would be appreciated and then I have a quick follow up.

Sure. And thanks for the question, Joe and I agree with you and Rod, you know, Peter will certainly be missed and looking forward to continuing the great legacy he is, he's left us here. So, appreciate the opening comments there. Look, I think you know Joe this pretty well. This business has continued to outperform. We continue to see clients over the broad base sign contracts for longer durations, continue to invest in the IT estate around the L&S prestige platform in general. I think you know, with, interestingly enough, when you think about what's going on, you know, obviously in the world today and you think about the AI component of that and you look at this business, I don't think it's really any different. Right. The value in the AI is really about the large language models and the data. And when you think about our, our L&S operating system, it's got tremendous amounts of data that is secure and usable from that perspective. So, when you look at the work that we're doing in the planning process around ClearPath Forward 2050, it's really about the ecosystem around the L&S platform. And I think what we've seen over the course of the last couple years and, and we expect to see prospectively, which is why we've raised our color guidance there up in both '25 and in '26 for an average of roughly $25 million per annum of an increase in those years on a top line basis. It's because we're getting that strength from our clients in their increased consumption and their willingness to sign longer term deals. Right. They're coming to us wanting to extend the life of the deal and also giving us work in the application space that sit on top of that platform to help modernize that infrastructure. So, this has not been new. Right. I think we've seen this trend of over performance from this business probably over the course of the last two years. And then as you know, we have a pretty deep line of sight into the clients that utilize this platform and work with them, you know, fairly exclusively in how we can continue to modernize. And we're seeing that take up rate. So we're pretty excited about the longevity of this business. We think it fits in really nicely to, you know, what you would consider a modernization story. And as you know, it's, it's the most secure, you know, operating system on the planet. When you, when you talk about, you know, according to NIST and the value that that brings. So, you've got this tremendous data set that can be utilized in a modernized way. So, you know, we're seeing really, I'll say, strong client support of that and that's given us confidence to increase our color there.

That's great. Thanks, Mike. And then maybe on the operations side a bit, I know Peter discussed this, I guess, the repositioning or restructuring in application services in the software factory. Is there anything special to note there on timing this occurring now? I know you've done a lot of repositioning internally over the last few years. Was this, did something new pop up on the roadmap or was this kind of planned? But there were other things to do first. Just some more color there would be appreciated. Thanks a lot.

Yes, great question and thanks, Joe, again for your continually following the story here and being spot on with these. Look, the applications factory, as we're calling it is nothing new. You're right. When we did our first premise of what the future strategy of the company would look like, this was under consideration then. But we had so much to do in order to kind of get the new strategy in place. We had a lot of change going on and it just wasn't the time from an adoption perspective. So, you know, we kind of left these areas sit in there I'll say legacy business ownership. Some of it was in ECS, some of it was in BPS, which is in our, was in our other segment. We kind of let it mature a little bit there, but was always intentional to bring this together to get the leverage that we wanted out of this business. We're just at a point where we're mature enough, I think, in both our leadership, our structure, our solution development, and wanting to get deeper into the industry verticals where it made sense to do it now. So, there's really no magic bullet as to why other than it's the majority of our solutions and of our management team and of our strategy that allowed us to do it. Effective January now, we will be putting out, you know, so an 8-K shortly that relates to the kind of restatement of those segment data so that everyone has the ability to model. We'll put two years out by quarter. That'll be probably filed after we file the K, which we expect to be a little later this week. And that'll give the kind of movements out of ECS into CA&I and out of all other into CA&I and give a good viewpoint. But look, we know that apps modernization in general is a fast-moving element of the industry and the segment and we want to take advantage of that. So, we're putting some, I'll say more wood behind the bat. We're bringing these teams together. It's giving us a good geography base, especially in EMEA, to grow from which we've seen some good growth over the course of the last year. And so we think it's the right time to do it. But there's no like triggering event, if you will. It's kind of always been in the hopper and this is just the time we thought was the most advantage to us to pull it together and take advantage of the growth that we're seeing in new business.

That's great. Thanks for that color Mike, and congrats to the team. Best of luck to everybody.

The next question comes from Arun Seshadri with BNP Paribas. Please go ahead.

Yes, hi. Thanks for sneaking me in here. Congrats again to Peter and Mike on the recent announcements and appreciate the continuity by your leadership, the board, Peter. Just very quickly from me, just a couple of things. First, I think you've kind of talked about higher renewal TCV year in 2025 versus 2024. Is there any way you can quantify, I guess, how much higher of a TCV renewal year '25 is relative to '24?

Yes, I don't know that I have the percentage that I, that I can give you a room. But there's really two reasons for that. One is just the timing of the renewal cycle. Right. And that does ebb and flow a little bit. The other was there were a couple deals that we expected to renew at the tail end of '24 that got pushed into '25. So, you know, when I look at it from that perspective, I would say it's '25 is probably a little bit more of a normalized renewal cycle, if there is such a thing. So not really a percentage that I would give you. I guess the thing I could tell you is if I look at, you know, kind of backlog conversion, the expectation is the backlog conversion of revenue in '25 is going to be fairly consistent to what it was in '24. And we're expecting that that renewal cycle to be stronger in '25 both for, you know, just the due dates on when they come up to bid. And I guess secondarily the rollover of a couple things that we expected to have happen in '24 that that got pushed into '25.

Got it. Thank you for that, Mike. And I assume that's also the push from '24 to '25 for some of those renewals is basically what impacted the book to bill. Is there some connection there as well?

Yes, you're exactly right, Arun. And thanks for calling that out. I should have done it as well. Yes, we were certainly expecting a higher book to bill in '24 and it was in relation to these expected closings. But as you know, tail end of the year you've got these closings, they push out a week or two and they change fiscal year. So, I think you'll see a higher number than normal in '25 based on that. Right. From a book to bill perspective and the increase in backlog and TCV. But if you're looking at the two years combined, it's normalized and aligned to what was in our strategy from inception.

Appreciate it. One more from me, and that is in terms of the, it was really great to see the L&S revenue transition here and the continued input with prior guidance versus prior guidance. But can you talk about sort of just to get a sense for how broad that is across of your, across your L&S base? Is there any way you could sort of talk about how many customers I guess accounted for this pretty significant improvement from the beginning of the year to the end of the year in terms of your expectations for the overall L&S evolution?

Yes, look, I would say in general and maybe tying this back into Joe's question, the favorable, I'll say market conditions that we're seeing is across the whole base. Right. It's not like it's a specific client. Now as you know these L&S renewals come up that, you know these are five or seven year deals. Right. So, when they come up for renewal is more a timing on the renewal schedule, which is why we break it out and it's lumpy. But I would say in general, you know, we've seen increased consumption and we've seen increased desire to extend contracts. Right. And that's across the base, not a one off or, or a one project-oriented thing. And it's been pretty consistent over the last couple years in that manner. So, it's not some anomaly of in our opinion of a one-off thing. And there's a reason why we have ClearPath 2050 as our mantra here. We have seen and continue to see the increase in consumption and the insight from our clients that there's a long tail here and they like this platform, it works well for them in the business and they've seen our ability to modernize around it. So, it's really been pretty favorable experience from our perspective.

Thank you, Mike. And then one last thing, maybe for Deb, just in terms of the free cash flow guidance, just want to make sure that the 2025 guidance includes the remainder, I guess the '25 million remaining in the legal settlement that was announced in Q4. And then on a sort of a longer time frame, I think we saw in 2025 there was a small reduction in pension funding requirements relative to your expectations going into the year. Any other possibilities like this in 2025 that could impact 2026 and beyond in terms of reducing the front end of the pension cash obligations? Thank you.

Right, so just to clarify, in our $100 million of pre pension free cash flow color that we gave, that does include the $25 million expected from that settlement. So that's your first question. Second, I think from a pension perspective, I'm not sure, you know, we did have a slight uptick in the contributions for the, you know, this next five years, which is what we typically focus on since that's the, the, you know, less volatile, more of the volatility is out in the later, in the later years. And also, you know, that's what we really focus on to look at our liquidity needs and our, you know, near term that, that five years. So you know, slight uptick there, but we feel like we're still on a path to be able to fund those with our pre pension free cash flow.

Just remember when we do that pension analysis annually, the full analysis is done. The actuarial viewpoint, there's typically very little movement in the first 18 months on the contribution side. When you see a movement in that, it typically comes in later in those contribution schedule as they pertain to actuarial assumptions. So, I expect that the next several years of those contributions are pretty much locked, floated and if we do see any movement up or down, it would be probably two years and beyond when we look at that. So that's Deb's point on the short-term liquidity component of it.

Thank you both.

[Operator Instructions] The next question comes from Anja Soderstrom with Sidoti. Please go ahead.

Hi, thank you for taking my questions and also want to thank Peter for his time and look forward to continue working with Mike. Most of my questions have been addressed already, but I'm just curious. With a much stronger L&S in expected in 2026, how's that going to impact your cash flow expectations?

Hi Anja, it's good to hear from you. Thank you for the question. Deb, why don't you, why don't you field that one?

Okay, great. Now it will help. So as far as that, you know, kind of expected, you know, potential bridge to '26, that is an element of it. So that SL&S, you know, going from what we're expecting to be $390 million in '25 going to $400 million in '26, you know, and it is at that higher margin, you know, approximate 70% that we laid out. And so given that it does, you know, contribute a decent amount to getting to that bridge. In addition to, you know, a bigger component is the Ex-L&S gross margin improvement which we kind of proven that we've been able to continue to increase that, you know, approximately 150 basis points, particularly if you're looking, you know, particularly CA&I and DWS, which we're calling for, you know, again in 2025. And then also you can expect that continue in '26. So that's the, a bigger piece of it, that gross profit from Ex-L&S, but that L&S, you know, bump of that $10 million more of revenue will also be a contributor to it along with SG&A improvements, as I mentioned, and then continued improvement in cash conversion.

Okay, thank you. And then in terms of demand in the commercial vertical, is there any industry that's worth calling out either on the negative side or the positive side?

Yes, I wouldn't say that there's any industry I would call out. Certainly, on the negative side, we don't really have anything to call out there. We have, as you know, really focused in public sector, diving a little deeper into higher ed. We have a pretty strong presence in travel and transportation and obviously in financial services. So, we're pretty, as you know, Anja, pretty evenly distributed amongst those various industries as far as our businesses is concerned. And we're fairly evenly distributed from a geography perspective as well. So, I think we have a really nice mix of diversity both in geography and segment that kind of insulate one another from any specific anomalies. And again, we've got clearly a focus area in public sector. As a reminder from that perspective, you're talking state and local business domestically and internationally, you know, clearly foreign countries, etcetera, that make up our public sector. So, nothing I would call out in particular other than to say that they've all been, at least where we're playing, all been performing pretty well as of late.

Okay, thank you. That was all for me.

This concludes our question-and-answer session. I would like to turn the conference back over to Peter Altabeth. Excuse me, Altabef. For any closing remarks.

I'll do quick closing remarks, but then I'll let Mike actually do the final closing remarks. I really want to appreciate and thank each of you. Joe, Arun and Anja, thank you for your remarks following Rod's. Thanks for your support. And it's encouraging and totally expected that you are supportive of Mike in the new role. He will be terrific in this role and I can tell you he has the support of both our board of directors and our entire leadership team. With that, over to you, Mike.

Great. Thank you. And I would like to acknowledge Peter here as well. Thank you, Peter, so much for your leadership in the company. And as a reminder to the folks on the following here, Peter is staying on as chair of the board, so we're lucky to keep him with us for an extended period here on the board side of the equation. So, thanks, Peter, for your guidance. Look, I'll just wrap by saying, number one, thanks for taking the additional time. I know we went over, but it's always good to get the questions and get the color out. You know, we continually try to give more and more transparency in our remarks and in our content. And by that, I would also remind you all to visit unisys.com investor relations website. There is a ton of information that we talked about here and additional information, again from a quarterly perspective and an annual perspective, exceeded our upward guidance as far as profitability is concerned, met our revenue guidance, improved our operating and free cash flow and hopefully gave you some good color into what we're expecting in '25, which is, you know, the continual improvement of the margin component of this business as well as seeing growth in that Ex-L&S business as well, driving additional profitability and cash flows. Right. That's what we're focused on. I know that you'll see the continuity in the strategy and the team and looking forward to our next call. So thanks a lot for your time and attention and looking forward to Q1. Thanks.

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