Good day, ladies and gentlemen, and welcome to the Unisys Second Quarter 2017 Results Conference Call. At this time, I'd like to turn the conference over to Ms. Courtney Holben, Vice President of Investor Relations at Unisys Corporation. Please go ahead.

Thank you, operator. Good afternoon, everyone. This is Courtney Holben, Vice President of Investor Relations. Thank you for joining us. Earlier today, Unisys released its second quarter 2017 financial results. I'm joined this afternoon to discuss those results by Peter Altabef, our President and CEO; and Inder Singh, our CFO. 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 the presentation slides that we will be using this afternoon to guide our discussion as well as other information relating to our second quarter performance on our Investor website, which we encourage you to visit. Third, today's presentation, which is complementary to the earnings press release, includes some non-GAAP financial measures. The non-GAAP measures have been reconciled to the related GAAP measures, and we provided reconciliations within the presentation. Although appropriate under Generally Accepted Accounting Principles, the company's results reflect charges that the company believes are not indicative of its ongoing operation and that can make its profitability and liquidity results difficult to compare to prior periods, anticipated future periods or to its competitors' results. These items consist of pension and cost reduction and other expenses. Management believes each of these items can distort the visibility of trends associated with the company's ongoing performance. Management also believes that the evaluation of the company's financial performance can be enhanced by use of supplemental presentation of its results that exclude the impact of these items in order to enhance consistency and comparativeness with prior or future period results. The following measures are often provided and utilized by the company's management, analysts and other investors to enhance comparability of year-over-year results, as well as to compare results to other companies in our industry, non-GAAP operating profit, non-GAAP diluted earnings per share, free cash flow and adjusted free cash flow, EBITDA and adjusted EBITDA and constant currency. From time-to-time, Unisys may provide specific guidance regarding its expected future financial performance. Such guidance is effective only on the date given. Unisys generally will not update, reaffirm, or otherwise comment on any prior guidance, except as Unisys deems necessary, and then only in a manner that complies with Regulation FD. And finally, I'd like to remind you that all forward-looking statements made during this conference call are subject to various risks and uncertainties for results to differ materially from our expectations. These factors are discussed more fully in the earnings release and in the company's SEC filings. Copies of those SEC reports are available from the SEC, and along with other materials I mentioned earlier, on the Unisys Investor website. And now, I'd like to turn the call over to Peter.

Thank you, Courtney, and thank you all for joining us today. As we referenced previously, we expected the second quarter of this year to be challenging given the comparison we faced from last year as well as the strong start to the year in the first quarter. Our revenue was down 11% or 10% on a constant currency basis. And non-GAAP operating margin for the quarter was 3.6% versus 10.8% last year. Both of these comparisons were impacted our technology segment ,which is historically lumpy from quarter to quarter and was up 31% in the second quarter last year and down 32% in the second quarter of this year. We also experienced weaker services revenue and margins. As we've previously discussed, we continue making progress with our cost restructuring and we have used some of the savings realized to reinvest in the business which impacts margin. These investments include new offerings and hiring subject matter experts and consultants. While we recognize the challenges faced this quarter given the nature of our business including technology renewal cycles, overall we believe we have made significant progress. We are reaffirming guidance for the full year for revenue, non-GAAP operating profit and adjusted free cash flow. Inder will provide more color on this shortly. Before getting into detail on the quarter, I'll first review some of the key elements of our strategy to provide a basis for comparison regarding our achievements to date and in the second quarter specifically. We are focusing the business to capitalize on key strengths that differentiate Unisys in the marketplace which we believe are our vertical domain expertise, IP led solutions and building security into everything we do, while also improving the company's efficiency. Our goal is to drive pipeline, TCV and revenue. And along with our targeted restructuring…

Thank you, Peter. Hello everyone and thank you for joining us this afternoon. In my comments today, I'll provide comparisons on a GAAP and non-GAAP basis and just to remind you the non-GAAP results exclude pension expense, cost reduction and other charges. As we had previously mentioned, we expected difficult year-over-year comparison in the second quarter. This wasn't fact the case as technology revenue was down 32% in the quarter this year versus being up 31% in the same quarter a year ago. We also saw some weakness in our Services segment this quarter as Peter mentioned. Overall, in the quarter we saw total company revenue down 11% year-over-year and margins also lower. While we recognize the Q2 challenges of course there are also a number of timing items between the first and second quarter of this year including and especially profitable transaction that was expected at some point during the year and happened to fall in the first quarter. Given this I'll provide some color on our results for the first half of the year, which helps normalize for some of these shorter from fluctuation and then I'll get into the specifics of the quarter itself. Turning to Slide 6, despite the challenge of the second quarter on a year-to-date basis, we believe we are continuing to make progress against many of our key strategic and financial goals. With respect to technology, I've already talked about its lumpiness and a tough year-over-year compare for revenue, which also affected margins in the quarter. However, the trends over a longer period of time for technology have been more positive with gross margin improvement of 6.8 points and operating margin improvement of 14.8 points against the first half of 2015, which had revenue over similar magnitude to the first half of this…

Thank you, Inder. We now like to give everyone the opportunity to ask any questions they may have. Operator would you please open the lines.

[Operator Instructions] First we'll take a question from Joan Tong with Sidoti & Company. Your line is open.

Good afternoon. Just a couple of questions, obviously it's a little bit disappointing for this quarter in terms of the performance, just putting aside Technology is having a tough year-over-year comp just focus on the Services piece, your target or your goal is really to improve profitability and obviously this quarter you didn't deliver the result yet you reaffirmed a whole year guidance it seems like you know the second half you really have to step up the margin improvement and on the Services side. Can you just give us a sense of where the confidence coming from that you can regroup some up the margin loss in the second quarter?

Yeah, Joan thank you, that's a great question. And you're exactly right. So the Services numbers were really roughly in line with expectations - excuse me the Technology numbers were roughly in line with expectations. Now the Services revenue was down a little over 5% in constant currency. But you expect, you have to get ahead of that decline in terms of your cost structure, and we did not get ahead of that decline in the quarter, it's pretty much as simple as that. By the time we really fully understood that, we made changes, and so as you may be aware, we did or operationally we actually merged the Services team with the Enterprise Solutions team during the quarter. That gave much more alignment to our cost structure and really kind of has enabled over the course of the last few weeks of the quarter for the team to take more decisive action frankly than had happened earlier in the quarter. So we do believe that the action that we took at the end of the quarter and have continued to take over the beginning of this quarter we'll work much better toward aligning that cost structure with revenues going forward, it's not immediate, but we do expect that improvement to occur during the second half. Second thing that occurs is, we do expect as we get new revenue in the door and that that revenue is over a base of some fixed cost and we'll increase margins. We are encouraged that the TCV number from quarter-to-quarter for new business was I think 74%, TCV can be a bit of a blunt instrument because of the differences in the term of the revenue. But if we look at ACV or annual contract value, which is the amount of revenue we expect in the first 12 months for that new business that we're signing, a new business we've defined as new logo or new scope at existing contracts. New business ACV in the quarter went up 127%, so you know we are selling to new logos and new scope to existing logos and we expect overtime that will act to increase our margin. It's a great question.

I'll just Joan jump in, sorry, this is Inder. So, just everything that Peter said, I think is bought on, I would just remind you of the three things I pointed to that I believe had the cost implication in the quarter. As you saw in our numbers, revenues weren't that far off in aggregate from where we were sort of indicating. Where I think we could of achieve even a higher margin outcome was three things I mentioned, and the combination of these three and I'm not saying them in any particular order was the timing of the French cuts, which we talked about. Some of that had associated with the new contract that I mentioned and then frankly execution on positive things, which we probably will do a far better drop off in the second half. The combination of these three things had they gone in our favor in the quarter, is three points to services gross margin. So if we reported 14.1% it would have actually been off year-over-year. So that's what gives us the confidence, we know what the things are and we can manage to those. I'm not saying it all rebounds in Q3, but as we look at the full year we expect that those things are controllable at least from a cost saving standpoint.

Right. Inder I do remember you guys mentioned during in early part of this year that the cost saving number is $30 million for this year, and I assume that that is a growth number and then obviously to net would be extra investment you still have to put in place, is that correct?

You know we are certainly creating those savings, and we're on track to deliver the $230 million for the full year, which is, which is what gives us confidence to reiterate the guidance for the full year. In part in terms of the execution plan, I think it's best characterized as a hiccup and to me that's a very sort of identifiable action that we have to take. Those savings just to remind you though our exit annualized run rate savings at the end of the year. So frankly they would accrue in the following year not so much in year, right.

Okay. Got it, got it. And then on a Technology side and you guys just climbing some difficult comp obviously compared to last year, and so we are thinking that maybe this year you're going to see a decline, but in terms of that magnitude of the decline, halfway through the year can you just share some of the your thoughts like how big you are talking about like in terms of year-over-year contractions on Technology?

Yeah, what I would say before Inder gave some detail in his remarks, but I'll let him provide some additional color. Our Technology segment as a whole is tracking pretty much against expectations for the year, and there is always some give and take, but I would say it's certainly within an order of magnitude of what we would expect, certainly at this time of the year. So you're exactly right that, there's timing issues on the Technology there's certainly be timing issues we think in between the first and the second half and even within the two quarters of the second half, but on the aggregate technology is tracking.

And I think that that Technology team is just executing very, very well each time, a tech deal comes up for renewal. Peter talked about the stickiness of that business and so we want to make sure that we maintain the relationship with the Technology base that we have installed out there. This year we expect to be as I said earlier, still in the 45% first half, 55% second half split. That's said as we as we look at last year remember when we began the year, we had guided for 14% technology decline and then it being slightly growth year-over-year. I'm not suggesting in all of that this year repeat that. But where we feel confident is the ability of the Technology team to really execute very successfully on opportunities as they present themselves. And so it gives us confidence that what we're telling you about the second half is on solid footing.

Right.

Joan, thanks you very much for your questions.

Thank you.

Thanks very much, that's really good questions.

And our next question comes from Frank Atkins with SunTrust. Your line is open.

Thanks so much for taking my questions. I wanted to ask a little bit about the revenue declines in application services and cloud and infrastructure. Just could you tell us about areas of kind of strength and weakness on the Services side in terms of the revenue and what gives you the confidence in reiterating the full year guidance on the revenue side?

Thanks, Frank. I'll again start and let Inder provide a little more detail and color. In the Services arena, the biggest percentage change decline in the quarter was application services, and that also by the way was again probably the biggest area of weakness from a margin standpoint in terms of total margin dollars. That's in part because application services historically is the highest gross margin area for us. Now, what really led the decline in the quarter was the expiration of a contract that had been terminated I mean I guess here its 2013 or early 2014. So it was a contract that the company lost four years ago or three years ago, and only now has the successor provider develop the software that was able to fully replace us. There was a large revenue loss in the quarter and it was a large margin loss in the quarter. So that was the biggest single item in application services. It wasn't a surprise, right it was the biggest single item, so what we didn't get in the quarter was enough new applications services revenue to fully make up for that, with the new business signings we think we're on a path to work our way back from that, but that was the region the biggest single reason for the revenue decline in application services. Cloud and infrastructure services decline a constant currency about 3.5%, which was not - is not a typical for what we would have been expecting and not a typical for our range, I mean our range of overall revenue decline for the year end constant currency is somewhere between 1% and 5%. So with that, I'll turn it over to Inder.

Yeah. I would just add that application services remains a focus area for us, it has been growing for the past couple of years. We're looking for that's remain strong for us as we move forward as Peter noted, there were a couple of contracts, one in particular and the social services area in the U.S. which we had lost to a competitor, took a long time to transition from us to them, for them to ramp up frankly to be able to service the client at the level they expected and that's been I think one of the reasons that we saw in the quarter. There was also a pharmaceutical contract that again is something that was exit it a while ago and that contributed to some of the decline. So if it's if identifiable, it's something that cut over run that business for us and team are driving hard to drive for us for the next two years of the high margin business for us. So we continue to invest in it, and you'll see us continue to make some of those investments and it speaks to what Peter said at the very beginning, we are driving a shift in our business from our historical sort of margin business the lines of business to the more profitable ones, and this is one that remains a sharp focus for us as we go forward. So a couple of quarters, a couple of contracts in the quarter is what I would say. Right.

Okay. Great. And in your prepared remarks, you mentioned single large renewal in U.S. Federal which hit TCV due to timing. Can you give us any color about that going forward and do you expect that to hit in the remaining quarters of this year or maybe the reason for that?

It was a multi-year contract that was signed in the first quarter - at the second quarter of last year. So was that was the impetus fair, it was a simple large multi-year contract. So it's it effected the TCV numbers, because there was not another similar large contract like that signed this quarter, but that was the impetus behind the numbers, and as I said when you take that contract out, you have growth in TCV, which is all TCV for the first half against the last half of about 7%. Again in the second quarter, we apprised everybody of the technology compare, but we still had a growth of 5% without that contract and technology. What is - what I don't want to lose sight of is the renewals come and go and are not annual, right so that was a multi-year renewal. What I think is of also import is that new business and the fact that new logos and the new scope is increasingly energetic, which I think proves the value of the services we're bringing to bear, but it was a single contract in the Federal in the second quarter last year.

And I'll just jump in and help and this Frank, our Federal business is sharply focused on a couple of areas. Homeland Security, Defense and Intel and Civilian and as we look at sort of that business for this year we've seen it in the last couple of years grow, field in part by these large deals of course, right, and so those continue to happen. Peter mentioned this one that was in the second quarter of last year it was in the civilian part of our Federal business and it was in the hundreds and million dollars and we were pleased to see it. We had a similar TCV win in the third quarter of last year. So they're lumpy to come, we were happy to see them. Over half of our U.S. Federal business is Homeland Security and remains our focus. So we believe are in the right place of the Federal spend as we look out for the rest of this year. We're not providing guidance for that business, but it's been growing for a few years. So we have confidence that business will continue to do so. I don't see this year-over-year comp issue on TCV from a year ago weighing on the performance of that business this year.

Okay. Great. Thank you very much.

Thanks, Frank.

And next we take James Friedman from Susquehanna. Your line is open.

Hi. Thank you for taking my questions and thank you for the incremental disclosures here. I had just two questions, one that would be assumptions on the margins in the second half and then two on Stealth. So first, just double check my math, we're kind of coming up with about a 5% first half non-GAAP operating margin, so would suggest to get to the bottom of your guidance for the year you're going to need to do about 9% or 10% non-GAAP operating margin in the second half. Inder, is that math sound about right?

Yeah, I think that that if you think about the full year guidance and you look at our first half and subtract that you get to the math that you just did. So your math is in the zone yes. And if your question is what gives us the color or the insight around that for us I would point you to the 45, 55 split of technology. So it isn't as if all of that has to be through cost savings, a lot of it is the fact that our technology business is queued into the second half as it typically does. And then some of the - I'll call it sort of what's in our control is the ability to manage our costs which arguably we could have done a better job than we did in the second quarter. And we intend to drive that with a very sharp focus as we go into the second half of the year. Those are the two principal levers that we believe will drive and therefore we feel comfortable with the reiteration of the guidance for the full year.

Okay. Thank you for that. And then if I could just follow-up on. Oh! I'm sorry, Peter, go ahead.

No, no, Jim, I said your second question was Stealth related, so just looking forward to that.

Yeah. So, you know Peter periodically you've updated metrics around Stealth, you shared some new customer deployments, so it sound exciting. I get it if and if you do it that will be great but if you don't want to share the updated financial on Stealth maybe another way to ask, it would be, I think that you have disclosed the mix of ClearPath verses application software being like 75, 25 would be the mix. It's my question be any observation about where is that ratio might stand today with some of the increase first half performance at a Stealth? Thank you.

Yeah. Jamie, thanks. So I don't believe we actually have ever disclosed the ratio. I think we've always been very consistent that the preponderance of the revenue in technology remains ClearPath Forward and that is certainly true. With - one other things I have been concerned about is given the fact that the Stealth numbers remain small in the absolute that they're not meaningful yet in absolute and therefore percentages can get kind of crazy in small numbers. But I will let you just in terms of some indication of where we're going, we made real progress especially toward the tail end of the quarter and even in July around Stealth. Our win rate on Stealth deals from a value standpoint is significantly up versus a year ago. It's up, it's more than double. Our pipeline is about the same as it was a year ago. But given that the win rate is more than double, I take out of that that the pipeline is a higher quality and that were executing better on the pipeline. Again, just our revenue year-on-year for Stealth and I don't want to give the numbers, let's just say that it is more than 100% of last year. So there are real good indications there signing for contracts in the month of July alone is progress, but at the end of the day, while Stealth is important, it is also important as kind of a leader for us in getting other business. So I don't want to diminish its value as kind of a leading thing that we show out there in terms of getting other business as either as part of it or as a follow on or once you're in the door you get to sell other stuff. Finally, one of the things we are now doing is actively talking to several what I would call alliance partners about making Stealth more readily available in if you will the larger ecosystem of simply signing one-on-one deals. So I mentioned the work with LogRhythm and really incorporating Stealth into that active security infrastructure. We're having very preliminary discussions in another context about also incorporating Stealth it what I would consider a larger ecosystem. I think doing those successfully will be very important for us in terms of getting more awareness and more adoption of stuff.

Thanks.

I hope that helps, Jamie.

Operator, are there any other question?

Next question from Joseph Vafi with Loop Capital.

Hey guys, good afternoon. How are you doing? I was wondering if we could appear in, it's been I guess a long enough period of time with some of the new product offerings coming on-stream and I know there are some puts and takes on the gross margin and on the cost of services. But if you can give us a feel for the new work types of businesses and services that are coming online and what that gross margin profile looks like versus the kind of base overall, just to get a feel for that kind of directionally where you're gone with the types of services you're offering and the margin profile it might have? And then I will follow-up?

Jose, I think that's a very good question and kind of helps me frame a little bit what I talked about in my comments. So when we go back to kind of where the company had been and the kind of level of focus that we are providing in the company, to go back to kind of the early inventory of software families that existed at Unisys, I think I mentioned several calls ago that that inventory came up with 66 families of software. And that's a lot for any company including one our size. So what we have really done is we've taken that world and we have said you know what, we need to focus, we're going to focus on a select few families that are leverageable or what I said in my remarks are horizontal. They apply to virtually all of our industries. And then we're going to take really one or two offerings that will be very industry specific in each of our four focus areas. And I think you now have basically a fifth focus area. So to put that in context, we have really four horizontal families and we have nine vertical focus if you will software led initiatives. So that's from 66 now 13. So while it may sound like a pretty good list I gave, it's a much smaller list. And many of those are brand new. One of those which was Digistics was launched last October. That's it, everything else has been launched this year. And most of that, excuse me, digital investigator was last year. Everything else was launched either later in the first quarter or in the second quarter. So which really early on these. And I'll give you an example one that I am particularly excited about is Elevate which is our omni-channel banking solution. That was not launched until late in the first quarter anywhere which was in Asia Pacific and Europe. In the second quarter, it was launched in Latin America and it will be launched in the U.S. and Canada in the third and fourth quarters this year. And ask a financial institution to adopt an omni-channel banking solution is not an immediate sale. So we it's a little early for us to identify gross margins on offerings that have had you know a significant focus. I do expect it will do it in the future, I'm not sure I've got it now in any meaningful way. Inder?

I agree. I think that the industries that we focused on are the ones that we believe our software really helps us with. And so our Technology business and our software solutions are the one that we're going to be driving to your point and to your question Joe, we feel a better margin faster as we look into the next couple of years. These are early, and so if I - here's the way I would frame it for you. Our first step as the company and this was even before I joined the company, we sharpened our focus onto these four industries. The second step was to begin to develop these new offers for these industries after hiring the domain experts for them, which we did over the course of last year. So those teams are now yielding these offerings that you see that Peter is talking about like Active Insights, like Digital Investigator, like digital investigator, like Elevate, like Digistics and what we're finding is in some cases these are not entirely new, I mean they are using existing software and selling it to a different kind of a customer. And adding features to it that allows for a solution for that particular industry. So it's leveraging the horizontal capability we have and then aiming the solution at a particular customer. So if these are coming out in the last for a couple of quarters we would expect it to begin to contribute in the coming years. But we're not at the point yet where we can quantify for you what those would look like a from market profile today.

Although I would say Joe, one thing that I think is important and I alluded to it in my in my notes, if you look at those 13, with those that we just released this past quarter, we released 12 of the 13 there's one more to go toward the end of this year, which is line side, and so in terms of the development effort, which is not to say that there isn't more development effort that will continue with these products naturally, but in terms of the huge focus to be able to get these out that's what's happened now. And so now it's about execution, now it's about building those pipelines, and now it's about executing. So I think we've got actually quite a lot in what effectively is significantly less than six months for all of these, but one

Yeah, and that's exactly right. And just to tag team on that. As you sort of conclude the development phase on some of these new offers, the software development effort as you know get capitalized during the development phase, and they then get amortized through the gross margin line as you start to see revenue and recoup that. So from a cash flow standpoint, we also see it as a positive, because we will be able to now benefit see the ROI if you will on these investments that we've been making.

Fair enough.

Hope to give you what you've done.

Yup, absolutely we'll be watching that carefully. And then just secondly, I think Peter you might have mentioned in Federal there were a couple clear path forward deals that didn't renew, is there anything in particular to note there and so the industry trends or customer behavior in those situations and why they may not have wanted to renew those? Thanks.

Joe I think that's just, if I said that I missed communicated, I am not aware of that at all.

It might have been me then, okay, it could have been my misunderstanding on that. And then just finally, was there I know you've indicated there was going to be a - there was a large employee hire in the quarter, how should we think about getting those people to work billable and implications for the business in the next couple quarters in terms of revenue and margin.

So if you know our employee number actually went up in the quarter and the reason it went up in the quarter was a contract that we have signed, which actually will bring on to the company a total of about 1200 people. And it is - it will take a little while to fully transition, we're very excited about that, it's a long term contract we signed to that contract last year, and we're simply in the process of executing against that contract. So that is not a question of finding gainful employment for those folks they are gainfully employed we're just in the process of executing and transitioning that scope of work.

And as I said Joe in my comments, this is more of timing between the headcount coming on and rev-rec beginning to contribute. You know just for color this particular contract is quite high margin and remains quite high margin, it's not wasn't a new logo win, so we have a relationship with this client going back some years, and this headcount therefore we think is going to yield the high margin they were expecting from it. But as you bring people on, as you can imagine if in one quarter you bring out that many people it has an impact and there's always a cost and whether it's contractors or whether it's full time employees, there's always a cost difference. So that I would think about it in terms of absorption of those people overtime it should have a trajectory like we've seen with this relationship with this client for some years.

Great, thank you very much.

Thank you, Joe.

And at this time I would like to turn the conference back to Peter Altabef for closing remarks.

Okay, I'd really like to thank you everybody for their questions. As always we look forward to continuing to have a dialogue with all of our investors, and we continue to put more detail and more hope effective detail onto our website. In addition to our investor website, I'd actually encourage people who wish to and who can to spend time on just our general website, over the course of the last two months our general website has gone through a complete overhaul. The amount of detail we have about these new offerings, the amount of detail about the vertical, as well as the horizontal solutions, customer testimonials that describe our business and our relationships in detail are frankly all new. And we think that it will also increase your understanding of both where we are and where we're going as a company. So I'd like to thank you for your time and look forward to speaking at the next call.

And that does concludes our call for day. Thank you for your Participation. You may now disconnect.