Good afternoon and welcome to the Unisys’ Second Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Courtney Holben, Vice President of Investor Relations. 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 2019 financial results. I’m joined this afternoon to discuss those results by Peter Altabef, our Chairman, President and CEO; and Mike Thomson, 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’ve 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 operations 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 expense. 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 investors, to enhance comparability of year-over-year results as well as to compare results to…

Thank you, Courtney, and thank you all for joining us to review our second quarter financial results. The second quarter represents one of our strongest recent quarters. Many of our key metrics improved year-over-year, we’re ahead of internal expectations and we beat consensus where estimates were available. As we’ve discussed on previous calls, our focus on security has resulted in numerous large contract signings in recent years, including notable wins in our U.S. Federal sector. These new contracts continue to drive revenue growth for us, and our focus on cost management help drive improved profitability and cash flow. More specifically, revenue grew at the highest quarterly rate in over 20 years. This was supported by continued strength in our U.S. Federal sector, which was a key driver of results in the second quarter. We expect this sector to continue to contribute to the success of the company among the coming quarters and I’ll spend more time on this shortly. We also saw the highest non-GAAP adjusted Services revenue growth rate since 2003. This marks the fifth consecutive quarter of revenue growth for the Services segment. Services non-GAAP adjusted operating profit margin was the highest it has been since 2014. Again, this was supported by our U.S. Federal sector, with Services operating margins remain above the company average. Total company non- GAAP adjusted operating profit margin expanded, as did adjusted EBITDA margin. Mike will provide more detail on our financial results shortly, but first, I’ll provide some more insight into the business. At the segment level, as I noted, we saw a strong continued growth in Services revenue. Much as Stealth and security have been differentiating our offerings in the market. Our new services offerings, such as InteliServe and CloudForte, continue to complement our industry go-to market efforts. As we discussed…

Thank you, Peter. Good afternoon, everyone, and thank you for joining us today to discuss our second quarter results. In my comments, I’ll discuss both GAAP and non-GAAP results and provide color for our key business drivers. Reconciliations of GAAP to non-GAAP measures can be found within our earnings presentation. We’re very pleased with the progress we have made in our financial results during the second quarter. Please turn to Slide 4, which shows some of the key metrics, each of which exceed a consensus estimates where they were available. [Technical Difficulty] improvements that Peter mentioned earlier. As we’ve discussed on recent calls, our focus on security continues to differentiate us in the market and along with our new cloud offerings and digital workspace services, has driven increased contract signings in recent periods. This helped to continue drive revenue growth and strong results overall for the quarter. We have also discussed our sharp focus on reducing our cost of delivery. We’ve implemented additional cost-cutting actions during recent periods as we’ve discussed, and we’ve worked hard to manage expenses. As a result of these efforts, we are starting to see improvements in profitability, which flow through the cash flow, resulting in the company being a free cash flow-positive for the quarter. With respect to specific results, non-GAAP revenue grew 12% year-over-year to $747.3 million in the second quarter or 15.5% on a constant currency basis. We have seen levels of growth in recent quarters that the company has not experienced in many years and the second quarter represents the highest quarterly growth rate we’ve seen in over 20 years. Non-GAAP operating profit margin expanded 370 basis points year-over-year to 12%, reflecting a solid growth quarter for both Services and Technology businesses, with strong margins coming out of our U.S. Federal sector…

Mike, thanks very much and with that, we’ll open up the discussion for Q&A. So operator, if you would help us with that please.

Thank you. [Operator Instructions] Our first question comes from Jon Tanwanteng of CJS Securities. Please go ahead.

Good afternoon. Thanks for taking my questions. It’s nice quarter from both segments there. You guys reaffirmed your full year guidance and I get you pulled in some renewals on the Technology side. But did you also pull in some Services business as well?

Yes. Services was up across the board both in – from a perspective of U.S. Federal certainly helped, and as we mentioned, our Services margins for that business tend to be a little higher than the remaining piece of the business. So we had growth across the board there in our enterprise solutions as well as our Federal segment, both of which supported growth from Services.

Okay. But from a timing perspective, nothing pulled in. Maybe give us a little bit of – a little bit more color on how you expect the revenue margin to trend in the Services segment as we go through the year? Do you expect that to trend higher as these large public contracts trends toward profitability. What’s the additional color that you can provide?

Sure, John. Thanks. As we talked about last quarter, and as we’ll continue to see throughout the remainder of the year, our expectation is the Services margins will improve. We talked about the transitional business and the impact it had in Q1. We’ve seen a significant decline in that in Q2, and our outlook looks like that we’ll continue to decline through the remainder of the year. So we expect to see margins improved from the perspective of that transitional business coming to regular run rate, profitability numbers. And as I mentioned, we’ve had some strong signings in the federal space, and those Services margins tend to come online a lot sooner because they don’t have quite the transitional impact. So we’re looking for favorable growth in those businesses.

Okay. Got it. So the sequential decline that you’re going to experience or you’re expecting on a consolidated basis is purely coming from the Technology segment? Is that correct?

Yes. Because as we talked about earlier in the year, we were looking at a 30-70 split on the Technology side and now we’re looking at 48-52 split on the first half, second half. And then we’ve given you the split for the third and fourth quarter. So really it’s more a shift in the Technology revenue as a pull forward. And as we’ve mentioned, we’ve got good visibility into the overall pipeline from a Technology renewal perspective, but sometimes these deals signed at the end of the quarter or the beginning of the next quarter and they are a little choppy from that perspective.

Great. Thanks for the color. What is the – I’m sorry, the reason that the COGS in the Technology segment were so low. You mentioned a higher mix of software. Is that expected to be sustained as we go through the similar revenue levels?

Yes. So we had some higher volume in the quarter that was a good driver there from a COGS perspective. It’s actually more volume-based than it was anything else.

Okay. Got it. But I assume revenues or volumes are going forward, should you be expecting COGS to be around the same?

Yes. We’re expecting COGS to be probably a little improved and that’s going to be part of why the service margin is improving over year. So I would expect to see our COGS improve in the back two quarters of the year.

Okay. Got it. And then specifically on the Technology side?

Yes. So, we’ll have a little bit of a mix in Q3 from a tech perspective, and I think that COGS will actually worsen a little bit in Q3 for the tech business specifically, largely due to some third-party components of a couple of deals that we have in the pipeline.

Okay. Great. Thank you. And then finally, just the difference between the Services businesses that you’re selling now that have Stealth enabled or don’t. What is your average marginal uplift that you are able to get when you include Stealth in the new signings? And kind of what percentage of your new contracts do actually have Stealth enabled?

So well, Mike is thinking about the financial answer to that, which is going to be a little difficult to pull out of our current deck, let me give you some color on that. When we insert Stealth specifically into deals, it is really to us – this is Peter, Jon, it is largely to distinguish ourselves in the deals. We do get higher margins for the Stealth component but it doesn’t necessarily increase our margins for the entire deal other than the Stealth component. It makes it more likely for us to win those deals. So I think that’s one way to look at it. So we’re not looking to drive margins up for the entirety. In some cases, Stealth represents 5% or 10% of the revenue of the deal. And so we’re looking for higher margins on the Stealth component. Now when we look at Services in general, and we look at that security number we gave you, this is the first time we’ve actually given a percentage of our business related to security and it’s a work in progress. You can see how we define security. There is some security work that’s not included in that number because we just can’t capture it yet. But at 20% of the revenue was the company, that’s a significant number for us and certainly, it’s the first time we’ve given that number. And there’s a reason for that. We want everybody to understand how much of the company is now security-focused. With respect to the profitability of that business, if you look at that security business and you look at the Services component, because that has got more services in it than, let’s say, the mix of the rest of the company because of the lack of ClearPath Forward in that number. And you do an apples-to-apples component, you’re going to see that the gross margin on our Services security work is higher than the gross margin of our non-services – excuse me, non-security services work. So we do get more profitability when we’re doing services. Is that fair, Mike?

Yes. That’s fair. And Jon, I wouldn’t say that the margins on that work is as high as the margins on ClearPath Forward. But to Peter’s point, the security revenue that we referenced has both services of tech in it and the tech portion of it is under 5% of total security revenue in general. So although there is a revenue uplift related to security or Stealth specifically in those deals, it’s probably in the 6% to 7% range from an uplift perspective.

Got it. That’s very helpful. Thank you. And then just finally, you said that lower CapEx than $170 million, did you give a specific number or just lower than that?

Yes. Actually, what we said was, higher CapEx, it’s in the high end of the 5.6% to 6.5% range. We’re expecting it to be $180 million, around $180 million is the number and what I was saying lower was we did some financing for CapEx, so the impact on cash would have been lower.

Understood. Thank you so much.

Thanks Jon.

[Operator Instructions] Our next question comes from Ishfaque Faruk of Sidoti & Company. Please go ahead.

Hi, guys. Congrats on the wonderful quarter. A couple of questions from me. Mike, you mentioned ClearPath renewal schedules being one of the main drivers for Technology revenue growth. Have you guys seen any Stealth revenue in the second quarter or was it like primarily ClearPath Forward revenue?

Well, clearly, we’ve got Stealth revenue in the quarter. But the Technology segment in general is largely ClearPath Forward and what we were talking about was a pull forward of deals that frankly, we had originally thought we’re going to come in, in Q3 and Q4 that pulled forward into Q2. So we’re not changing our feel on total Technology revenue for the year. We think it will be flat year-on-year in total and it’s really just the shift, Ishfaque, into Q2 from some of the later quarters in the year.

And Ishfaque, this is Peter. And again thanks for the call – the question, and looking forward to your follow-up questions as well. But keep in mind that we get both Technology and Services revenue from Stealth. If we look year-on-year for the full year of 2018 versus the full year of 2019, we expect total Stealth revenue, Services and Technology, it’s an expectation because we, obviously, were only halfway through the year but for the full year, we expect that to more than double. So we continue to see progress on Stealth.

Our next question comes from Rod Bourgeois of DeepDive Equity Research. Please go ahead.

Hi, there. Hey, so, I want to talk about if you can provide some more color on the performance in the federal business and then I want to ask, do you see opportunities to apply some of the learnings in the federal business and the growth that you are driving there? Can you apply some of those learnings to the other segments to get similar juice out of the other businesses as well?

Yes. Rod, so, this is Peter. Thanks again for dialing in and thanks for asking the question. Mike’s going to probably provide some additional answers, but let me just take the lead on that for – to start with. 33% year-on-year growth is a good number for us and it’s coming from all elements of our federal business. So when we think of federal business, federal really was the start for us in this idea of very focused industries. Within federal, we’ve break down our business to civilian, defense and Intel and homeland and critical infrastructure. All three of those groups saw a significant growth year-on-year and when we look at the total revenue represented by those groups, Homeland and critical infrastructure is 44% of that revenue, civilian is 35%, and defense and Intel is 20%. Of the three segments, defense and Intel grew the fastest. So it’s making up a bit for lost time – for lost ground, if you will. We consider all three to be strong areas of growth for us. With respect to learnings and kind of some of the goodness from our approach in that area, I would actually say those learnings go both ways. So I mentioned two of our offerings in my remarks, InteliServe and CloudForte. Interestingly, InteliServe was started in the enterprise solutions part of our business, which is the non-U.S. Federal, whereas CloudForte was started in the U.S. Federal business. And so we’re absolutely taking the benefit of that CloudForte initiative and moving that into the rest of the company. We’re also taking the benefit of InteliServe and moving that into the federal part of the company and some of the big wins that we have received this year, a couple of the very largest actually are InteliServe-based, which came from the enterprise solutions, if you will, from their formation and has now migrated into federal. So one of the things we deliver is we are not proud about where these ideas originate, and we try to cross-pollinate as quickly as we can.

And Rod, maybe I’ll just add, I think that was a pretty fulsome answer but just from a perspective of this cross-pollination, the work that we’re doing in public sector is very much applicable to some of the work we’re doing in federal space, and we also see from a quals perspective that there’s a lot of crossover there, some of the deals that we’re talking about using – are using federal quals and vice versa because the work that we’re actually performing is very similar for state local as it might be for U.S. Federal in some cases. And obviously, outside of the U.S. Federal security work that we’re doing in other countries has applicability as well.

Okay. And a related question. The webinar/demo that you did on Stealth recently, that was very helpful. I’m wondering are you seeing traction with Stealth in the commercial market or is there a different sort of receptivity in the commercial market versus the government sector?

We have seen increased awareness in both markets. I will tell you the commercial market is just different because it’s just broader geographically and it’s obviously broader by industry. So one of the things you saw from us in the second quarter was an announcement that we are working with Dell Technologies. And effective the end of June of this year, Stealth is now available as part of the cyber vault-suite of offerings from Dell. And so we can put Stealth directly into, for instance, Dell servers as you buy the servers, as part of cyber vault. And obviously, while Dell sells to the federal government, the majority of their sales are outside the federal government. So that’s an example Rod of the way we’re going about expanding the distribution pipe. I think when we get to the non-federal part of the world, when you have a product or a solution like Stealth, one of the things we are focusing on a company is how do we get it out beyond our own sales force. It’s pretty straightforward. We will subcontract with some other large federal players but our own sales force can cover a lot of the U.S. Federal market. It’s not the case outside. So partnering out with companies like Dell, like Cylance, like LogRhythm is very important for our security offerings including Stealth.

That’s helpful. In past quarters, you’ve disclosed at certain point, the amount of margin dilution that’s occurring on new large deals that are in these transitional stages. Is there an update on what that margin dilution impact is as of the latest quarter?

Yes. So, I think we disclosed last quarter was 180 bps We are looking at it being about 160 bps this quarter, and I think we mentioned in last quarter that we expect as the year unfolds, that this continues to decline. So that by the end of Q4, we're probably not having this discussion around transitional business impact.

All right. Nice progression there. Thanks guys very much.

[Operator Instructions] All right. Our next question comes from Bill Smith from William Smith & Company. Please go ahead.

Hi, Peter and Mike, and Courtney, congratulations on a tremendous quarter and the progress that you've made over the years. I'm just wondering with the improved performance and the numbers that you've just announced, is there an opportunity to do something with the high cost debt that you have in terms of maybe restructuring or having a discussion about that. I think things are a little bit different today than when you first put that debt on. So are there – is there an opportunity there?

Yes. Hey, Bill, it’s Mike. Thanks for the question for sure. I think we’ve mentioned even last quarter that we are kind of all ears as it pertains to the capital markets are concerned. Just from a perspective of when those terms come due. You're talking about make-whole provision that post April 1 of next year, that make-whole provision gets cut in half and the economics around doing some kind of refi on that become a lot more feasible and a lot more economically sound. So – but clearly, it's something that we're looking at from a capital structure perspective, and we'll continue to look at for opportunities to do better. As you mentioned, the market right now is pretty hot and the rates are obviously lower than the coupon that we currently have. So, certainly something we are looking forward to.

And just to remind me, is it 10.5%, I don't have it in front of me right now. But something around there?

Yes, 10.75%.

10.75%, yes. Okay.

Thank you, Bill.

Yes, Bill. This is Peter. Thanks again, for your question.

Our next question comes from Doug Thomas of JET Equity Partners. Please go ahead.

Hey, good afternoon. Congratulations on a terrific quarter. It's good to see Unisys get its mojo back.

Thank you, Doug.

I guess – I'm going to start – it's nice to have early contract signings for a change. And Peter, I just wondered, maybe, if you could – it seems like the company has some very good visibility, particularly on the government side and I'm wondering, could you sort of walk through the budget that's been recently passed, it gives you some sense of certainty I would think at least over the next two years. But where do you see in terms of some of the larger opportunities on the government side, the funding must be – it seems like it must be in place, so that you have an opportunity to see some pretty substantial growth across the board.

Yes, Doug. That’s a great question and I’m going to try to unpack it a little bit, because there's a lot in your question. The first is about visibility. We do have pretty good visibility, but we can also be wrong. So this quarter is a good example of us being wrong. We gave – in the ClearPath Forward business, we gave a quarterly or first half, second half breakdown as to when we thought the revenue was going to come in. We think we have a pretty good idea of the ClearPath Forward license revenue and a minimum, which is the Technology segment, and we got it wrong because we got more of that revenue in the first half than we were expecting to get. So we'll get less than the second half. So you can see the different numbers there. So I don't want to take too much credit for us being able to see into the future because we do get it wrong. With respect to government however, it's a little different. We have had such a powerful set of signings. I think the TCV we signed over the last 18 months is $1.9 billion from government. And so that business is signed. And so – and the thing about the government from a reporting side is unlike the non-government sector where you have some question as to exactly when you report revenue because the time of transition tends to vary based on implementation. In the U.S. Federal market, there is little variation on implementation time. You get revenue pretty quickly after you sign a deal and you kind of know when it's going to come in. So I would say to your question, we have more visibility in terms of the revenue around government because of…

And then – while I got you, Peter, you mentioned hosting the CIO event, and I'm just wondering maybe if you could for a moment talk about that event. How it came together? Who showed up? How much of it was commercial versus government and so forth? And just what message you try to get across and how it went over?

Yes. So, Vishal Gupta, who is our Chief Technology Officer and who leads the Technology organization for us was really the host of that event. We had it in Washington, D.C, and we did invite clients from around the world. We had clients in the U.S. and Canada. We had clients from EMEA, we had clients from Latin America. And so we were really thrilled with the turnout. It was, if you will, a prototype. We expect that to expand over time and one of the initiatives that Eric Hutto, who leads our enterprise solutions team has been working on for a while is as we have done, if you will, an analysis of our business, we – when we do more than one line of services or one line of Technology for a client, when we are broader than a one-trick pony at our client, the business gets stickier. Obviously, revenue grows up but profitability grows up – goes up. And part of the profitably growing up is you don't have to participate in our fees, the client doesn't have to do all at the expense of those. You'll get additional business and you can share the value of not having all of that cost. So the idea behind the CIO forum was really to bring in CIOs, some of whom only really buy one type of thing from us and show them a much broader portfolio of the company's offerings. So you might be a ClearPath Forward client, and we're going to show you InteliServe and we're going to show you CloudForte. You might be a financial services client but not using Elevate. And so that was the idea behind the forum. I think it was successful. We've got very good ratings, if you will, from the participants and good feedback. But again, I – it's the first time we did it. I consider it a beta and then we're going to expand it as we go forward.

Terrific, okay. And then Mike, I had a quick question for you. You mentioned in past, I'm not sure I remember it, you guys talking about this much in the past is except for the fact that you've been going through this transition over the last several years. But when you talk about exiting certain geographies or certain countries and I don't know if you said additional business lines or customers and that you'd be taking obviously charges for that or we could expect that you might possibly be taking charges for that. Could you talk a little bit more about what to expect in that regard and what's going on?

So, if you recall, back in 2015, early 2016 we put up some significant restructuring charges, and we exited some countries in regards to that where it was just kind of upside down from a pyramid perspective. And so we went through that program. We pretty much finalized that program by the end of 2018 or end of 2017, and in the end of 2018, we put up an additional restructuring charge of approximately $28 million. I guess the line of sight I would give you is that we’re always looking for opportunities to continue to expand our margin and as automation kicks in, in certain regions and/or we have the ability to rightshore or we have the ability to maybe optimize and use some third-party services to optimize some of our resources then that may free up the need to have to be in a specific country. I did not reference leaving any type of business unit or any type of service offering, it was more country-based and predominantly when we talk about that, we’re talking about it through the lens of EMEA, which is as you know, a pretty difficult environment and also from a pyramid perspective and a staffing perspective, very costly when you have to take restructuring charges. So – but we’re always going to be opportunistic to try to expand and improve our margins and where we see continual options to do that we’ll take advantage of those.

Gotcha. So really nothing new there?

No.

Okay. Thank you very much. I really appreciate it.

Thanks, Doug. Thank you for the call.

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

Thanks very much operator. I want to thank you everyone for joining the call. One of the things we started a little over a year ago was a series of webinars, led by different company leaders to really describe their areas of the company, whether that was looking at our sales effort, looking at some of the enterprise solutions teams, looking at U.S. federal, looking at our Technology group. We’ve been a little over eager to tie those webinars out and kind of take them down, and we think given the interest that several have discussed, we’re actually going to put those back up. So, by tomorrow, you will be able to have access, again, to – for instance, PV Puvvada. [Technical Difficulty] about our strategy on U.S. Federal. We think that’s still very relevant and so we’ll have that back up by tomorrow, and we’ll have some of the others up as well. So I would encourage those of you who have kind of a greater interest in some of our segments based on performance that we’ve talked about today, will be able to get access and really a much deeper dive based on those webinars. So I want to thank everyone for joining. I want to thank the teams at Unisys for their performance, not only this quarter, but to get the company to this point in time. We did benefit in the quarter as we discussed from an acceleration of some of the ClearPath Forward contracts but I think as you look through our numbers, you’ll see a lot of other things to like as well. So with that, I want to thank everyone and remind people of all the data we have on our internal relations site. Thanks, very much.

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