UNISYS CORP Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Solid Execution: Third quarter revenue grew 8.2% in constant currency. New business TCV was up significantly year-over-year, with new logo signings contributing strongly. Pipeline grew sequentially, with Ex-L&S pipeline up 10%.
• L&S Solutions: Expect incremental $40 million of revenue upside this year, with slight increases in L&S forecasts for the next two years. License and Support revenue within ECS exceeded expectations, driven by a third-quarter renewal.
• AI Initiatives: Over 120 active AI projects across the company, with many involving Generative AI. Projects in production and client-facing, with solutions tailored to various segments like DWS and CA&I.
• Workforce and Efficiency: Low trailing 12-month voluntary attrition (11.8% vs. 13.3% prior year). Investing in technology, process improvement, and talent initiatives. SG&A expenses targeted to be ~17% of revenue by end-2026.
• Industry Recognitions: Received new designations from industry experts like Avasant, Everest, ISG, and NelsonHall for solutions in various areas.

Segment Performance

• Digital Workplace Solutions (DWS): Revenue was $131 million, a 7.1% decline year-over-year. New business TCV was up 46% year-to-date. Year-over-year declines were driven by lower discretionary volume with clients, including third-party technology revenue.
• Cloud, Applications and Infrastructure Solutions (CA&I): Revenue was $132 million, a 1.5% decline year-over-year. Decline was due to lumpiness in nonrecurring revenue and project volumes with commercial clients in the U.S.
• Enterprise Computing Solutions (ECS): Revenue was $158 million in the third quarter, a 29.2% increase year-over-year. Specialized Services and Next-Generation Compute Solutions grew 2.5% in constant currency, led by growth in specialized services with commercial sector clients and application services revenue with financial services clients.
• License and Support (L&S) within ECS: Revenue was $105 million, a 57% increase year-over-year in constant currency. Exceeded expectations due to a third-quarter renewal. Full-year L&S revenue expected to be ~$415 million (previously ~$375 million), with a slight increase in average annual L&S revenue for 2025 and 2026 to ~$370 million.
• Backlog was $2.8 billion, up 18% year-over-year, with aggregate DWS and CA&I backlog up nearly 25%. Trailing 12-month book-to-bill was 1.2x for total company and Ex-L&S Solutions.

Guidance

• Full-year total company revenue guidance range maintained. Non-GAAP operating margin guidance raised to 6.5%-8.5% (previously 5.5%-7.5%).
• Full-year free cash flow expectation increased to ~$30 million (previously ~$10 million), driven by L&S renewal levels and favorable tax settlement.
• Slight increase in L&S revenue outlook for 2025 and 2026, with average annual L&S revenue expected to be ~$370 million.
• Anticipate declining legal, environmental, and other payments through 2025-2026, with an approximate $30 million partial reimbursement of certain environmental costs once cleanup work is approved.

Risks

• Economic/Industry Dynamics: DWS segment goodwill impairment triggered by economic and industry dynamics impacting client signing pace.
• Discretionary Volumes: Softness in discretionary project work in DWS, though long-term prospects remain positive.
• L&S Revenue Timing: Uncertainty in L&S revenue timing due to dependence on renewal timing, client budgeting decisions, and contract duration.

Question and Answer

Q: Discuss the increase in L&S revenue outlook and what's enabling it?

A: Peter Altabef and Mike Thomson noted increased L&S revenue due to embedded higher volumes, pricing power, and continued consumption. Renewals are coming in at higher volumes, and the business remains sticky with strong pricing and consumption.

Q: Talk about the goodwill impairment in DWS?

A: Deb McCann explained it was a non-cash impairment triggered by economic and industry dynamics impacting client signings, but the company remains enthusiastic about DWS with strong new business TCV growth.

Q: Margin expansion in Ex-L&S?

A: Peter Altabef and Deb McCann stated margin expansion driven by selling value-added solutions, delivery efficiencies, and SG&A reduction efforts, with expectations of continued improvement through top-line growth and delivery efficiencies.

Q: New customer success areas?

A: Mike Thomson mentioned diversity in geography and segments, with solutions resonating across regions and industries, and new logos often involving multiple segments for stickier relationships.