UNISYS CORP Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Steady Focus: Continues to focus on improving delivery and operational efficiency to navigate macroeconomic uncertainty.
• L&S Performance: On track to meet $430 million L&S expectations for 2025, with increased projection for 2026-2028 to $400 million average annual revenue.
• Pension Strategy: Executed an annuity purchase in September to remove over $300 million of U.S. pension liabilities, over half the $600 million target by end 2026.
• Revenue Timing: Revenue miss due to timing issues, PC cycle and IT budget impacts, and U.S. government shutdown affecting public sector clients.
• Client Signings: Total contract value up 15% year-over-year, driven by Ex-L&S renewals; highlighted specific client engagements in DWS, CA&I, and ECS.
• Solution Portfolio: Allocating capital to ClearPath Forward, updates to operating systems, AI-driven portfolio, focus on mid-market enterprises, and partnerships with Dell, Microsoft, etc.
• Industry Recognition: Received new leader rankings in cloud services for mid-market, cybersecurity, etc., supporting strategic focus on application development, AI services, and mid-market penetration.

Segment Performance

• Digital Workplace Solutions (DWS): Third quarter revenue was $125 million, a 5.8% year-over-year decline. Year-to-date, DWS revenue is down 2.9%. Gross margin in Q3 was 16.2%.
• Cloud Applications and Infrastructure Solutions (CA&I): Third quarter revenue was $180 million, a 6.8% year-over-year decline. Year-to-date, CA&I revenue is down 5%. Gross margin in Q3 was 19.6%.
• Enterprise Computing Solutions (ECS): Third quarter revenue was $133 million, a 13.9% year-over-year decline. L&S revenue in Q3 was $83 million vs. $105 million in the prior year quarter. Specialized services and next-generation compute solutions grew 1.7%. Gross margin in Q3 was 46.2%.
• Ex-L&S: Third quarter revenue excluding license and support was $377 million, a 3.9% year-over-year decline. Ex-L&S gross profit was $70 million, with an Ex-L&S gross margin of 18.6%, up 70 basis points year-over-year.

Guidance

• Full-year constant currency growth expected to be between negative 4% and negative 3%, translating to a reported revenue decline of 3.6% to 2.6%.
• On track to meet the midpoint of the upwardly revised non-GAAP operating margin guidance range of 8% to 9%.
• Expect to generate approximately $110 million of pre-pension free cash flow for the full year.
• Revised full-year outlook includes revenue timing shifts, with some headwinds persisting for a few quarters.

Risks

• Macroeconomic uncertainty impacting revenue.
• PC cycle and IT budget impacts causing client pauses or delays in project initiation.
• U.S. government shutdown affecting public sector project work.
• Competitive pricing pressures, with some competitors undercutting based on aggressive AI assumptions.
• Uncertainty in timing of license and support revenue recognition.

Question and Answer

• Q: How are you seeing AI's impact overall on your P&L?

A: Mike Thomson discussed AI's impact on delivery model, margin improvement, consumption increases in L&S, and growth in ClearPath Forward.

• Q: What's your view on the pace of delivery improvement going forward and Q4 cost reduction charges?

A: Mike Thomson said there will be incremental cost reduction in Q4, with actions to mitigate top-line impacts.

• Q: What are you seeing on the demand front in cloud spending, particularly on the AI front?

A: Mike Thomson mentioned demand is there, but need for client education and adoption roadmaps due to competition.

• Q: Any update on public sector with government shutdown?

A: Mike Thomson said project work in U.S. public sector has reverted, with renewals ongoing but no uptick in project work.

• Q: Pricing pressure?

A: Mike Thomson said disciplined in signing contracts, focused on profit dollars and margin, not willing to undercut beyond limits.

• Q: Free cash flow for 2026?

A: Deb McCann said no guidance yet, but L&S is a big driver with 70% margin.

• Q: Book-to-bill and renewal activity?

A: Michael Thomson and Deb McCann discussed strong book-to-bill, high renewal cycle in Ex-L&S, with significant growth in renewals year-to-date.

• Q: Government shutdown impact on project work?

A: Mike Thomson said project work in U.S. public sector has lingered, expecting several quarters of slowdown.