Unisys Corp Q2 FY2020 Earnings Call

Good day, and welcome to the Unisys Corporation Second Quarter 2020 Earnings Conference Call. I would now like to turn the conference over to Courtney Holben, Vice President of Investor Relations. Please proceed.

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 2020 financial results. I'm joined this afternoon to discuss those results by Peter Altabef, our Chairman 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 related 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, debt exchange and extinguishment, cost reduction, and other expense. Management believes each of these items can start 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 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. In addition, this quarter, we will be continuing to report non-GAAP adjusted revenue and related measures as a result of certain revenue relating to reimbursements from the company's check processing joint venture partners for restructuring expenses included as part of the company's restructuring program. For more information regarding these adjustments, please see our earnings release and our Form 10-Q. From time to time, Unisys may provide specific guidance or color regarding its expected future financial performance. Such information is effective only on the date given. Unisys generally will not update, reaffirm or otherwise comment on any such information, 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 that could cause the actual 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.

Thanks very much, Courtney, and good afternoon, everyone, and thank you for joining us today. Since our last call, the world has continued to confront health, economic, and social issues. And I'd like to start by saying that we hope you, your family, and friends remain safe and healthy. Usually, when I say that, which I do a lot now, I'm referring to COVID-19. This afternoon, I'm also referring to the hurricane and the hurricane conditions that are affecting those of you on the eastern seaboard. 2020 has simply been that kind of year. Turning to the company's operations in the most challenging COVID-19 quarter, our revenue expectations are unchanged for the full year 2020 when we have increased visibility on profitability. Our client satisfaction is high, represented by our industry-leading Net Promoter Score. And our liquidity is strong, with our cash balance at $782 million compared to $790 million at the end of the first quarter. I want to begin by highlighting some of the reasons why our revenue expectations for the year are unchanged despite the year-over-year declines we experienced in the quarter. Approximately half of our revenue decline in the second quarter was due to COVID-19-related impacts to our Services business. And the other half was driven by intra-year shifts in ClearPath Forward renewals, as well as currency and expected declines in our check processing joint venture. We anticipate improvements in the most significant COVID-19 drivers in the second half of the year. For instance, and as we expected, field services, BPO, and travel and transportation were the areas of the business that were the most significantly disrupted by COVID-19, and leading indicators within each of these have started to improve. Before describing the improvement in each of these, I want to put in context our performance, perhaps relative to what we're seeing in the economy and the industry by looking at the makeup of some of our Services revenue. As those of you on this call know, because you have followed us for a while, or hopefully, you have, our global workspace business is a large part of our revenue. In the second quarter, it reflected about 30% of our revenue. That is untypically high for companies in our space. And within that, we have a higher percentage than I believe any of our peers in what we call field services. If we look just at field services revenue alone and we reduced that, or we look at the reduction as a percentage of constant currency services revenue, once we take out iPSL, which Mike will talk about a little bit at our nonprofit joint venture, so taking out iPSL, field services alone represents 85% of the reduction in our constant currency services revenue. So I just wanted to sit on that for a second. So 85% is in the area where we are simply unlike the rest of the business. And I hope that, that explains why our performance is a little different than perhaps some others. Speaking about field services, however, that is on the rebound. So ticket volumes declined in March and April, but we began to see the trend reversing in May and June. So for instance, monthly tickets raised from a low of approximately 50% of their pre-COVID levels in April to approximately 70% by the end of June. Okay. Moving beyond field services, let's look at BPO. And of course, the largest part of BPO is iPSL, but we have other BPO contracts as well. As our BPO teams went back to the office in many geographies, BPO volume has begun to increase. For instance, volumes on 2 of our largest contracts rose from lows of 0% and 36% of their pre-COVID volume levels in April to 38% and 80%, respectively, by the end of June. Within travel and transportation, volumes are still depressed compared to pre-COVID levels. However, by the end of June, our global average daily air waybill count, which measures the volume of air cargo transactions, had increased from a low of 36% of pre-COVID volumes in April to 51% as of the end of June. Additionally, our Services' renewal schedule is approximately twice as high in the second half of 2020 as it was in the first half, and our renewal rate remains in the high 90s. With respect to the other half of the revenue decline, we also have a more favorable ClearPath Forward renewal schedule in the second half of the year as 2 ClearPath Forward contracts in the second quarter were delayed and are now expected to be signed in the third quarter. So although ClearPath Forward revenue in the quarter was down significantly year-to-year, we view this as a timing issue inside the year only. We expect second half Technology revenue to improve compared to the first half as a result. And as Mike will describe in more detail, revenue for the quarter was also negatively affected by currency movements and expected declines in that iPSL check processing joint venture. Based on all of these, we expect improved revenue in the second half of 2020 compared to the first half. Additionally, the scenarios we are currently modeling for the full year indicate revenue in line with our discussion in the first quarter, showing that non-GAAP adjusted revenue may be down approximately 10% year-over-year, although, of course, this could be more or less. We also have much better visibility into full year profit expectations. And while we were not in a position to provide you a range of expected results last quarter, we are doing that today. And Mike will be providing that information in a few minutes. With respect to the quarter, the lighter ClearPath Forward renewals I mentioned accounted for 90% of the year-over-year decline in non-GAAP operating profit in the quarter. And as we said, they are not expected to impact the full year, either revenue or profit. In the quarter, we expanded Services' non-GAAP adjusted gross margin, both year-over-year and sequentially. Additionally, we had previously identified a number of contracts that were performing below their target margins. During the second quarter, we increased margins on over half of these contracts, and we expect further upside during the second half of the year. Mike will provide some more color shortly on some additional initiatives, as well as our views on expected profitability for the full year. We continue to excel at serving our clients, and this is highlighted by our industry-leading Net Promoter Score of 53. This NPS reflects the sentiment of clients that participated in our April 2020 client satisfaction survey. Client satisfaction and referenceability are key go-to-market differentiators for us. In addition to NPS, there are a number of things that we consider leading indicators to monitor insight on our go-to-market momentum. We think those are especially relevant in periods like these. We look at pipeline, win rate, and TCV among the metrics. As the total company level, our pipeline was up 10.1% sequentially versus the first quarter. This was supported by growth in all regions. Total company new business pipeline, which is a subset of all pipeline and consists of new logo and new scope, was up 14.4% sequentially. Our win rate increased 29 points sequentially and was up more than that year-over-year. And Services' TCV, which is inherently lumpy in this business, was up 1.4% year-over-year in the quarter, and up 16.5% year-over-year during the first half. Demand drivers continue to align to our products and platforms, which also contribute to our go-to-market positioning. Specifically, there is strong demand for digital transformation, cloud enablement, and cybersecurity. We're meeting this demand with InteliServe, our digital workplace solution; CloudForte, our integrated multi-cloud and application optimization platform; and Stealth, our cybersecurity solution. The demand for these solutions, even during COVID-19 was highlighted during the quarter by the pipeline TCV and win rates I mentioned. Digital workplace services is a key strategic focus for the company, and our InteliServe platform helps differentiate our offerings. During the quarter, we launched general availability of our InteliApp and artificial intelligence and machine learning functionality, which aim to improve the customer experience and overall efficiency of customer interactions for our clients. In digital workplace services, we extended and expanded our relationship with a leading provider of innovative technology solutions for the treatment of cancer and brain disorders. We will now deliver our InteliServe solution to enable omnichannel service desk support for improved end-user experience and at a lower cost. We use our cloud offerings, such as CloudForte, to implement holistic digital transformation solutions for our clients. We launched general availability of CloudForte Navigator 2.0 and CloudForte compliance 2.0 during the second quarter, which help clients more effectively and efficiently manage their migration to the cloud, which is even more relevant in the COVID and post-COVID periods due to remote work trends. In cloud services, we entered into an expanded contract with a global commercial real estate services firm, under which we'll use CloudForte to optimize their cloud environment. We'll also provide InteliServe to automate that client's digital workplace support experience. As in this situation, we are increasingly looking to provide multiple solutions to our clients. Also in cloud services, we're using CloudForte in a new logo contract with the state of Nevada for the Nevada Criminal Justice Information System to improve safety for Nevada citizens. This contract is a good example of the strength of our public sector, even after the sale of our Federal division earlier this year. Cybersecurity remains a top global priority as attacks have increased worldwide in the remote work environment of the last few months. Our pipeline for Stealth grew 20% sequentially versus the end of the first quarter. And during the quarter, one of our partners secured a multiyear contract with an IT services company to provide Unisys Stealth to protect critical applications across a variety of IT platforms for the clients' customers. These have implications covering data centers, retail stores, and distribution centers. I'd like to close by spending a minute on our views on diversity and inclusion and on our associates in general. At Unisys, we have an unwavering commitment to diversity, inclusion, and equality, that is at the center of our principles as a company. We have zero tolerance for racism, bigotry, or hatred of any kind. Our goal is to continue increasing diversity across the company at all levels of seniority and continue raising awareness of unconscious bias through training offered to help all leadership and associates. We have a global inclusion and diversity council that helps guide the company's efforts, including establishing our Women in Action program, aimed at helping women successfully transition to leadership roles, and our diversity accelerator program, which focuses on minority associates with a desire to advance into leadership positions. Our council has also supported associate interest groups such as The Pride Network, the Ability Innovation group, and the Veterans Interest Group. We were honored by being recently recognized as a noteworthy company by DiversityInc and were named as a Best Employer for Disability Inclusion by the Disability Equality Index. Beyond these focused efforts related to inclusion and diversity, I also want to recognize the outstanding contributions made by associates of every kind as we are navigating through COVID-19. I have never been more proud of our Unisys team. The rest of 2020 will undoubtedly continue to bring more challenges, but our team can handle it, and we remain focused on executing against our plans and driving the business forward. With that, I'll turn the next section of the call to Mike to provide more detail on our results. Mike?

Thank you, Peter, and good afternoon, everyone. I want to express my hope that you, your families, and friends are all doing well during this ongoing difficult time. In today's discussions, I'll reference both GAAP and non-GAAP results. Reconciliations of these metrics can be found in our earnings materials. Additionally, information regarding discontinued operations is accessible on our website. As Peter mentioned, our revenue expectations for the full year 2020 remain unchanged, and we have increased clarity around full-year profitability expectations. We ended the last quarter with a solid liquidity position after facing our most challenging COVID quarter. I'll provide more details about the COVID-related impacts that specifically affected us due to our unique mix of field services, the timing of our Technology renewals, the growth in our Services margin, and our robust liquidity position, as well as updates on several other important matters. To reiterate, our actual and anticipated results are aligned with our full year revenue expectations shared in the first quarter. Although COVID-19 made the second quarter difficult, the segments of the business affected were as anticipated going into the quarter. Non-GAAP adjusted revenue was down 22% year-over-year or 18.9% on a constant currency basis. About half of this decline stemmed from Services non-GAAP adjusted revenue, which dropped 13.3% year-over-year on a constant currency basis. Field services were the primary contributor to this decline, accounting for 8.7 points of the 13.3% decrease. We had anticipated a revenue decline in our check processing joint venture, contributing an additional 2.8 points to the 13.3% decline. Excluding these two businesses, the remainder of our Services segment only declined 3.3% year-over-year on a constant currency basis. We did not observe any identifiable negative revenue impacts resulting from remote work, as we maintained exceptional service to our clients, supported by a significantly higher Net Promoter Score than our competitors. I will soon discuss some opportunities arising from this situation. Our Services backlog concluded the quarter at $3.6 billion, down 4% sequentially despite the disruptions from COVID. The other half of the non-GAAP adjusted revenue decline was due to a timing shift in ClearPath Forward contracts, which we believe will not alter our full-year expectations for Technology revenue. However, Technology revenue was down 49.7% year-over-year in constant currency. Last quarter, we mentioned that two ClearPath Forward contracts were renewed sooner than expected, bringing that revenue into the first quarter. Conversely, during the second quarter, two other ClearPath Forward contract renewals that were expected to be signed in the second quarter have now shifted to the third quarter. As discussed, we generally recognize all revenue associated with ClearPath Forward contracts upon renewal, meaning there could be fluctuations in our Technology results if contracts are accelerated or delayed. This activity, along with the other expected ClearPath Forward renewals, should result in a year-over-year increase in Technology revenue in the second half, leaving our full-year outlook unchanged. We had stated at the start of the year that we anticipated Technology revenue to decline sharply due to a lighter ClearPath Forward renewal schedule compared to last year. Currently, we expect Technology revenue to be split approximately 40% in the first half and 60% in the second half, with the second half revenue distribution approximately 30% and 70% between the third and fourth quarters. As Peter stated, despite these figures, our solutions remain highly relevant to our clients, as evidenced by a 7.2% year-over-year revenue growth in our public sector, showcasing a consistent demand for our digital government transformation solutions, a key focus area for us. We are optimistic about the outlook for the second half of the year. Given the current visibility of improving trends and assuming no significant adverse changes in the broader economic conditions, we expect our revenue to improve sequentially during the third and fourth quarters. This expected improvement will be driven in part by the ongoing recovery in our field services and BPO businesses from the temporary setbacks of COVID-19, along with the anticipated rise in Technology revenue in the latter half that I highlighted earlier. Looking at 2020 overall, our current models suggest that the 10% year-over-year revenue decline we discussed during the first quarter call is still a relevant benchmark, although actual results could vary. Moving on to profitability, the non-GAAP operating profit margin for the second quarter was 20 basis points, compared to 9.8% in the prior year. Over 90% of the year-over-year decline in non-GAAP operating profit was due to lighter Technology renewals in the quarter coupled with a largely fixed cost base in that sector. Technology expenses are chiefly linked to software development, and due to this, paired with the shift in Technology revenue, there was a notable impact on both gross and operating profit margins within the Technology segment. The Technology gross profit margin was 42%, down from 78.1% in the previous year, while the Technology operating profit margin was 2.2%, compared to 56.7% last year. It's also worth noting that last year's second quarter included a significant number of ClearPath Forward renewals, which positively impacted profitability during that time. Regarding Services, we effectively identified and cut costs to counteract a large portion of the margin impact related to COVID-driven revenue declines. We are continuing to automate processes to enhance productivity, thereby minimizing excess capacity and associated costs. Furthermore, we've made strides on several accounts targeted for margin improvement, and we've also eliminated approximately $50 million in costs previously linked to our legacy U.S. Federal business, with an additional $10 million in such costs expected to be eliminated by the end of the year. Consequently, Services non-GAAP adjusted gross profit margin increased by 20 basis points year-over-year to 15.5% and rose 280 basis points sequentially. The Services non-GAAP operating profit margin registered a negative 40 basis points, down 90 basis points year-over-year, but improved by 310 basis points sequentially. The year-over-year decline at the operating profit level was largely due to the impact of lower revenue on SG&A, some aspects of which are more fixed in the short-term compared to the cost of revenue. For the company overall, operating costs decreased by $48 million sequentially compared to the first quarter and by $69 million year-over-year. We recorded approximately $8.5 million in restructuring charges during the period, affecting GAAP operating profits and totaling $66.8 million in charges through net income or $1.06 per share. These charges were related to the cost-cutting measures previously mentioned, along with a pension expense of $24.5 million and a one-time $28.5 million charge associated with the early repayment of our senior secured notes. The adjusted EBITDA margin was 11.4% compared to 16.8% in the prior year period. Non-GAAP diluted loss per share was $0.15, compared to non-GAAP earnings per share of $0.52 last year. As I indicated, we have made progress in enhancing margins for key contracts targeted for improvement during the quarter. We have also laid the groundwork for longer-term reductions in SG&A to further refine our cost structure. Additionally, due to our evolving field services business and the impact of COVID-19, we are targeting some cost reductions in the third quarter to improve profitability in this revenue stream moving forward. Our associates have transitioned seamlessly to a remote work setting while maintaining efficiency comparable to what we’ve experienced in recent quarters. Since the health and safety of our team is our top priority, we are reassessing our real estate needs, believing we can successfully operate with a significantly reduced in-person presence at our facilities. This shift also offers our associates greater flexibility, which is particularly critical given current challenges with childcare options. We did not provide profitability expectations at the end of the first quarter, given the considerable uncertainty at the time, but everything I've outlined gives us more clarity now. Given that most of the overall margin decline was due to fixed costs within Technology, we expect operating profit margins to improve in the latter half of the year as Technology revenue is projected to increase. For the full year, as indicated last quarter, we anticipate 2020 profitability to decrease more significantly than revenue. Our updated visibility suggests a low-end scenario around 250 basis points below the guidance range we previously provided and a high-end scenario about 200 basis points below the upper end of that same range. For context, our original guidance range for 2020 was 7.7% to 8.7%. All these forward-looking statements are based on our current visibility, and if there are spikes in the virus causing substantial adverse economic effects, our actual results may differ from expectations. We concluded the second quarter with a solid liquidity position, holding approximately $782 million in cash, down less than $10 million from the end of the first quarter. With the repayment of our senior secured notes and our current cash flow schedule, we face minimal near-term cash needs outside of regular operational expenses. Adjusted free cash flow was a negative $37.1 million compared to $14.3 million in the prior year. As mentioned regarding profitability, last year’s strong Technology renewals in the second quarter also led to a higher cash flow than is typical. We did not experience any negative effects on cash collections from COVID-19 and remain aligned with historical norms. Capital expenditures decreased by 11% year-over-year, and we aim for $150 million in CapEx for 2020. In addition to the operational and cost enhancements we've discussed, we made progress in refining our capital structure plans during the second quarter. In terms of our pension obligations, I want to highlight that as of June 30, necessary contributions through 2025 were reduced by $175 million, based on market conditions compared to calculations at the end of the first quarter, while the pension deficit increased by less than $60 million. Legislative elements included in the house version of the next phase of the economic stimulus package aim to provide permanent pension relief. If these components remain in the final bill, they could positively impact our future cash contributions. Specifically, after our anticipated contributions for the remainder of 2020, we would not be required to make additional contributions until 2026, which would amount to about one-fifth of our current annual obligation. There are also discussions about the immediate monetization of certain U.S. general business tax credits, which could provide significant cash benefits depending on the specifics. We are committed to pursuing a permanent solution for pension relief and the overall enactment of this economic stimulus legislation. We announced that our Board of Directors unanimously approved the early termination of our tax asset protection plan, established during the sale of our U.S. Federal business to safeguard our deferred tax assets. That plan has fulfilled its initial purpose and is no longer necessary. Therefore, we are moving the expiration date from February 5, 2021, to August 4, 2020. As we mentioned, the sale of the U.S. Federal business significantly enhanced our leverage and liquidity. Having reduced our leverage and addressed our near-term pension obligations, our focus is now on optimizing our balance sheet and progressing toward a more normalized capital structure. A step forward in this recovery occurred this quarter when we received a credit rating upgrade from S&P, and we plan to utilize traditional debt to further mitigate our pension deficit and reduce its variability. Since there are no contributions required for the U.S. plan in the next two years, we intend to be strategic in accessing the debt markets. We have also begun to implement our pension liability reduction program globally, targeting approximately $1 billion in liability reduction over the next eight months through a mix of bulk lump sum buyouts, annuity purchases, and transfers to multi-client, multi-employer plans. We initiated this process with the aim of completing this round of liability reduction by the end of the first quarter of 2021. Alongside this and other initiatives, we anticipate three major charges in the third quarter. First, a significant reduction of pension liability that could be classified as a settlement from a GAAP perspective, possibly accompanied by noncash settlement charges. We anticipate this charge could be as much as $100 million, allowing us to entirely eliminate one of our international plans, and again, this charge would be noncash. We are currently modeling this as an action for the third quarter, but it may be delayed depending on processing times. The second charge relates to our EMEA optimization plan, which necessitates closing certain entities, resulting in noncash currency translation adjustment write-offs. This one-time noncash charge is expected to be around $20 million in the third quarter. Thirdly, we expect to incur a cash charge related to our reassessment of our real estate portfolio, likely within the third quarter. The projected range for this charge is between $5 million and $10 million, and it is still under evaluation. We expect the annualized savings from this charge to be between $20 million and $30 million. In total, from these three initiatives, we anticipate approximately $125 million to $130 million in third-quarter charges, all of which will be one-time, with $120 million categorized as noncash. Overall, we are looking forward to improvements in the second half of the year and progress on the initiatives we've discussed. Now, I will turn the call back over to Peter.

Mike, thanks very much. With that, operator, we'll open up the call to Q&A.

And our first question today will come from Rod Bourgeois with DeepDive Equity Research.

So first question about the demand environment and how it's impacting revenues. So clearly, during the intense COVID lockdown weeks, you saw demand disruption. At the same time, I would assume that there are parts of the business that should see increased demand due to COVID. And so my question is, is it true that COVID is or can bring some benefits to demand? And is it also true that the benefits of COVID demand are prone to occur at a lag, certainly relative to the hits that you've already experienced? In other words, are there some benefits in demand from COVID that are just going to occur at a lag effect to when the lockdowns existed?

That's an excellent question. Determining which benefits are directly related to COVID and which are part of existing business growth can be challenging. I can say that our non-global workspace cloud and infrastructure business performed well and grew throughout the quarter. Regarding our global workspace business, as mentioned, depending on the calculations Mike and I provided, I excluded iPSL from my analysis. After removing iPSL, if we examine the decline in Services revenue on a constant currency basis, we find that 85% of that decrease is linked to a segment of global workspace, specifically field services. This portion is clearly related to COVID-19. Therefore, while we do acknowledge some growth potential in cloud services, we don't foresee growth in field services—our business model is being adjusted to maintain a lower level of field services permanently. However, other aspects of global workspace, which encompass service desk and more end-user experience elements as opposed to solely end-user services, are anticipated to drive growth as we emerge from COVID-19. We expect these areas to increase in absolute terms. I hope this answers your question, Rod.

Yes, that's helpful and makes perfect sense. I noticed that your total contract value increased year-over-year, which is encouraging. However, your win rate seems to have improved significantly. Was this improvement due to fluctuations in specific deals, or is there a more fundamental change contributing to your win rate, especially now that you have streamlined your focus after eliminating the Federal business? Is there something at a structural level that is positively impacting your win rate?

I believe it's the latter, and I think it will continue to increase. When we analyze our sales focus and our actions as a company in 2018 and 2019, we recognized that we were well positioned in the Federal market. This was largely due to our CloudForte and InteliServe offerings, and to some extent, Stealth. However, CloudForte and InteliServe aligned perfectly with what the government required, and government spending increased. As a result, we directed our sales resources and our go-to-market strategy towards government, which led to high win rates in that sector and enabled us to sell the Federal business at a significant premium. Following this, in March, we shifted our attention to the non-Federal business and strategized on how to apply the same level of focus here. We are pursuing this in two ways. Currently, the increase in win rates can be attributed to enhanced discipline and focus within the company. Starting in September and October, we will launch a new digital sales platform, which we have been developing for a while and which will be a major advancement. We believe this platform will set an industry standard, significantly bolster our abilities to leverage automation in the sales process, improve the effectiveness of our sales executives and business development teams, and enhance margins. Ultimately, it will also increase both our win rate and our pipeline, as we will be able to target more deals. I would say that the increase in win rate is a work in progress. For now, it's primarily due to our focus after selling the Federal business, and by the end of this year, we will introduce more tools to support our efforts.

Hey, Rob, it's Mike, too. If I could just add to that. Clearly, a concerted effort around calling the pipeline, a concerted effort around ensuring qualifying that pipeline at a much earlier stage and not chasing, obviously, a bunch of things that don't ultimately turn into TCV or revenue. And I think the part that Peter mentioned around public sector, as you know, at the end of '18 and early '19, we signed a lot of large public sector deals. So the know-how and muscle memory on what those governments or state and local and foreign governments are looking for is now starting to be part of our muscle memory on the next sale. And obviously, having tremendous quals there with our NPS scores is certainly helpful in that win rate as well.

Great. And so one other question. You gave us numbers to make it clear that the earnings challenge that you had in the quarter was primarily due to the timing in your ClearPath Forward renewals. We've experienced that in the past where you have upside because the timing is positive and other quarters where the timing is negative. In the second half, do you feel like you have better visibility on the timing that would certainly increase the probability that your earnings works out for the year, so how is the visibility in the next two quarters on the renewal timing at this point?

Yes. I believe we have good visibility for the year, but, as you know, delays of even a week can affect things, especially since many of these are scheduled for the end of the quarter, leading to fluctuations from quarter to quarter. As I mentioned earlier, two renewals have moved to Q1, while two have been pushed to Q3. We are quite optimistic; for us, it's not about if, but about when. We have confidence in the overall renewal schedule, and we feel assured about the timing in the latter half of the year. Just to emphasize, based on last year, we had a near 50-50 distribution between the first and second halves. This year, we are projecting more of a 40-60 split, and in the latter half, we anticipate a 30-70 distribution between Q3 and Q4. This level of quarterly insight should provide you with a clear understanding of our confidence in the timing of these renewals.

Yes. Mike mentioned the timing, and we discussed a few deals that were pushed from the second to the third quarter. We are very confident these will be finalized in the third quarter. Additionally, we had some deals that arrived earlier than expected; we initially anticipated them for the second quarter, but they actually closed in the first quarter. We don't have control over the timing of these deals; they can arrive early or late. However, from a financial perspective, a shift in how expenses are recorded in the Technology sector significantly impacts Technology profits, which in turn affects the company as a whole. This is a crucial point for all analysts to understand, especially when you observe a significant decline occurring within the fiscal year. We hope you consider this information.

And the next question will come from Jon Tanwanteng with CJS Securities.

The first one, just on the renewals in the quarter. The two customers you referred to that pushed out. Can you give a reason why they delayed? Was it something COVID-related? Or something else, maybe a change of scope for contracts and just negotiations? Any color would be appreciated.

I do not have color on the delay, whether it was COVID or not. But again, it is usually not. It is usually related to specific circumstances at the client themselves. When we look at the two that were accelerated into the first quarter, they were actually accelerated before COVID-19 really kind of hit in its current form. So largely, these are unrelated to COVID-19.

Got it. And just to piggyback on the prior question in terms of timing, there seems to be a very large portion of the Technology revenue falling into Q4. Is there any risk of that pushing into the next year?

I'll start by saying there is always a risk, particularly when deals are signed toward the end of the quarter. We encounter this risk every year. Is the risk greater this year than in a typical year? Yes, because this year is atypical. However, we don't believe it will significantly impact the overall size of our renewals, even though some may shift into early 2021 instead of 2020. It's always a possibility.

Got it. Okay. Switching to Peter, I think you mentioned that you had a partner selling Stealth in the deployment. I was wondering if that was SAIC or another one of your partners. If it wasn't SAIC, how are they performing in the market compared to your expectations? Have you seen any closures from them thus far?

That's a great question. Thank you, Jon. First, the partner in question was not SAIC. We have been working on expanding our distribution network with Stealth. Several organizations are currently exploring partnerships with us. For example, Dell has now added Stealth to its cyber vault’s capabilities offerings. In this case, this partner is moving Stealth to an IT services company with our support. That IT services company is incorporating Stealth into their offerings, which we consider a fantastic development. There is a significant market available, and we want to ensure we capture it. Regarding SAIC, they are an excellent partner and have shown significant focus on Stealth. Their wins this quarter were somewhat modest, but their future pipeline looks very promising. However, we will not be announcing deals with SAIC or categorizing them; we will allow them to handle that. I can assure you that we are very pleased with the level of engagement from SAIC.

And the next question will come from Joseph Vafi with Loop Capital.

It's Joe Vafi over at Canaccord. Could you please update us on InteliServe and CloudForte, and how their revenue models compare to global workspace in general? I have a follow-up after that.

Sure. When we consider the terminology used in the industry, global workspace serves as the overarching term that describes how employees connect with their employers, interact with hardware, software, and applications. Initially, this area focused on end users, which encompassed field services and support desks as the primary elements. As the concept of end users has progressed, it has expanded significantly. We now discuss end user experience rather than just providing help desk services; the focus has shifted to enhancing employee productivity. This broader perspective includes understanding how employees engage with financial services platforms, HR, and business operations to ensure they are as productive as possible. This transition represents a considerable development from traditional end user services, which we believe will be a key growth driver for us in the future. Currently, about a third of our revenues come from this area. As we move towards prioritizing end user experience over end user services within the global workspace framework, we expect a shift where a smaller portion of our revenue will come from field services, while a larger share will come from remote and automated solutions, including leveraging artificial intelligence and providing more consultative services linked to HR, financial services, and business operations. InteliServe is pivotal in this approach, functioning as the cohesive element that integrates these components in a more automated and elastic manner. Consequently, we are reducing the reliance on labor as a percentage of our cost of sales. Year-on-year, our labor costs have decreased from over 56 percent to approximately 50.9 percent. This reduction is part of our evolution from end user services to end user experience, all under the umbrella of global workspace. Does that clarify the global workspace and InteliServe topic for you, Joe?

Yes, I think that's helpful. Mike, you mentioned the international efforts regarding pensions and associated charges. Are we expecting cash payouts or similar options? I suppose you believe that utilizing cash now is a better choice than holding a term balance.

Just to clarify, Joe, the charges we are discussing are settlement charges and are noncash. Even when we make bulk lump sums or annuities, that cash is drawn from the pension, not from our cash reserves. Our goal is to eliminate the volatility of that liability. We aim to supplement through public debt to fulfill those contributions and stabilize that interest expense, rather than dealing with the fluctuating volatility caused by discount rate movements against those liabilities. We consistently want to ensure that both sides of this issue are being addressed. Again, to emphasize, none of those charges are actual cash charges.

And the next question will come from Frank Jarman with Goldman Sachs.

I guess just to start, you mentioned in the slides that half the revenue impact was driven by COVID, but I wanted to see if we could dig into the travel and transportation channel a bit more. Really, just to understand, one, your offering there; two, sort of how to think about the revenue split; and then three, how we should be thinking about the expectations for the ramp back up. Obviously, being aware that you've already given us the guidance for the full year.

Mike, would you like to address that? I’ll begin by mentioning that travel and transportation represents a fairly small portion of our business. Last year, it made up about 4.5% of our total, and this year, it is an even smaller percentage. However, it is not a significant part of our overall operations. Mike, what are your thoughts on this?

Yes. No, I think that's spot on, Peter. And kind of the way we look at that, Frank, is really just some of the volume-based contracts can get impacted in that travel and transportation business. But even when COVID struck, I think when we combined both our China business as well as the travel and transportation business, it was sub-7% in total. So relatively low impact from T and T on the types of things that we were talking about for full year guidance. And I guess the volume component would largely be predicated on the waybills and other items that Peter mentioned in his script.

So we do expect that business to pick up during the second half of the year somewhat. But just to put it in context, it's down about 50% year-on-year.

Great. That's super helpful. And then maybe one for you, Mike, just on the balance sheet. So you made in your comments that you plan to utilize traditional debt and be opportunistic about tapping the debt markets. And as I look at your balance sheet today, you obviously made a lot of progress with regards to deploying the proceeds to pay down the high-yield notes. You still, I believe, have about $59 million drawn in your revolver, you've got $84 million stub of converts, and then you've got the pension contributions this year. And then obviously, you have some time until 2026. So with that as context, I just wanted to better understand how you're thinking about being opportunistic. Obviously, the high-yield markets are relatively open right now. And so I wanted to think about what your appetite is to issue debt and be a little bit more proactive on the pension deficit here. And then further to that point, how should we think about your appetite for unsecured versus secured versus convertible debt at this point in the story?

Okay. Well, great, Frank. A lot of good meat there. So let me start by saying post the contributions to the pension, one of the big factors in order for us to move forward with the 'opportunistic view' of the debt markets is waiting to see what the stimulus package contains. If it has the elements in it that were embedded in the house bill, there would be no cash contributions required until 2026. So when we're talking about getting into the public debt market at this point, we're looking at unsecured, and we were looking at it for the 2023 and 2024 contribution. So we're weighing what the pre-COVID rates were for unsecured debt and where they're at now. And although it is open, and it has been more favorable, it's still not back to pre-COVID rates. And so I think the first domino that would need to fall from our perspective is we need to see what the legislation provides as far as either it's pension-permanent relief or potential temporary relief in regards to that, and then that would kind of lead itself into us being out in the public markets. And again, I think we would be looking for unsecured and we'd be looking for something to deal with the 2023 and 2024 pension contributions. And as I mentioned earlier, what that essentially would do from our perspective on the U.S. plans is they would be in a position basically fully funded at that point, and we'd be able to remove a lot of that volatility that we see with the low interest rate environment that we've been living under for these probably 8 years now.

And the next question will come from Ishfaque Faruk with Sidoti & Company.

A couple of questions from me. First of all, on the Technology revenue side. Mike, you said that you expect maybe some bump that comes from some of the transition service agreements that you guys have with SAIC. When you give outlook for the back half of this year, does that factor any revenues from that? Or is that just organic Technology revenues from ClearPath Forward and Stealth?

Okay. Hey, Ishfaque, yes, what's embedded in there is organic, right? We're not anticipating, in those numbers, a bump from SAIC. So that would be upside against what we've put out.

Okay. And just to follow up on that, are you expecting any revenues from some of the transition service agreements that are not maybe in these COVID times right now or maybe later on?

Well, as Peter mentioned, look, I think we're very happy with the level of engagement that we've had with them. The relationship has been excellent. And we'll let them close their deals and announce their own sales. And we're happy that they are explicitly engaged with us, specifically in Stealth. As you know that we have U.S. Federal ClearPath Forward clients that were part of that transition, so those will come by way of normal renewal scales from our perspective. So really, it's really their sale closing process that we're kind of piggybacking on.

And on the ClearPath Forward side, they have been successfully renewing those deals, obviously, with our assistance. So we don't believe there's going to be any drop or lack of focus on ClearPath Forward.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Peter for any closing remarks.

So first, I want to thank everyone for staying on the call. I was on a call about a half hour before we started here with someone from the East Coast, and their power went out during the call, and so I know you guys are dealing with some issues on the eastern seaboard. Secondly, this was a complicated quarter for us, and I really appreciate each of you on the call, being on the call to dig into it. I want to reaffirm some of the items that Mike mentioned. On the Technology side, we really see this as an intra-year timing. Some of it moved to the first quarter, some of it is moving to the third quarter. On the Services, when you take out field services, that is 85% of the non-iPSL-related drop in our Services' revenue. So we think that really is unique to that part of the business. Nonetheless, with all of that, we are consistent with our full year 10% revenue drop with which we led within expectation last quarter. We feel more confident about looking at expectations on profit. And so we have given you a range of profit expectations for the year, which we couldn't do last quarter. So we think that is an improvement in our visibility as well. We feel very confident about the company. I want to reiterate the things we are doing on diversity and inclusion, and my thanks to all the associates at Unisys for really a sterling effort throughout COVID-19. We do believe that the second quarter is the worst of the quarters for us, and so we look forward to having a better discussion with you next quarter. With that, I want to thank you all for joining. We have a lot of information in addition on our website, and we remain available to you for follow-on questions. Thanks very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.