Unisys Corp Q1 FY2021 Earnings Call

Good day and welcome to the Unisys Corporation First Quarter 2021 Earnings Call. All participants will be in a listen-only mode. Please note that 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 first quarter 2021 financial results. I am joined this afternoon to discuss those results by Peter Altabef, our Chair 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 first 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 post-retirement, debt exchange and extinguishment 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 presentations of its results that exclude the impact of these items in order to enhance consistency and comparability 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. For more information regarding these metrics and related 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 the other materials I mentioned earlier on the Unisys investor website. And now I'd like to turn the call over to Peter.

Good afternoon, everyone and thank you for joining us to discuss our first quarter results. At our Investor Day in January 2021, we laid out goals related to further strengthening our balance sheet, transforming our organizational structure, improving margins and cash flow, enhancing and expanding our solution portfolio, growing revenue and enhancing our associate experience. During the first quarter, we made progress on each of these. I will provide some detail on the organization, our solutions and our associate experience and Mike will discuss the rest of these points, including the significant improvement to profitability and cash flow that we made during the quarter. During the first quarter of 2021, we transitioned to our new segment structure, which targets Digital Workplace Services or DWS, Cloud and Infrastructure or C&I and ClearPath Forward or CPF. This was a key step in implementing the strategy we developed in 2020 and laid out in our Investor Day. We are now running the business and reporting our financials on this basis. We have also built out the leadership team of these businesses and the company overall. We hired Leon Gilbert, our new Head of DWS in February and brought on Gene Chao, our new Head of ClearPath Forward in April. Wendy Reynolds-Dobbs joined as our new DEI leader in March and she will also co-lead our ESG efforts. Dwayne Allen, our new Chief Technology Officer joined us in April and will partner with our business unit leaders to innovate new solutions that expand and enhance our portfolio. Finally, last week, Maureen Sweeney our new Chief Revenue Officer came on board. Maureen will work across our businesses to leverage capabilities, identify key opportunities and help drive growth. More information on each of these leaders is available on our website. With the significant strengthening of our balance sheet last year, we now have the levers to fully execute on our strategy. These new leaders and the team already in place are doing just that. As we discussed at our Investor Day, our plan over the next three years is to grow margin, cash flow and revenue. We expect to achieve this in part through our DWS transformation including expansion and enhancement of our offering portfolio and shifting to experience-based solutions. Additionally, we expect to continue our momentum in C&I with a focus on higher-margin cloud offerings. Within CPF we are targeting growth in CPF services, which are the highest margin services in the company. Supporting all of this are improvements to operational efficiency. While we will maintain a focus on revenue, margin and cash flow at all times as we execute on the strategy, we have expected to see earlier progress with margin and cash flow. These metrics are already benefiting from efficiency improvements and reduced pension contributions have further improved cash flow. We expect our DWS transformation and growth in cloud and CPF services to drive further profitability and cash flow improvements as well as increasing revenue growth rates in 2022 and 2023. Within DWS during the quarter, we improved efficiency and margin by reducing our total cost of labor and with automation and artificial intelligence. As of the beginning of April, we have moved all of our service desk clients onto our AI-enabled cloud-based InteliServe contact center platform. We expanded our solution management and experience-based talent and offerings within DWS, which will help drive revenue growth. In the quarter, we signed a contract with a global publishing company in EMEA for service desk support, field services and asset management in which we will automate and streamline global user support to help improve the user experience for our clients' associates. Within C&I, we are helping clients in their journey to private public and hybrid clouds with a particular emphasis in the public and highly regulated sectors. This is higher-margin business than our legacy infrastructure work and we have begun to see the benefits of this in our improved segment profitability. We are also pursuing increased cloud operations management and monitoring, as well as development and modernization of clients' cloud-based applications. These represent opportunities for additional profitability improvements and revenue growth. As an example, we are migrating a significant U.S. state government IT services agency to the Oracle, Microsoft Azure, and AWS clouds as part of an initiative to modernize services to citizens at a lower cost and improve reliability, cybersecurity, and cost-effectiveness of key state administrative operations. During the first quarter of 2021, we signed seven contracts for additional work associated with these transformation efforts and have several more opportunities in the pipeline with this client. Similarly during the quarter, we also signed a new-scope contract with California State University or CSU, the nation's largest higher education system. As part of this new contract, Unisys will be providing financial, security and cloud operations to offer the client greater agility to execute digital cloud strategies that better serve the campuses and improve the student experience for nearly 500,000 students. For ClearPath Forward, we have a slightly different approach than with DWS and C&I. ClearPath Forward is already operating at attractive margins with license and ClearPath Forward Services, representing the highest margin revenue in the company. So our strategy here is focused more on growing CPF services revenue while maintaining the stability we have seen in the ClearPath Forward license base. To do this, we are implementing a coordinated strategy to better leverage our technology solutions while utilizing our deep client relationships to identify areas where those clients can benefit from additional ClearPath Forward services. Specifically we're targeting growth in both managed services and application services revenue. As contracts renew, we are also aligning maintenance pricing to market as an example of our expanding relationship with our existing ClearPath Forward client to provide new ClearPath Forward application services. During the first quarter, we began work on a new-scope contract with a European national government agency that manages processing and payment for public pensions for about two million people. Unisys is now also providing ClearPath Forward consulting services to make their ClearPath Forward system more scalable and more interoperable with other systems. Within the framework of our new business unit structure and based on the strategies I just described, we're evolving our solutions portfolio in very specific areas to complement our current capabilities and enhance our margin profile and future revenue growth. This evolution will be the result of build, acquire and partner activities. In cases where it's most efficient to do so, our enhanced balance sheet gives us the flexibility to pursue inorganic opportunities in a way we have not been able to in the past. As we consider such opportunities within DWS, we initially expect to focus on relatively small-scale companies that have solutions that would further enhance our experience-based strategy. Within C&I we will look for opportunities that help us scale the business and leverage our solutions more broadly. As we drive all of these operational strategies forward, we are also aiming to enhance the experience of our associates. In addition to being the right thing to do to support our people and to make Unisys a place they are increasingly proud to call home, we believe that this can also help us achieve a number of other important goals including accelerating recruiting, bolstering retention, and being a more attractive partner and supplier for our clients. We're actively working to create new opportunities to enhance diversity, equity and inclusion in our workplace and throughout our team. Likewise, our continuing efforts related to ESG are important to our clients, associates, partners and investors alike and we will continue to develop and target ESG opportunities, which Unisys has been doing in quantifiable ways since 2006. In conclusion, we're making progress towards the goals we laid out at the beginning of this year some shorter-term and some longer-term. There is an excitement at the company as we do so and I'd like to thank our associates for their ongoing enthusiasm and efforts to help us drive the business forward. With that, I'll turn it over to Mike to discuss our financial results.

Thank you Peter, and good afternoon everyone. In my discussion today I'll refer to both GAAP and non-GAAP results. As a reminder, reconciliations of these metrics are available in our earnings materials. As Peter highlighted, we made significant progress on both our strategic and financial goals during the first quarter. Peter discussed a number of items on the strategic front and so I'll focus more on the financial accomplishments including margin and cash flow improvements, positioning the company for improved revenue growth and strengthening our balance sheet. Starting first with margins. We saw significant improvements year-over-year in the quarter. Non-GAAP operating profit increased 75% year-over-year to $51 million and non-GAAP operating profit margin increased 440 basis points year-over-year to 10%. Gross margin improved in each of DWS, C&I and ClearPath Forward. DWS gross profit increased 157% year-over-year to $19 million with DWS gross margins up 860 basis points to 13%. C&I gross profit increased from a negative $3 million in the prior year period to a positive $12 million with C&I gross margin up 1,240 basis points to 10%. ClearPath Forward gross profit was up 3% year-over-year to $103 million with ClearPath Forward gross margins up 290 basis points year-over-year to 61%. The margin improvements were driven in part by progress against our previously outlined goals for efficiency improvements in 2021. We noted on our last call that we were targeting between $130 million and $160 million in run rate savings exiting 2021 and we have completed a significant portion of the actions required to achieve this with a total of approximately $100 million of run rate savings in place as of the end of the first quarter. We took additional charges related to these efforts in the first quarter of $8 million and we expect less than $10 million of additional charges throughout the remainder of the year to complete this program. The improvements to non-GAAP operating profit also flowed through to adjusted EBITDA, which increased 30% year-over-year to $94 million. Adjusted EBITDA margin increased 440 basis points year-over-year to 18%. And non-GAAP EPS increased significantly to $0.46 from $0.02 in the prior year period. This margin expansion also contributed to significant year-over-year improvements in cash flow. Cash used in operations improved $335 million year-over-year to $43 million. And adjusted free cash flow improved $52 million to a negative $24 million. A large portion of the improvement to operating cash flow and free cash flow was attributable to reduced pension contributions. CapEx was roughly flat year-over-year at $28 million and as a reminder it is typical for us to start the year with negative cash flow, given the timing of our cash generation and usage. We expect the momentum with cash flow to continue over the year. Our expected CapEx spend for the year is between $120 million and $130 million and we anticipate cash taxes to be approximately $45 million to $55 million. Additionally, as we noted, at our Investor Day in January, working capital is currently at a run-rate use of approximately $20 million to $30 million, which we expect to improve over time. As a result of all this, we expect free cash flow positivity for the full year 2021. We had expected profitability to be the key driver of improvement in the first quarter, as we were anticipating a modest year-over-year revenue decline. The total company revenue was down $5.6 million or 1.1% year-over-year, driven by a decline of approximately $16 million in field services, travel and transportation, and BPO processing activities. Cloud and Infrastructure revenue remained strong, increasing 19% year-over-year to $123 million. And the cloud aspect of this business increased 31% year-over-year. Additionally, C&I revenue in the U.S. and Canada grew 24% year-over-year. ClearPath Forward continues to demonstrate stability and opportunities for growth. ClearPath Forward revenue was down 2% year-over-year, largely driven by currency and the divestiture of some low-margin third-party contracts which contributed to the improvement in ClearPath Forward gross profit and margin that I mentioned earlier. The decline in Field Services, that I noted, contributed to the 12% year-over-year revenue decline in DWS, which was also in part due to the fact that this segment has a large base of legacy solutions, which have lower growth than the experience-based solutions to which we are transitioning. Peter highlighted a number of the key steps that we took in the quarter to progress our DWS transformation. And we expect over time to continue to see improved performance out of this segment. Overall, our first quarter results were in line with or slightly ahead of our internal expectations and beat consensus on all key metrics. Looking to the rest of the year, we would remind you that we expect ClearPath Forward license revenue to be split 55% and 45%, between the first and second half of the year, with the third quarter expected to be the lightest of the year and the fourth quarter expected to be the strongest. This quarterly revenue timing will also impact profitability, as ClearPath Forward costs are distributed relatively evenly throughout the year. As a result of this, our first quarter results and our expectations for the remainder of the year, we're reaffirming our guidance ranges for the full year of zero to 2% year-over-year revenue growth, non-GAAP operating profit margin of 9% to 10% and adjusted EBITDA margin of 17.25% to 18.25%. Total company backlog which now includes license revenue given our new segment structure was $3.4 billion, as of the end of the first quarter, relative to $3.6 billion as of the end of the year. Of the $3.4 billion, we expect $380 million to convert to revenue in the second quarter. The company's legacy BPO businesses and the ClearPath Forward renewal schedules were the largest contributors to the sequential decline in backlog. Additionally, the weighted average length of contracts signed during the first quarter of 2021, has been shorter than the weighted average length of contracts signed in 2020, which means that the backlog is expected to convert to revenue more quickly, which is positive for near-term growth. We expect revenue and backlog to improve over the course of the year as we continue to implement our strategy to enhance our solutions portfolio with a particular focus on DWS in the short-term, which enables a gradual move up the revenue and margin stack. We're currently building out our segment go-to-market materials that support our strategy. And we expect that new material will be in the market this quarter. Additionally, we expect an increase in demand for cloud transformation and increased opportunities in managed services application development and application modernization in both C&I and ClearPath Forward to further drive improvement in revenue and backlog. Turning to the balance sheet, we continue to make significant progress on our pension obligations. As we disclosed during the first quarter, the signing of the American Rescue Plan Act in March has resulted in changes to our pension contribution requirements. Based on our current calculations, we are not required to make any additional contributions to the U.S. qualified defined benefit pension plans in the future. As a result, we no longer expect to make the $200 million voluntary contributions we've previously discussed, leaving us with even stronger expectations for liquidity and near-term cash flow than we had at year-end. We may in the future elect to make voluntary contributions in order to implement additional derisking opportunities or strategies. As we've discussed, we've been targeting a reduction in gross pension liabilities of $1.2 billion. The domestic portion of this program has been completed with approximately $550 million of liabilities removed. The final two actions to achieve our $1.2 billion target relate to transferring $650 million of gross pension liabilities from two of our international plans to multi-employer collective foundations. Our work to complete these transactions was done at the end of the first quarter and we expect to receive final approvals and complete these transactions in the second quarter instead of the first, at which point we will have achieved our goal of removing $1.2 billion of gross pension liabilities. As a reminder, we are required to recognize non-cash settlement charges for each plan as we remove these liabilities. The amount of the charge related to the second quarter activity will be approximately $215 million. Before I turn the call back to Peter, I'd like to thank the Unisys team for their ongoing efforts to help implement our new strategy and continue our company's transformation. We're off to an exciting start in 2021, with strong profitability and cash flow. And we look forward to continuing to drive results over the remainder of the year. With that, I'll turn the call back over to Peter.

Thank you Mike, very much. And with that, we'll open the call to a discussion, as well as questions, so, Cole, if you would open up the call. And let's get to it.

Certainly, and we will now begin the question-and-answer session. Our first question today will come from Jon Tanwanteng with CJS Securities. Please go ahead.

Hi, good afternoon, guys. Thanks for taking my questions and nice quarter. Just wanted to clarify a couple of points. Mike, did you say you expect backlog to grow from here as in sequentially or is that just over the course of the year at some point?

Yes. We're looking – Jon, hey, thanks for the question. We're looking for growth in the second quarter, both in the quarter and the year-to-date and we're looking for backlog growth for the full year as well. So I guess the answer would be both in the quarter and the year, Jon.

Got it. That's great to hear. And I was just wondering how sustainable the margin – the operating margin is in your services business as we go through the year? Are there any changes to the profile as you get through different projects or as revenue fluctuate? Any color on that would be helpful.

Yes. Look as you know Jon, the services margin aspect of our business is pretty solid right? So what plans that around a little bit is the technology aspect of that. So as I noted in my prepared remarks in the third quarter, we'll have a lighter tech quarter. But as far as the services margins go, we feel pretty strongly that they're very sustainable. I think you've seen from us over the last three quarters, consistent improvement in that and a big step-up in this quarter and we expect to maintain and continue to grow those services margins along the lines as what we discussed in January at the Investor Day.

Got it. And you usually give kind of like a ballpark percentage of revenue that you expect in technology per quarter or per half. Do you have that kind of clarity at this point in time?

Yes. So what we're calling for was 55% in the first half and 45% in the second half, Jon with Q3 being the lowest quarter, Q4 being the highest. From – and again it's 55% 45% and pretty flat for the year from a technology licensing perspective, just for modeling purposes.

Okay. Got it. And then finally just high level. You benefited from the stimulus bill with the pensions. Is there any benefit for you coming in the potential infrastructure bill? I know there's funding going to a variety of end markets that you serve, I'm wondering if you have any insight as to whether that would flow to you guys at all?

Yes. Maybe I'll take that for a minute. And Jon, I want to add my thanks to Mike and thanks for recognizing the quarter. We feel very good about the results we had this quarter and we're on track also this year as well as the plan that we rolled out in January. This infrastructure bill is – at least in its current form is defining infrastructure in a much broader way than in prior bills. Cybersecurity, broadband access are all front and center in this bill as active integral parts. Given our focus in the United States on the public sector, which we define as state and local, anything other than federal, we see opportunities around cybersecurity and around increased evolution to new platforms for state and local that we think that the infrastructure bill, if passed in a fulsome way, would help us given our public sector visibility.

And Jon, I know you didn't ask this aspect of it and Peter gave the infrastructure piece of it. But I just wanted to maybe throw in the tax piece of it as well, in case that's on your mind or on the mind of some of the other analysts here. We do not expect any negative issues in regards to any of the discussions from a tax perspective. As you know, we've got quite a bit of DTAs. We have about $1 billion worth of DTAs that will shelter about $3.5 billion of income. So we're not expecting really any fallout from any of the items being discussed, whether it's the corporate tax rate, the GILTI tax rate or the dialogue on the B taxes. So I think we're really no change in regard to that as well.

Got it. That's good to know. Maybe one final one if I could. The well-publicized supply chain issues on – just on technology and semiconductors and all of that. Is that limiting your ability to deliver hardware associated with your services at all, or is that not much of an issue – as much of an issue as it might have been just given the migration to the cloud and offloading that capacity?

Yes. That's exactly right, Jon. It is not as much of an issue for us. Obviously, certain sectors like the automobile sector are being hit very directly. We have not seen significant availability issues in the hardware that we're providing to clients. Some but nothing significant.

Okay. Great. Thank you.

Thank you.

And our next question will come from Joseph Vafi with Canaccord. Please go ahead.

Hey, guys. Good afternoon. Good results. I just – kind of looking at some of the segment performance in the quarter and kind of thinking about the strategy moving forward. And clearly C&I doing well and looks like it's kind of the emerging growth driver of the new segment reporting and – so how do you see kind of ROI on sales and marketing expense relative to the three segments now? And where you're prioritizing that? And then I'll have a follow-up. Thanks.

Yes. So Joe, I'll probably take that to start. And thanks very much for the congratulations again. We feel very – when we go back to our January strategy, the bulk of the revenue growth we expect will come from DWS, from Cloud and Infrastructure and from the services segment of ClearPath Forward. I will tell you that we feel very good about all three of those, a few months into this. So you see some reduction in Digital Workplace Services revenue year-to-year. We expect DWS revenue to pick up and we expect it to be positive for the full year. In fact, we expect all three of those to be positive for the full year. Again relatively modest revenue but we expect to pick up the losses from DWS. We expect the pipeline for DWS to increase markedly over the course of the year. We have visibility of some large deals that will come out in the third and fourth quarter. We feel very good about our positioning for those. So I would tell you that piece of our strategy, which is that we really expect over time to have a larger and larger share of DWS very much in play. On Cloud and Infrastructure, we had a little bit of a head start compared to DWS. So Leon Gilbert, who is leading the DWS team joined us in February. Mike Morrison, who is leading Cloud and Infrastructure has been here for several years. And I think you're seeing a little more maturity in the Cloud and Infrastructure and particularly those cloud numbers, of course, this quarter. On ClearPath Forward, I would tell you, again, a new leader who I mentioned, Gene Chao started in March for us. Very, very interesting perspective on the CPF business. We have a good view from January about where to take the services revenue. And I think Gene is looking very hard at opportunities to increase the software revenue on a ClearPath Forward. Early days on that, but really like the vitality that he's bringing to that entire segment for us. So we really feel that we're on track Joe with where we expected to be at this point.

Thanks, Peter. If we consider the ongoing restructurings and their impact on margin, there’s $200 million that has become available due to the congressional American Rescue Plan Act. How should we approach deploying that capital back into the business? It seems like M&A could be a suitable option, but I would like to hear your thoughts on this.

Well, first of all, we are not in a rush to spend the money we have. With the new Act in place, we no longer expect to contribute $200 million, which we appreciate. As I mentioned earlier, we now have the flexibility to act on various fronts. We've closely examined which areas will benefit us the most, particularly DWS and the cloud segment of Cloud and Infrastructure. Our previous collaborations with firms like McKinsey and AlixPartners have helped us understand how these sectors need to evolve in the coming years. We have conducted a detailed analysis and have created bundles of offerings in both DWS and Cloud, aiming to complete these bundles over the next couple of years. This is a classic analysis of whether to build, buy, or partner, and we expect to pursue all three strategies. Regarding acquisitions, current market pricing for DWS businesses is slightly more favorable compared to some cloud businesses, which aligns with our strategy. We have noticed that some industry players are pulling back, and we plan to take advantage of this opportunity as it presents a strong business prospect for us. Therefore, we anticipate focusing on specific smaller acquisitions in DWS that will address particular niche solutions, as these will significantly enhance our revenue growth and market share in that area. Given this potential, we believe we are well-positioned to be effective acquirers. On the other hand, the situation in the cloud sector is a bit different as the asking prices are generally higher, and this area is more mature in terms of our next-generation offerings. However, we do intend to pursue cloud acquisitions over time, particularly to strengthen our scalability in certain offerings, geographies, or advisory services. This will be our approach to cloud acquisitions.

Great. Thanks, Peter. Yes, that makes sense. I could see Unisys really kind of becoming a big scale player in what you call DWS as perhaps that opportunity is one that others aren't focused on as much so. Thanks much for the color great results.

Thanks, Joe.

Okay. Thanks, Joe.

And our next question will come from Matthew Galinko with Sidoti. Please go ahead.

Hey, thanks for taking my question. Maybe just as a follow-up to the question around supply chain and component shortages. I realize we're still in the early days of that, but I'm curious if there's any macro push towards or extra macro push towards cloud migration from existing customers and whether that could be any catalyst for you in any segment? Thanks.

Yes, why don't I take that first Mike and then hand it over to you for your perspective as well if you don't mind. And it's one of several, right? So it's hard to imagine people need more push to the cloud at this point, right? So COVID-19 already accelerated people who really did not want to bear the cost or the people involved in managing their own data center. So that was a push. The work-from-home effort that came along with COVID also acted to push people more toward the cloud. The advances in what we're doing around Digital Workplace Services, which is making the employees of our clients at least as productive anywhere they are a lot of our DWS work, ultimately revolves around having capabilities for the client, which has to be available anywhere with very, very low latency around the world, and that largely means putting it into the cloud. So I think you've had a bunch of reasons why people were accelerating to the cloud already. Supply chain issues, I think do it in two ways. First, obviously, you're not as concerned about the availability of servers, et cetera. And secondly, is around security. There is obviously managing a secure environment that is being hosted by AWS or Azure or Google or someone else, you still need to manage it very carefully and we obviously do for our clients. But there's a second element of that which is kind of the core supply chain of are you buying hardware that has the right provenance? And how do you determine the right provenance of the hardware you buy and of the software that needs to run it in a networked environment? And so I think what you're finding here is a willingness to let the big cloud public providers do that work. And especially midsized companies not have to worry about that provenance. So I do agree that over time that's an added element, especially around the security side of that. Mike, your thoughts please?

Yes. And Matt, thanks for the question. Look, I think, Peter you covered the main elements there. Maybe the only other component that we didn't cover is just the cost of the materials themselves, right? We're seeing supply chain increases there from availability cost. Peter talked about security and the complexity. So look Matt, I mean, from our perspective, we've been pursuing a capital-light strategy for probably three years or four years now. And this really just plays into that when we're having discussions with clients that we're thinking about the cloud three years, five years out. Now those discussions are around one year out now, or certainly in the near term. So I think all of the things that Peter mentioned in the prelude here are really just another catalyst to get folks on the cloud adoption or the digitization path. And as you know, that fits very nicely into our strategy and our business plan.

I would like to add to what Mike just said. Back in 2016, we made a decision to ensure that security is integrated into all our solutions. ClearPath Forward is recognized as the most secure operating environment, and Stealth is essential to that security framework for both our internal operations and our clients. However, our commitment goes further. We emphasize providing our clients with the most secure environments possible. With ransomware becoming increasingly prevalent in the IT world, its impact is significant, affecting local and state governments as well as private organizations globally. Having more of your environment in the public cloud does not offer complete protection from ransomware. We understand that ransomware can compromise data regardless of its location, but it allows companies to focus on ensuring that they have the most secure systems within their control, including backups and resiliency to manage a ransomware attack effectively. Therefore, in the broader context of cybersecurity and what Unisys offers, we're observing that organizations are choosing to migrate to the cloud while also concentrating on bolstering their ransomware defenses for both on-premises and cloud-based systems. This trend contributes to the cloud growth we reported this quarter.

Well, thanks for comprehensive answer and nice quarter.

Thanks, Matt.

Thank you, Matt.

And our next question will come from Rod Bourgeois with DeepDive Equity Research. Please go ahead.

Hi, guys. Hey, very nice progress on profitability. And I should also say that I'm liking the three new reporting segments it seems to lay out your trends in a clear way. And for me it just ties your financials better to how I look at Unisys in the marketplace. So nice work on the story there. I have a question about the growth revival plan in the digital workplace business. You mentioned rolling out some new material there and so on. Can you give us some flavor on the DWS messages that you're taking to the market to revive its growth? And clearly there's a plan to move to the end-user experience value proposition. Can you just talk about the messages that you're rolling out in the actual market?

Yes, that's a great question, and I appreciate your support for the segment. I completely agree. Mike and I discussed this extensively last year, and when we finally made the decision, it seemed obvious. However, it only became clear once we took action. Now that we've done it, it really does appear quite evident. I believe this approach provides investors with greater clarity on how to assess the company, especially as we move closer to normalizing our pension obligations. Regarding DWS, as I previously mentioned, it's a crucial aspect of our future. The margin improvement you are seeing is a result of the efficiencies and economies we have been developing over time, which really became apparent this quarter, although the groundwork was laid long ago. Much of the work we undertook last year was in preparation for the strong results we are currently experiencing. On the revenue side, we have a detailed understanding of the capabilities we possess. The market is evolving, and things will undoubtedly change in the coming year. Nevertheless, we are confident in our profound industry insights. We expect to be a leading force in the market in terms of size, geographic reach, and capabilities. Therefore, we feel very optimistic about this area. As I mentioned in response to Joe's question, you will likely see us take a leading role in acquisitions within DWS before we do so in cloud, as we are highly focused on what is necessary for revenue growth. There are promising opportunities within DWS, and our timing appears quite advantageous. We are bullish about this sector.

Got it. And – yes.

I was just going to add a couple of little elements there, Rod, and thanks so much for the question. You know how we feel about the space and, as Peter mentioned, we've got people exiting this space and we think it's really an opportunity for us to be a dominant player there. But maybe specifically to your question, we're talking about this messaging in the context of not only the EUS to EUX transition which we've talked about quite a bit, but it's really about the holistic view of where our clients can be a year from now, three years from now and us being able to take them on that journey. And it's about the deepening of our solutions whether that's in UCaaS or VDI or UEM type areas. But this is an area that we think is really ripe for the taking. And as you heard us say in the January Investor Day materials, we want to be the dominant player in this space and we're putting a lot of focus on that.

Got it. Very helpful. Hey, and a more general question about demand trends, are you seeing an uptick in add-on work at your existing accounts, particularly as we get through some of the COVID crisis challenges, are you just seeing a general uptick in add-ons? And I know you mentioned that the duration was down in the backlog, could additional add-on work be part of that, or is that a different dynamic that's driving the lower duration in the backlog?

I'll start and then let Mike finish. Yes, it is. When discussing our segment that experienced the highest growth this quarter, which is Cloud and Infrastructure, particularly in cloud services, much of the work came from existing clients. Some clients migrated from private to public clouds, while others established robust hybrid clouds, but not all of it involved new clients. The strong relationships we built during COVID-19 are evident in what you refer to as add-on or extension work. Additionally, regarding DWS, our strong foundation in end-user services gives us a significant advantage. Not all end-user experience work derives from new engagements; it can originate from our existing clients. When we consider seamless collaboration in UCaaS, workplace-as-a-service, intelligent workplace, modern device management, and other key aspects of end-user experience, we are engaged in these areas related to end-user services, but not to the same extent as the overall market direction. We believe that extending existing relationships is a crucial part of our future.

Yes, Rod, and I would echo that and really just say, specifically within public sector within our Cloud and Infrastructure business, we've seen quite a bit of that add-on work, as you call it. In fact a lot of the contracts that we're getting are really unsolicited opportunities, right? And that's the beauty of the long-term relationships that we've got with blue-chip clients. And you're there, you're walking the halls and they need other work done. So from our perspective, the more wholesome our solutions can be, the more of that we think we'll get, right? And that's really been a core tenet to our strategy, really for a couple of years now, that's not necessarily new here. But as we expand and deepen our solutions, we think there's a lot more of that right, because they're paying others for it at this point. So it's a good opportunity for us to expand our wallet with existing clients as well.

Good stuff. Thanks, guys.

Thank you, Rod.

Thanks, Rod.

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

Thanks very much. I'd like to thank Courtney and Mike for joining me on the call today. We really appreciate the level of questions we've gotten. We think those help explain what's going on in the business beyond our prepared remarks. We also think that what helps explain the business is the refreshed Investor Relations website that we have put up, which actually went up after the investor call in February. So we hope that you spend some time on that. We think you'll find that helpful and increasingly transparent, which is one of our goals. We also are available to you by phone and obviously through Zoom calls and at some point in the year, through in-person meetings as well, which we also look forward to. So I'd like to thank everybody. And on behalf of Mike and Courtney, look forward to visiting with you again next quarter.

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