Unisys Corp Q4 FY2021 Earnings Call

Good day. And welcome to the Unisys Corporation Fourth Quarter and Full Year 2021 Earnings Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I’d now like to turn the conference over to Courtney Holben, Vice President of Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone. This is Courtney Holben, Vice President of Investor Relations. Thank you for joining us. Yesterday afternoon Unisys released its fourth quarter and full year 2021 financial results. I am joined this morning 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 morning to guide our discussion, as well as other information relating to our fourth quarter and full year 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 have 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 compared 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 expenses. Management believes each of these items can obscure the visibility of trends associated with the company’s ongoing performance. Management also believes that evaluating the company’s financial performance can be enhanced by using 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. For more information regarding these metrics and related adjustments, please see our earnings release and our Form 10-K. 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 morning, everyone. And thank you for joining us to discuss our fourth quarter and full year 2021 results. 2021 was a very active and exciting year for Unisys. We made advances on revenue, profit and cash flow, and our investments in solutions, go-to-market and workforce management planning have positioned us to advance our momentum in 2022. Mike will provide detail on our financial performance and accomplishments, but first, I will give some insight into the business. Starting with Digital Workplace Solutions or DWS, we made significant progress in 2021 on our goal to transform to higher growth and higher margin user experience-based solutions. As of year-end, we have established our base offering portfolio to compete effectively in additional markets and we are seeing traction with recent new contract wins. We are focused on continuously improving our solutions to evolve with and lead the market. We are integrating our solutions with capabilities added through acquisitions to enhance our full suite of DWS solutions. As we noted on the last call, industry analysts such as Gartner, IDC, Everest, ISG and HFS are recognizing our improved and expanded capabilities. During the fourth quarter, we were designated a leader in Advanced Digital Workplace Services, and NelsonHall’s NEAT Assessment. During the fourth quarter, we accelerated our Unified Endpoint Management or UEM capabilities, one of our targeted solution sets, with the acquisition of Mobinergy. We are already seeing cross-fertilization opportunities across both client bases and key strategic partners of Mobinergy and Unisys, which now includes the clients from our Unify Square acquisition earlier in the year. Mobinergy has strong relationships with many telecom carriers, which are valuable prospective partners to the Unify Square business, as they can embed PowerSuite, which focuses on UCaaS. During the fourth quarter, we signed a contract with a new banking client in Europe to provide an upgraded user experience with Digital Workplace Solutions, including Device Lifecycle Management, Unified Endpoint Management and Field Service. Moving to Cloud and Infrastructure Solutions or C&I, our strategy of growing cloud in our targeted markets resulted in C&I being our fastest-growing segment in 2021. Cloud revenue specifically grew 22% year-over-year for the full year. In the fourth quarter, we further advanced our cloud migration and management capability. We improved our single pane of glass services management to drive actionable insights across infrastructure-as-a-service, cloud native applications and data capture. We enhanced our multi-cloud management capabilities across hyperscalers and added plug-in accelerators for container-based application management services. We expanded our capabilities in Google Cloud Platform, Microsoft Azure, and AWS including upskilling talent with training and professional-level certifications across each of these platforms. Through our Unisys University Program we increased our cloud infrastructure-as-a-service and microservices certifications. We achieved an 80% increase in expert-level accreditations in cloud computing for the year. During 2022, we are focusing our capability development efforts on enhanced cloud-native application development, cloud security and AI machine learning operation. Our new cloud capabilities also received additional recognition from industry analysts, as we were recently named a major player globally in Managed Multi-Cloud Services by IDC. We were also named a leader in the U.S., the U.K. and Brazil in ISG’s Provider Lens on Public Cloud Solutions and Services. In the fourth quarter, we acquired CompuGain, deepening our cloud offerings with CompuGain’s significant application modernization, cloud-native agile application development, and cloud and hybrid cloud data management expertise and capabilities, including designation as an Amazon Web Services Advanced Consulting Partner. CompuGain has a strong presence in the financial services sector, which has added to our established position in that sector and we expect cross-selling opportunities with CompuGain and Unisys’ clients. We recently signed a new scope contract with a leader in the U.S. housing new finance system to develop and implement cloud-native data pipeline solutions to increase agility and reduce time to market for data workloads in a highly controlled environment. Turning to Enterprise Computing Solutions or ECS, our goal has been to grow revenue through expanding the ECS ecosystem, while maintaining license revenue stability. We have brought in our approach to key industry solutions to encompass the diverse workflow-centric demands of our clients. In travel and transportation we are extending capabilities into retail channels in the airline industry. We are also augmenting our Cargo Solutions with a robust data analytics capability. With respect to our Financial Services Industry Solutions, we have signed a partnership agreement to augment our capabilities around payment processing. During the fourth quarter, we signed a renewal and expansion with a major U.S.-based global airline for our SaaS-based Cargo Solutions product suite to support airfreight management, sales, operations, load planning, cargo handling, customs and mail handling, along with interfaces to e-commerce, mobile devices, revenue management and accounting. Turning to our broader go-to-market efforts, throughout 2021, we invested in our sales force, solution architects and marketing initiatives, leading to our strongest TCV and ACV of the year in the fourth quarter, year-over-year growth in total company pipeline and expected continued improvement in go-to-market metrics during 2022. Full year ACV was up 11% year-over-year. ACV grew 54% sequentially in the fourth quarter. TCV grew 29% sequentially in the fourth quarter. Full year TCV was down 11% year-over-year, but noting average contract length is declining as the market evolves. Had the average contract length been consistent year-over-year, TCV would have been flat. Notwithstanding, we expect to have an absolute increase in TCV in 2022. And finally, our pipeline grew 5% year-over-year. We are pricing new contracts to offset anticipated cost increases related to the competitive labor market and the weighted average expected gross margin associated with contracts signed in 2021 was higher than that in 2020. Turning to marketing initiatives, we are investing in our brand and have brought in world-class agencies to support us in these branding efforts, and we look forward to updating you on these activities in the near future. We have partnered with Landor & Fitch to enhance the Unisys brand, including positioning, visual identity and messaging. In addition, we have brought in TBWA Worldwide to advance our advertising and we have hired Golan as our public relations firm to help us better connect to clients and prospects through media coverage and thought leadership. With respect to workforce management, the market for talent is highly competitive. We adapted quickly during the year with targeted talent attraction and retention initiatives, resulting in voluntary attrition for 2021 of 17.1%, which was lower than the pre-pandemic level of 17.9% for 2019. Initiatives such as internal mobility and upskilling programs have increased opportunities for our associates, which resulted in a 33% internal fulfillment rate for 2021, which is up from 30% in 2020, which is itself up from 24% in 2019. With respect to wage inflation, we are actively reviewing our workforce and also focusing our compensation adjustments on the capabilities and roles that have been identified as critical to achieving our short- and long-term strategic goals. We are also leveraging referral-based hiring, which increased to 21% in 2021 from 19% in 2020 and 16% in 2019. These overall efforts allowed us to avoid any material disruption of service to our clients and kept us on track to drive growth while improving margins that also position us to continue executing against our operational and financial goals in 2022. Turning to ESG and DEI, at the end of 2021, we published new sustainability and DEI reports on our website, which we encourage you to review. A few highlights of our recent ESG progress include joining the UN Global Compact in the fourth quarter and driving 75% of our key suppliers to disclose their ESG actions and commitments. We expect to reach our 2026 goal for reduced Scope I & II GHG emissions in 2022. A few highlights of our recent DEI progress include launching a new leadership development program for associates from underrepresented groups and a new inclusive leadership workshop, which is underway and which nearly 90% of our leaders have already completed. We also expanded our Associate Impact Groups that facilitated more than 50 programs during 2021 and increased our Women and Underrepresented Ethnic Group representation by 3 points each within director and above levels. In conclusion, we made significant progress executing our strategy in 2021. I would like to thank our associates for their hard work and commitment. With that, I will turn the call over to Mike to discuss our financial results.

Thank you, Peter, and good morning, everyone. In my discussion today, I will 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 are pleased with the progress we made during 2021 on our key operational and financial objectives. The progress resulted in year-over-year growth in full year revenue, profitability and free cash flow. It also resulted in us being free cash flow positive for the first time since 2016, supported by year-over-year gross profit and gross margin increases in each of our three segments. We also achieved all of our full year guidance metrics. We believe that the investments we made during the year in enhancing our solutions, our go-to-market strategy and the proactive approach to workforce management positions us well to advance our momentum in 2022. We are expecting accelerated revenue growth and additional profitability improvement, which I will highlight when I cover our 2022 guidance shortly. First, let me review the results for 2021, full year revenue growth of 1.4% year-over-year, which is above the midpoint of our guidance range of zero percent to 2% growth. Our ongoing enhancements to our cloud capabilities and efforts to increase awareness with industry analysts and clients resulted in C&I being the fastest-growing segment for the year, with full year 2021 revenue growing at 6.7% year-over-year to $496.5 million, now representing approximately a quarter of total company revenue. This was supported by full year cloud revenue growth within the segment of 22% year-over-year. As we noted on our last call, we expected C&I revenue to be down year-over-year in the fourth quarter due to a one-time revenue pickup we received in the prior year period from a public sector client. Ultimately, C&I’s fourth quarter revenue came in a little stronger than expectations. ECS full year 2021 revenue grew 2.7% year-over-year. This annual growth was above our internal expectations, primarily as a result of several contracts which were renewed earlier than planned. We continued to see strong demand for our ClearPath Forward Solutions and our large client renewal rate remains above 95%. As we have previously noted, we expected ECS license revenue to be split approximately 55% and 45% between the first half and second half of the year, based on our anticipated software renewal cadence. As a reminder, the 2020 first half/second half license split was 40% and 60%, with 40% of the full year license revenue coming in the fourth quarter. As a result, fourth quarter ECS revenue was down 13.3% year-over-year, though it was better than expected and pushed the first half/second half license revenue split to 50-50. With respect to DWS, as Peter mentioned, we now have our base portfolio of integrated experience offerings established and we are moving into the next phase of our transformation of this segment, with an emphasis on continued enrichment of our solutions, implementing our go-to-market strategy, and ultimately, increasing wallet share for new logo expansion. Peter noted some of the examples of recent client wins showing traction with our enhanced offerings. As we remarked on our last call, we have also transitioned away from some heritage contracts that were not core to our future growth and not part of our client experience roadmap. The exclusion of these contracts resulted in DWS revenue being down 5.6% year-over-year in the fourth quarter and 3.6% for the full year. We renewed all material contracts scheduled to be renewed in the fourth quarter, and as I will get to shortly, gross profit for the segment was up in both periods even with lower revenue, which in part illustrates the low margin nature of the work we exited. Overall, as I noted, our 2021 revenue results were in line with our guidance. We expect accelerated revenue growth in 2022 and are providing revenue growth guidance of 5% to 7% for the full year of 2022, with 1% to 3% of that growth coming from organic operations. This guidance implies even higher growth rates for the rest of the business when considering that we expect ECS revenue to be down high-single digits or low-double digits year-over-year due to the 2022 ClearPath Forward anticipated license renewal schedule. As a reminder, this means that we expect fewer contracts to be up for renewal in 2022, not that we are expecting lower renewal rates. Our first half/second half ECS license revenue split is expected to be approximately 35% and 65% in the front half and back half of 2022. Total company backlog was flat sequentially at $3 billion. As a reminder, the ramp up of our go-to-market strategy and the hiring of additional direct sellers, as well as the emphasis on channel sales and the addition of advisory capabilities was all happening in the back half of 2021. We are expecting backlog to increase throughout 2022 and into 2023. We are also expecting a 5% to 10% increase in backlog for the full year 2022. As we discussed, the type of solutions that we are shifting towards are less capital intensive and have a shorter implementation timeframe, which we believe will lead us to quicker conversion of backlog to revenue than we have seen in the past. This is supported by year-over-year increases in ACV that Peter mentioned. Of the $3 billion in backlog, we expect approximately $365 million will convert into revenue in the first quarter of 2022. We expect first quarter total company revenue to be down low-double digits year-over-year due to the timing of the ECS ClearPath Forward license revenue schedule that I mentioned previously. Moving to profitability, full year 2021 total company gross profit was up 18.4% year-over-year and gross profit margin was up 400 basis points year-over-year. These results were supported by year-over-year improvements in full year gross profit and gross profit margin for each of our three segments. Fourth quarter DWS gross margin increased 160 basis points, and as a result, gross profit was up 6.9% year-over-year even with lower revenue. Additionally, full year DWS gross profit was up 38% year-over-year and full year DWS gross profit margin was up 410 basis points year-over-year, based on the improvements to efficiencies made throughout 2021, the exiting of some low margin contracts, as well as our focus on our higher margin experience solutions. Full year 2021, C&I gross profit increased 144% year-over-year to $56.6 million, with fourth quarter C&I gross profit up 24.7% year-over-year. Full year C&I gross margin improved 640 basis points to 11.4%, with fourth quarter C&I gross profit margin up 310 basis points to 15.2%. These increases were driven by improvements to margin in both Cloud Solutions and Traditional Infrastructure Work. Although, fourth quarter ECS gross profit was down 13.4% due to the revenue timing I mentioned, gross margin was flat year-over-year. Full year ECS gross profit increased 14.1% year-over-year to $428.6 million, and full year gross margin increased 620 basis points to 63.1%. As a reminder, our targeted growth in the ECS segment is through the expansion of our services offerings, which is expected to put modest pressure on ECS margins in the future, but would benefit gross profit and overall company margins. We also saw significant improvement year-over-year in our full year non-GAAP operating profit, which was up 25.6% to $192.8 million, and in our full year non-GAAP operating profit margin, which was up 180 basis points to 9.4%, a little stronger than we had anticipated going into the fourth quarter. Non-GAAP operating profit margin was down 230 basis points in the fourth quarter, due to the revenue and profitability items I mentioned, but again a bit stronger than we expected entering the quarter. As we have previously discussed, we are anticipating a slight drag on operating profit as we continue investing in our go-to-market strategy required to support our continued growth, as well as investing to retain and attract top talent within the context of a highly competitive labor market. The ClearPath Forward renewal schedule will also impact margins in 2022. In spite of all these factors, we expect anticipated benefits from our continued efficiency improvement efforts and the benefit of the shift to higher margin solutions through our development efforts and successful integration of the acquisitions we made in 2021 to absorb the pressures on margin and we are setting our non-GAAP operating profit margin guidance for 2022 at 9.5% to 10.5%, still showing advancement even at the floor of our range. As we have noted in our calls throughout 2021, we have undertaken significant efforts to continue to derisk our balance sheet, including removing $1.2 billion of gross pension liabilities during the year, in addition to the $300 million of liabilities removed in the fourth quarter of 2020. The successful derisking efforts resulted in approximately $500 million or $6.77 per diluted share of required non-cash pretax settlement charges during 2021 versus approximately $140 million or $2.25 per diluted share of such charges in 2020. As a result, our net loss from continuing operations for the full year 2021 was $448.5 million or $6.75 per diluted share versus $317.7 million or $5.05 per diluted share in the prior year period. Full year, non-GAAP net income was $117.5 million versus $75.4 million in 2020 and full year non-GAAP EPS was $1.75 per diluted share versus $1.13 per diluted share in 2020, representing a 55% increase in non-GAAP diluted EPS. As with revenue and non-GAAP operating profit, we saw significant improvement in our full year adjusted EBITDA results. Full year adjusted EBITDA increased to 15.3% year-over-year to $369.9 million relative to $320.8 million in 2020 and full year adjusted EBITDA margin increased 220 basis points year-over-year to 18% versus 15.8% in 2020, based on similar drivers as non-GAAP operating profit and margin. This was all above the midpoint of our guidance range, which was 17.25% to 18.25%. For 2022, we expect similar improvement in adjusted EBITDA margin, as we noted, with respect to non-GAAP operating profit margin, and as a result, our 2022 guidance for this metric is 18% to 19%. We continue to employ our capital light strategy and our focus on integrating best-in-class offerings to enhance our solutions and optimize development costs. Our full year 2021 capital expenditures declined approximately $30 million year-over-year to $100 million. However, in 2022, we expect to increase and be between $125 million and $150 million to support our recent anticipated new logo contract wins. We are also excited to report a significant improvement in full year cash flow, including being free cash flow positive for the first time since 2016. Full year 2021 free cash flow was up $843.6 million year-over-year to $32.3 million in line with our internal expectations and full year adjusted free cash flow was up $129.6 million to $172.2 million. While we don’t provide guidance on free cash flow, we expect to see significant improvement in this metric in 2022, given our anticipated ongoing margin improvements, the modest remaining cash charges associated with the optimization program we completed in 2021 and the removal of the required pension contributions for our U.S. qualified pension plan. We are expecting cash taxes to be between $50 million and $55 million, working capital is expected to decline to a use of $10 million to $20 million, cash interest is expected to be approximately $35 million, and lastly, we expect approximately $10 million to $15 million in remaining cash payments associated with the actions in the optimization program that we completed in 2021. As of the end of 2021, our global pension deficit decreased by $283 million relative to our position as of year-end 2020 to approximately $750 million. Additionally, based on the calculations and actuarial assumptions as of December 31, 2021, no future cash contributions are required for our U.S. Qualified Defined Benefit Pension Plans for at least the next 10 years. Our other plans at this point require approximately $40 million of contributions in 2022, stepping down to approximately $35 million per year from 2023 to 2026. Our net leverage also remains low, and we have a healthy cash balance. Excluding the deficit for our U.S. Qualified Defined Benefit Pension Plan, our net leverage is 0.6 times and our cash balance is $553 million as of the end of 2021, more than double our working capital needs. To wrap up, we are energized to see the efforts across the company and see our strategy translating into significant improvement in our financial performance. We look forward to continuing executing against our medium-term goals and achieving our 2022 guidance in the year ahead. With that, I will turn the call back over to Peter.

Thank you, Mike. With that, Operator, can we please open the call for questions?

Thank you. Our first question comes from Rod Bourgeois from DeepDive Equity Research. Please go ahead.

Can you discuss your progress in enhancing your growth capabilities? Over the past year, you've made leadership changes in your three segments during the first half, and it appears that in the second half, you've begun to increase your investments in sales and branding efforts, which is a departure from previous years when you were dealing with a pension overhang. Are you now seeing the anticipated outcomes from these efforts reflected in your deal flow, or do you expect most of the benefits to materialize several months from now as you look ahead over the next couple of years? I'm trying to gauge the magnitude and timing of the returns from your sales and branding initiatives. Thank you.

Hey, Rod. This is Peter. That’s a great question and thanks for making it, and thanks also for your observations. So if we take a little bit of a bigger picture and look at how the company is transforming, 2020 was really the year that we dramatically improved our balance sheet and with that balance sheet, we were able to lay out a more powerful strategy going forward and an organization to execute on that. We did that in 2020. As you noted in 2021, right, actually in January of 2021, we then execute on that new strategy and that required changing our organization to create the business units that we talk about now, it looked inside and outside the organization to get the best leaders for those business units; the majority of those came from outside the organization and it also meant executing on both the go-to-market and the cost savings. What you saw in 2021 in terms of our margin expansion was a lot of margin expansion resulting from the cost savings part of that equation to go-to-market effort really started with new leadership in the April and May context, and then fleshing out the team throughout the rest of the year. So what you saw in the fourth quarter was really the beginning of the results of that. You saw a dramatic increase in ACV, a dramatic increase in TCV, you saw a lot of signings of our new more higher margin capabilities. So to answer your question, last year most of the savings or rather most of the margin improvement came from those savings. What you can expect in the next three years is continued margin improvement from the savings, and by savings, I mean, things like automation and AI, not just simply kind of old-fashioned labor savings, but savings because of new technologies. About half of the margin improvement will come from that. About half of the margin improvement will come from the fact that we are signing kind of next-generation higher margin work. The pipeline is picking up every one of our indices that looks to our effective go-to-market is picking up. The last element in this multi-year strategy is actually marketing and communications. We really didn’t want to start that until we had everything else in place. We didn’t want to start to market until we knew we have the capability to deliver. With the changes we made in the fourth quarter of last year, we hired all of those three very significant outside firms to help us on marketing, communication, advertising. That is well underway now and that’s really the final piece. That’s really going in in the first six months of this year. I hope that helps, Rod.

Very helpful. And then, on a somewhat sort of related line of thinking, if I kind of go back to where we were three months ago, your Q3 had what seemed to be temporary headwinds, the supply chain disruptions, some contract exits and even some lag effect in getting the pricing ramped up, maybe even some challenges in getting sales and branding efforts in place. Can you just give us an update on those headwinds, where you were wrestling with headwinds three months ago, where you are today and what you are assuming in your outlook for 2022 on those headwind fronts? Thanks.

That's a great question, Rod. Let’s break down the headwinds into a few different categories. Regarding the supply chain, I can say that we are not encountering the issues we faced in the third quarter, which we initially thought might persist longer. Currently, supply chain concerns are not having a significant impact. The issues you mentioned are not materially affecting us right now; those have largely been resolved. The main exception relates to labor costs. We’re experiencing an increase in demand for IT services, which is positive for our industry, but it also brings increased labor costs. We are managing this through various strategies, including not only raising compensation but also enhancing entry-level recruitment and leveraging employee referrals. Additionally, we’re keeping our overall turnover lower than the average in the IT services market, which we believe is effective. If I were to identify a remaining headwind, it would be the careful management of labor costs. Regarding our performance this year, as Mike mentioned, this year isn’t as strong for ECS licensing revenue compared to last year, impacting both revenue and profit. However, we expect the other two segments, DWS and C&I, to significantly compensate for that.

Yeah. And Peter, if I could just add to that, Rod, as well, just on that ECS comment, the expectation as we get into 2023 and 2024 is that ECS license revenue and services revenue start to come back in line with things that we have seen in earlier years, like 2020 and 2021. So that is temporary in nature, Rod, in the sense of, as you well know, it’s just the schedule in which those licenses get renewed. I mentioned in my prepared remarks the renewal rates remain pretty high in that business. And I think, maybe two or four components of headwind, Peter picked on the staffing piece, I think he’s 100% right there, but we have been happy at least that the pricing side of the coin has held pretty steady; people are certainly aware that the costs are rising and we seem to be able to bring that forward as well. So I think that’s been pretty solid and we are looking forward clearly to the go-to-market investments that we have made already and will continue to make through certainly the front half of 2022 and beyond to start seeing that pipeline increase. I mentioned, we are targeting about a 10% increase in backlog year-over-year. So we are really focused on all of the investments and heavy lifting that we have done over the last 18 months to really shift that focus to growth, but still increasing the operating margin along the way as well, right? So maybe not as dramatically as the almost 200 basis points or 180 basis points this year, but still moving up as well. So I feel pretty good about what we have done today and where we are going.

Our next question comes from Matt Galinko from Maxim. Please go ahead.

Good morning. Congratulations on a strong finish to the year. My first question is regarding your revenue growth forecast for 2022, which seems to be primarily influenced by inorganic factors. How do you classify cross-selling in terms of organic versus inorganic growth? Additionally, you mentioned feeling satisfied with the platform. Does that mean you have completed all mergers and acquisitions for the year, or do you see further opportunities in that area? Thank you.

Yeah. Thanks, Matt. I think one thing to keep in mind on the inorganic versus organic is that the largest acquisition we did by revenue was CompuGain, a very important acquisition for us. That was not closed until December. So there simply wasn’t much revenue from CompuGain in 2021. With respect to future acquisitions, we closed three acquisitions in 2021, which were the first acquisitions we had done in over a decade and that was largely because we had made the balance sheet changes we did in 2020. That acquisition program remains active and we are continuing to look for good opportunities. Those opportunities tend to be in the DWS and in the C&I space, and we are focusing on those two areas with respect to acquisitions. With respect to the cross-selling and exactly where that revenue is taken up, our approach is pretty clear. Those acquisitions came with a certain amount of revenue and we are treating all of the revenue that those acquisitions came with as inorganic. Then the question is, what did we build from on top of that, that revenue is considered organic, because it is requiring the company to support the way we are moving forward. Mike, any clarification on that or further thoughts on it?

Perfectly stated, Peter. I wouldn’t change a thing.

All right. Great. And maybe just one follow up, I think you mentioned wanting to get closer to maybe industry standard levels of turnover in your workforce. I think you mentioned something along those lines. What are you using as the benchmark and how far do you feel you have to go to get there?

Yeah. So, Matt, I think that was in response to my answer to Rod earlier and I may have confused the answer. What I intended to say was that we are already we believe below the average involuntary turnover rate. So we think we are better than the industry right now. It’s hard to tell and to some extent, it doesn’t really matter, because what matters is how you manage the turnover yourself. But our turnover effective for the full year of 2021 was 17.1%. That we believe based on what we have seen in other reporting is slightly lower than the involuntary turnover average for our IT services competitors. Importantly for us, it’s also lower than our turnover rate in 2019. So we are still operating at a turnover rate that is below the rate we saw pre-pandemic. So I think we all expect that rate might increase some in 2022. We are doing a lot of activity, as I outlined, to keep that under control. But at this point, we don’t see that turnover rate affecting operations or our ability to grow.

Thanks. If I could sneak just one quick last question in there. I think you mentioned an 80% increase in cloud credentials in your workforce. That sounds like a significant increase. I'm curious about how much of that came from mergers and acquisitions versus organic workforce development, and how that impacts your ability to execute on your current pipeline.

Yeah. Mike may have the split of how much of that was M&A versus organic, but I would tell you from the work that we did at what we call Unisys University, which is part of our HR team, we entered the year in 2021 with a very significant goal for certifications organically and we exceeded that significant goal. So I’m going to guess that the vast majority of that, if not all of it, we are counting was organic. But, Mike, do you have any more data on that?

Yeah. I don’t have anything more specific, but based on the fact that the acquisitions that we brought in were obviously very late. I would agree, like, we have seen trends happen throughout the year as far as our improvement in those certifications. And Matt, that’s something, as you know, when we talked about the investments that we have been making, it was not only in our solution, obviously, it was in our people as well and that certification process and we have talked a little bit about some of the other reporting and Peter mentioned it in his prepared remarks around some of the D&I stuff, the outside of that piece of it and the leadership development, it’s also about the upskilling aspect and just making Unisys a better place to work. And I think, you know, those are good KPIs or metrics that we track to continue to provide opportunity for our associate base here.

Yeah. Just picking up on what Mike said, Matt. One of the indications of how effective that certification process has been for us is the amount of open positions that are filled internally. Those are almost exclusively people who are moving from one job to another job because the new job is better. It’s more next generation. It pays better. It has more opportunities and it’s growth. So getting certifications, and one of the reasons that we exceeded even our aggressive role on certifications is people are seeing that correctly as a way to really advance. So if we look at the last three years in 2019, and 24%, as I mentioned, of our openings, came from internal fills that jumped to 30% in 2020 and 33% in 2021. So those certifications are working, and I think, as Mike pointed out, that’s one of the reasons we have kept attrition down because people are seeing their ability to advance inside the company.

Our next question comes from Jon Tanwanteng from CJS Securities. Please go ahead.

Hey, guys. Thank you for taking my question, and Mike, again, congrats on the strong performance ending the year. My first one is just a little more color on the ECS license renewal, both in Q4 and heading to next year, if you could. I was wondering, did you pull in any from 2022 or was that just simply a bigger renewal than you expected, first of all? And then, second, do you still expect services revenue within ECS to grow even while the license renewals decline?

Sure, Jon. In my prepared remarks, I mentioned the ECS. I don't want to call it a pull-in, as it's typically client-driven wanting to renew earlier than planned. There was some ECS acceleration related to early renewals in 2021. However, 2022 and, to some extent, 2023 were both lower renewal years overall concerning the timing of those contracts. Looking ahead to 2024, the renewal schedule is expected to rise back to 2021 levels. This is largely due to how those contracts were signed and their duration; sometimes a three-year contract extends to five years. Earlier this year, we even had a five-year contract signed that turned into a seven-year contract. Clearly, there is strong demand for the product, and we are continuously growing our base in terms of both volume and the other areas you mentioned. Services remain a core focus for growth in the segment as a whole. When we project growth for the entire segment in 2022 and 2023, it is primarily driven by the expansion of services, which comes in various forms. Some of this expansion refers to managed services for clients updating their operating systems, along with application development, app modernization, and migration services, as well as security-related services above the operating system layer. We are very focused on growing the services component within this segment. However, as Peter and I pointed out earlier, a lower renewal cycle has not only affected our top line but has also slightly pressured the ECS margins, which are above 60%. Nevertheless, when considering the overall company, we are still experiencing margin growth, indicating how well the other two segments are performing.

It does. Thank you. And it actually leads pretty well to my next question, which is what is the implied improvement in total services margins, given that renewables are just going to be weaker this year?

What, Jon, I will have to go back and look at that and maybe get back to you offline on that. I don’t have that right in front of me. But I can certainly get to it and we will put something out on the website as well, so we can make sure it’s Reg FD cleared.

Yeah. Jon, just to follow up, one of the reasons Mike doesn’t have that information is that, with the changes we made, we don’t really separate services revenue and tech revenue. This doesn’t mean it’s not important to you or others. However, our company is now structured around these three segments, and all revenue in those segments is something we consider for what we expect them to produce. We’ve shifted to a segment approach rather than a services and tech distinction. This is how we’re managing the company, and while that number may not be readily available, we will get it to you.

Yeah. And look, I am able to dig it up while we are chatting here. So roughly, Jon, about a 7% increase from the services side of the house is what we are expecting in that segment.

Our next question comes from Joseph Vafi from Canaccord. Please go ahead.

Hey, guys. Great progress in 2021. Congrats on that. I was wondering if we could just talk about growth. We have been talking a lot about labor. How linear is growth now for you to growth in headcount and maybe if you could break that down, especially maybe in DWS and C&I, I think, does headcount have to grow in line with revenue there or is there leverage now and then a quick follow-up.

Yeah. So, Joe, I will take that at first and then let Mike follow up. One of the things that has been an active focus of our efforts has really been to decrease the cost of labor as a percent of revenue. And so what you saw, if you go back to FY 2020 or two years ago, the cost of labor as a percent of revenue was about 55.6% and then if you look at last year, the cost of labor decreased to 52 – 54.2%, so more than about 1.4% less. That’s really one of the ways we are measuring, if you will, the tide and it is our goal to continue to drive that down and we think we will continue to drive that down in 2022. If we think about the different segments, whether it’s DWS or C&I or ECS, really we are separating, if you will, the direct correlation between cost of labor and revenue in all three of those. In DWS, that comes largely from automation and AI, in C&I as well and then in ECS, it’s a little trickier, because although we are getting more efficiency in our software development efforts, because services are becoming a larger percentage of that and services are more dependent on labor as just kind of a general principle than software is, there’s going to be a little bit of a countercyclical effect in ECS just by the nature of that work. But I would say in the real areas of revenue growth of C&I and DWS, we are using AI and automation to really take away some of that direct link between cost of labor and revenue. Mike, follow up on that.

Yeah. No. Look, I think you have got all the components right, Peter, both by segment and otherwise. So, Joe, I would say is that we look at our revenue growth in 2022 and beyond, clearly the headcount is not moving nearly in the same manner and for all the reasons that Peter just mentioned. So I do think there is leverage happening and will continue to happen. We are not where we want to be fully from an automation perspective and that’s the reason why you are seeing gross margin improvement continue in both DWS and C&I and that’s really exactly what you are speaking to. So we will continue to see some benefits as leverage model and so I don’t think it’s certainly not linear. And as Peter mentioned that, the total cost of workforce in comparison will be flat and/or declining over those periods, which tells you that the headcount is to be levered even more so from a linear perspective.

Sure. Got it. That’s great. And then, are there any heritage contracts that may roll off this year? I mean, maybe at this point, there’s a chance they could still renew or not, but is there anything built into the guidance on that at this point? Thanks a lot.

Yes. We mentioned in the third quarter of last year that there were only one or two other contracts we had concerns about in our guidance for renewals, and one of those has already been signed. Therefore, we do not have significant concerns regarding renewals. In the third quarter, we exited a few contracts related to oilfield services and some white label or point-of-sale work. Consequently, we do not have many renewals in the pipeline, and we feel confident that our renewal base is not only healthy but aligns with our client experience journey and can provide substantial value to those clients. Overall, we are optimistic about this moving forward.

Our next question comes from Anja Soderstrom from Sidoti. Please go ahead.

Hi. Thank you for taking my questions and congratulations on the good performance in 2021. I wanted to follow up on the M&A discussion. You mentioned that you plan to remain active in that area. Can you share your perspective on the valuations, considering the recent downturn in the public market? What are you observing in the private market, and what potential opportunities are you exploring?

Yeah. So, Anja, this is Peter. That’s a great question. And we are seeing kind of a continuation of the relative valuations we saw last year, but we are seeing a decrease in the valuations almost across the board. So what I mean by relative valuations is, the closer you get to cloud, the more expensive the acquisition is in terms of the kinds of deals we are looking at, the closer you get to DWS, the less expensive. And that’s in part an indication of the DWS market in general is growing more slowly than cloud and is a little less profitable. From our standpoint that works great for us because DWS is an area where we believe that we have now a really powerful solution set, especially with the acquisitions we made last year and we could look forward to more scale acquisitions as we go forward if we find that opportunity at the right price and we do think that price is again lower than a comparable cloud company. With respect to cloud acquisitions, we have to be careful because historically in the last 18 months, they have been expensive and although the price is down a little bit, they are still expensive in terms of our analysis. That said, the CompuGain acquisition we made in December was exactly the one we needed to make. We had been looking for an acquisition like that ever since we started the program up after changing the balance sheet in 2020. All of that CompuGain revenue and talent is in cloud work and application development work. And as I think all of you know the applications and an AI portion of cloud is where a lot of the growth is and although we had some capability in that particular area before the acquisition of CompuGain, it’s a whole new world for us now. It’s a dramatic increase in capability. So that was a little more expensive because it was cloud-related, but it exactly filled our needs and we are very enthusiastic about the ability of that organization to grow. So that’s kind of what we are looking at, Anja. Little long-winded answer, but I hope that’s helpful.

Yeah. And Peter if I…

And Mike, please.

Yeah. Yeah. I just wanted to one slide add on, some of the things that we are looking for are more skill-based and solutions-based in some of that in regards to M&A and the solutions-based IP is what drives a lot of those valuations really high. So we are talking about CompuGain being a great example where we really enhanced our skill set in regards to apps development and things like that. Although cloud-oriented you still don’t have quite as bad as some of the multiples that you have seen in preceding transactions where it’s really IP that you are after. We feel pretty good about our portfolio, both in cloud and in DWS about the solution itself, right? So it’s really more about the analysts and the engineers and the development team, which is a little more pulling some of the other elements that you see.

Yeah. Mike, that’s exactly right. Anja, any follow-up on that or did that hopefully answer your question?

No. That answers my question. Thank you. That was all for me.

Thank you.

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

Thank you very much. I appreciate everyone joining the call this morning. As Mike and I responded to Rod's initial question, our company might differ from typical expectations. We have a strong multiyear strategy that we are diligently pursuing. The changes we implemented in 2020, our execution in 2021, and our performance in 2022 are all rooted in a thoughtful approach. We are pleased to have met all of our projected metrics in 2021, and we hope to maintain this trend as we progress along our path. I sincerely thank everyone on this call, especially the investor analysts, for supporting us, being part of this journey, and taking the time to understand our company. We remain available for one-on-ones and calls. Our Investor website is continuing to improve, and we look forward to connecting with you in the next quarter. With that, we will conclude the call.

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