Q1 2011 Earnings Call
April 25, 2011 5:30 pm ET
J. Coleman - Chairman of the Board and Chief Executive Officer
Niels Christensen -
Janet Haugen - Chief Financial Officer and Senior Vice President
James Friedman - Susquehanna Financial Group, LLLP
Chris McDonald - Kennedy Capital
Bill Smith - Lowering, Smith and Company
Joseph Vafi - Jefferies & Company, Inc.
Previous Statements by UIS
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Good day, everyone and welcome to the Unisys First Quarter 2011 Results Conference Call. At this time, I would like to turn the conference to Mr. Niels Christensen, Vice President, Investor Relations at Unisys Corporation. Please go ahead, sir.
Thank you, operator. Good afternoon, everyone and thank you for joining us. Earlier today, Unisys released its first quarter 2011 financial results. With us this afternoon to discuss our results are Ed Coleman, our CEO; and Janet Haugen, our CFO. Before we begin, I wanted to cover a few housekeeping 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 on our investor website. These materials are available for viewing, as well as downloading and printing. Third, today's presentation, which is complementary to the earnings press release, includes non-GAAP financial measures. These have been provided in an effort to give investors additional information. The non-GAAP measures have been reconciled to the related GAAP measures and we have provided reconciliation charts at the end of the presentation. 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 actual results to differ materially from expectations. These factors are discussed more fully in the earnings release and in the company's SEC filings. Copies of these SEC reports are available from the SEC and from the Unisys investor website. Now, I'd like to turn the call over to Ed.
Thanks, Niels. Hello, everyone and thank you for joining us today. Please turn to Slide 1 as we begin our discussion. The first quarter was a challenging one for Unisys as our results were impacted by weakness in our U.S. Federal Government business. This was our first quarter without the TSA contract, which represented about $30 million in revenue in the year ago quarter. But we knew we had a tough hurdle coming into the quarter. In addition, we saw less than expected federal agency spending as a result of the government budget impact that continued throughout the quarter. As you know, until the 2011 federal budget was finally passed a couple of weeks ago, six months into the fiscal year, the government was operating on a series of continuing resolutions that limited funding on new contracts. This also affected funding availability for many of our existing cost plus and time and materials contracts, which represent about half of our federal revenue. These two factors contributed to a $50 million decline in our federal revenue, which along with the charge related to our debt reduction activities, put pressure on our overall results and contributed to a net loss in the quarter. The focus on spending cuts and deficit reduction in Washington is creating a more challenging environment in the federal market, which represents about 20% of our revenue. Nonetheless, Unisys, with our long history in the government space, brings a great deal of innovation and experience in this market and we're focused on opportunities to help agencies cut costs and operate more effectively and securely through our outsourcing, applications modernization, security and cloud computing solutions.
While our federal results and the loss in the quarter were disappointing, we remain confident in our strategy and focused on achieving the 3-year goals we've set. In fact, as we look at our performance outside the U.S. federal business, we saw a progress in the quarter against these goals.
As a reminder, these goals, which you can see in Slide 2, are: To increase our annual pretax profit to $350 million in 2013, excluding any change in pension income or expense from 2010 levels; to reduce our debt by 75% from the September 2010 level by the end of 2013; and to consistently achieve an 8% to 10% services operating profit margin. To achieve these goals, we're focused both on growing our IT Outsourcing and systems integration services revenue at market rates, adjusted for the fact that we no longer have the TSA revenue in 2011, while maintaining flat technology revenue over the 3-year period.
As we look at progress against our goals turning to Slide 3, first during the last 60 days, we took actions that accelerated our progress toward achieving our 75% debt reduction goal. As you saw in our recent announcements, in the first quarter, we completed a mandatory convertible preferred stock offering and used the proceeds to redeem approximately $211 million of our high-coupon senior secured notes. We took a charge of approximately $32 million in the quarter related to these actions. On April 11, we used cash to retire an additional $179 million of our senior secured notes. Since September 2010, we've reduced our debt by about half. These actions will enable us to reduce our annual interest expense by $53 million, an important contributor to achieving our 2013 pretax profit goal.
Second, we continued to show good cost discipline. Operating expenses were down again in the quarter and outside the federal business, we improved our services operating margins year-over-year. Third, we saw a progress during the quarter against our top-line goals. While our total services revenue was down 6% in the quarter, outside the federal business, services revenue was flat year-over-year compared to the last few years of declines. And in our IT Outsourcing business, we grew our non-Federal revenue by 9% in the quarter. This represents the fifth consecutive quarter of year-over-year growth in non-Federal ITO revenue.