Unisys (UIS)

Q2 2011 Earnings Call

July 25, 2011 5:30 pm ET

Executives

Niels Christensen -

Janet Haugen - Chief Financial Officer and Senior Vice President

J. Coleman - Chairman of the Board, Chief Executive Officer and Member of Finance Committee

Analysts

Joseph Vafi - Jefferies & Company, Inc.

Unknown Analyst -

Presentation

Operator

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Good day, and welcome to the Unisys Second Quarter 2011 Results Conference Call. At this time, I'd like to turn the conference over to Mr. Niels Christensen, Vice President of Investor Relations at Unisys Corporation. Please go ahead, sir.

Niels Christensen

Thank you, operator. Good afternoon, everyone, and thank you for joining us. Earlier today, Unisys released its second 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.

J. Coleman

Thanks, Niels. Hello, everyone. Thank you for joining us today to discuss our second quarter 2011 financial results. Please turn to Slide 1 to begin our discussion. As you saw in our earnings release, we reported a net loss in the quarter driven by the previously announced debt reduction charge. On a non-GAAP basis, diluted earnings per share were $0.93 and we generated adjusted EBITDA of $106 million. We made progress in the second quarter toward our 3-year financial goals, despite continued weakness in the U.S. Federal Government market and lower revenue number in our Technology business. In our Services business, we continue to be impacted by lower revenue in our U.S. Federal business due to the ending of the TSA contract and the uncertainties in Washington. Outside the U.S. Federal business, our overall services revenue was essentially flat year-over-year in the quarter helped by currency. We were able to improve the profitability of the Services business in the second quarter even with the lower revenue, driven by continued improvements in service delivery execution. We reported a service's operating profit margin of 7.1%, up from 6.1% a year ago and up from 4% in the first quarter of this year. As you may recall, one of our goals is to drive a consistent 8% to 10% operating profit margin in our Services business. While we're not there yet, I'm pleased with the progress we've been making towards the goal. In our Technology business, our revenue in the quarter was impacted by lower sales in ClearPath systems against the strong quarter a year ago. As you know, our ClearPath sales can vary significantly from quarter-to-quarter, which is why we believe the best way to measure this business is on an annual basis. We grew our ClearPath sales in the first quarter of this year and for the full year 2010. For 2011, we continue to focus on our goal of maintaining ClearPath revenue roughly flat with 2010 levels. We also continued progress during the quarter in strengthening our balance sheet. We completed a cash tender offer that reduce our debt by $179 million, another major step towards our stated goal of cutting our debt by 75% from September 2010 levels. The debt reduction actions we took over the past 2 quarters have cut our annualized interest expense in half, which is key to reaching our pretax profit goals for 2013.

I want to take a moment to highlight the balance sheet improvement we've made. Slide 2 shows the balance sheet journey we've taken over the past 2.5 years. When we started, we had $1.1 billion of debt. Today our debt is under $450 million and our financial position is significantly improved as cash exceeds our debt by $178 million. Turning to Slide 3, from a top line perspective, while our overall revenue declined in the second quarter due to the lower U.S. Federal and Technology revenue, we're encouraging points of progress in the quarter. As you may recall, our 3-year financial goals are based on growing our IT outsourcing and Systems Integration services revenue at market rates, adjusted for the fact that we no longer have the GSA revenue in 2011, while maintaining flat Technology revenue over the same period. Against these goals, we saw a continued growth during the second quarter in our IT Outsourcing business. Outside the U.S. Federal business, we grew our IT Outsourcing revenue 7%. This represents the sixth consecutive quarter of year-over-year revenue growth in this business. We've done work in recent years to enhance our portfolio of outsourcing solutions and to focus on providing world class levels of service and support. And these efforts are paying off in a stronger deal pipeline and improved customer satisfaction. In fact, about 30 IT outsourcing orders we received in 2011, have been for expanded work from existing clients, which speaks to the quality of our services and our customer relationships. In our project-based Systems Integration business, while we've not yet turned the corner on revenue growth, I'm encouraged that we see 2 consecutive quarters of year-over-year order growth. Our commercial Systems Integration business has historically been tied to vertical industry services and solutions based on our own technology and software applications. To grow this business, we're making investments in our industry solutions, while also pursuing new growth opportunities to help clients address and take advantage of disruptive technology trends, they're changing the way people work and do business today. For example, in the area of cloud computing, we're applying our expertise in complex mission-critical systems integration to help clients integrate and build their own secure cloud-computing environment and applications. As part of this effort, we've recently announced alliances with CA Technologies and BMC to work at their systems integration partner on cloud projects. We're also working to expand the market for our industry solutions by offering them to a software-as-a-service model. We've seen success doing this with our cloud-based air cargo solution, while we continue to add new clients. We're pursuing similar initiatives working in tandem with our clients for some of our financial services solutions. In the area of security, in addition to the work we do and identity management and credentialing, fraud detection and airport and seaport security for organizations around the world, we're applying our consulting and integration skills to help clients protect their networks against cyber attacks and secure the exploding number of mobile devices and social applications being used within the enterprise. We also see commercial and government growth opportunities for self-network technology, which was recently certified by the National Security Agency as meeting its requirements to protect classified government data.

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