Unisys Q1 2010 Earnings Call Transcript

Unisys Q1 2010 Earnings Call Transcript
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Unisys (UIS)

Q1 2010 Earnings Call

April 27, 2010 8:15 am ET

Executives

J. Coleman - Chairman of the Board and Chief Executive Officer

Niels Christensen -

Janet Haugen - Chief Financial Officer and Senior Vice President

Analysts

Sundar Varadarajan - Deutsche Bank

Joseph Vafi - Jefferies & Company, Inc.

Jeffrey Harlib - Barclays Capital

John Moore - Robert W. Baird

Presentation

Operator

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Good day, everyone and welcome to the Unisys First Quarter 2010 Results Conference Call. At this time, I'd turn the conference over to Niels Christensen, Vice President of Investor Relations at Unisys Corporation. Please go ahead, sir.

Niels Christensen

Thank you, operator. Good morning, everyone, and thank you for joining us. About an hour ago, Unisys released its first quarter 2010 financial results. With us this morning to discuss our results are Ed Coleman, our CEO; and Janet Haugen, our CFO.

Before we begin, I want to cover just a few housekeeping details.

First, today's conference call and the Q&A session are being webcast via the Unisys Investor Web site. Second, you can find the earnings press release and the presentation slides that we will be using this morning to guide our discussion on our Investor Web site. 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 some non-GAAP financial measures. Certain comparisons made in this call will be between periods on a constant currency basis. We're excluding the impact of foreign exchange. In the presentation, we have provided an explanation of the basis for the constant currency calculations.

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 Web site. Now here's Ed.

J. Coleman

Thanks, Niels. Hello, everyone, and thank you for joining us today to discuss our first quarter 2010 results. We continued to make good progress in the quarter in our ongoing turnaround program at Unisys. If you've been following our progress, you know that we're focused on four priorities in our turnaround program. Those priorities, which you can see on Slide 1, are to drive profitable revenue by better focusing our resources and enhancing our portfolio and to drive cost efficiency and margin expansion by enhancing our service delivery model and simplifying the organization.

In 2009, we succeeded in improving the profitability and cash flow of the business while addressing our debt situation in a very challenging economic environment. In 2010, our goal is to continue to deliver improved profitability and cash flow and do so consistently and predictably. While we continue this work, we're also focused in 2010 on stabilizing our revenue, which has been impacted by the economic downturn last year, and our own work to better focus our resources.

Our first quarter performance had a number of positive indicators of progress against our goals for 2010. I'd like to highlight three in particular, which you can see on Slide 2.

First, our year-over-year operating results improved in the quarter despite lower revenue as we continue to simplify, reduce expenses and improve the cost efficiency across the business. While we reported a net loss in the quarter driven by foreign currency losses, our operating profit nearly quadrupled over the year-ago period to $59 million. In our Services business, we more than doubled our operating profit margin to 4.6%. Our goal is to get our Services business to a consistent 8% to 10% operating margin, but we still have a lot of work to do, but we are moving in the right direction.

One of the key drivers of our service margin improvement is enhanced profitability of our IT Outsourcing business. Outsourcing is our largest services business at about $1.7 billion in annual revenue. About 75% of this revenue comes from IT Outsourcing, with the remainder in Business Process Outsourcing. We've been working to enhance margins by shifting our Outsourcing business mix more toward IT Outsourcing and also by making greater use of automation and lower cost labor.

While it takes some time to make this transition, we're beginning to see results in terms of improved Outsourcing service margins. Operating results also improved significantly in our Technology business. Our Technology operating margin improved to 13.7% in the quarter, reversing a year-ago operating loss as we benefited from higher ClearPath sales and lower costs. This was the second consecutive quarter of year-over-year growth in ClearPath sales. Over the past year, we've refreshed our ClearPath product line with contemporary features and functionality including support for iPhones and mobile devices.

Today, we believe we have the most modern open mainframe platform available in the market and we've been working to communicate these benefits to our client base. But we're pleased to see the recent improved results in this business. Tight cost management will continue to be a key focus for us in the year ahead as we look to build on our operating improvement. Due to cost actions we've taken already, we've met our previously disclosed target for $500 million of annualized cost reductions across cost-of-service delivery and SG&A expenses. But particularly given the pressure on revenue, it's critical that we continue to look for ways to operate more cost efficiently. We're focused on identifying and implementing additional cost reduction opportunities. As one example, we now have 23% of our employee population residing in lower-cost labor pools, either offshore or onshore. This is up from 20% at the start of the year, but we realize we still have much more to do to match competition in this area.

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