Unisys Corp (UIS)

Q2 2010 Earnings Conference Call

July 27, 2010, 8:15 AM ET

Executives

Niels Christensen - Vice President, Investor Relations Officer

Ed Coleman - Chairman, CEO

Janet Haugen - Chief Financial Officer

Analysts

Eric Boyer - Wells Fargo

Joseph Vafi - Jefferies & Company

Arun Seshadri - Credit Suisse

Jeff Harlib - Barclays Capital

Tony Venturino - Federated Investors

Presentation

Operator

Good day and welcome to the Unisys second quarter 2010 results conference call. At this time I will turn the conference over to Mr. Niels Christensen at Unisys Corporation. Please go ahead, sir.

Niels Christensen

Thank you, Operator. Good morning, everyone, and thank you for joining us. Earlier today 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 website. 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 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, include some 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 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 will turn the call over to Ed.

Ed Coleman

Thanks, Niels. Hello, everyone. Thank you for joining us today to discuss our second quarter 2010 financial results. Please turn to slide one to begin our discussion today.

This was another solid quarter for the company as we continued to make progress in enhancing our profitability and reshaping our business model at Unisys. By staying focused on our business priorities we delivered our fifth consecutive quarter of year-over-year improved profitability.

We also generated positive free cash flow in the quarter and continued to make progress in strengthening our balance sheet.

Driven by a strong performance in our technology business, our second quarter operating profit grew 58% to $107 million and we reported a 10.1% operating margin in the quarter. Including the pretax gain of $65 million from the sale of our Health Information Management business we reported net income of $120 million, up from $38 million a year ago.

Net income from continuing operations rose 77% to $59 million. Our technology business had a great quarter growing revenue 47% as sales in ClearPath servers more than doubled in the quarter.

In our services business, while revenue declined in the quarter, we saw a growth of 9% in IT outsourcing outside of the US federal government. Services revenue also strengthened sequentially enabling us to drive higher services margins and operating profit compared to the first quarter of the year.

We've also maintained our focus on expense management with operating expenses down 6% year-over-year and we continue to increase our use of lower-cost labor pools to improve our direct labor cost with offshore and lower-cost onshore resources now accounting for 25% of our employee headcount, up from 23% at the end of the first quarter and 20% at the start of the year.

Through the first six months of 2010 our operating income has doubled over the first of 2009. The net income from continuing operations is up almost nine fold over the same period. I am pleased by the continued solid execution we're seeing against our business priorities as evidenced in our results for the quarter and over the first half of 2010.

Our forward business priorities, as you may recall, are to better focus and concentrate our resources, sharpen our value propositions, enhance the cost efficiency of our services delivery organizations and simplify the organization to reduce expenses.

Through these priorities we aim to create a business model for Unisys that produces consistent and predictable profitability and cash flow and delivers superior customer service and profitable growth in our focus markets.

Against these priorities we've made striking progress over the past 18 months. Slide two shows how far we've come over this period in terms of enhancing the profitability of our operations. This chart shows our trailing 12 months operating profit by quarter over the past six quarters.

As you can see, trailing 12-month operating income has improved quarter-by-quarter over this period from about $10 million in the first quarter of 2009 to $409 million in the most recent quarter. We've also made progress in reshaping our revenue profile and laying a foundation for profitable growth.

Turning to slide three, as you may recall from our past calls, to drive profitable growth at Unisys, we're focusing on leveraging our core strength in the area of security, data center transformation, including our server business, in-user outsourcing and application modernization. These are the solution areas that we're investing in for profitable growth.

We deliver these solutions by drawing on capabilities in systems integration and consulting, IT outsourcing and technology as shown on the left side of this chart. The area shown on the right, our focus is not to grow, but rather to maintain our capabilities or, in some cases, de-emphasize lower margin areas in order to enhance our profitability.

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