Unisys Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2023

There are 10 speakers on the call.

Operator

Good morning, and welcome to the Unisys Corporation First Quarter 2023 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 would now like to turn the conference over to Mikaela Pawarski, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone. Thank you for joining us. Yesterday afternoon, Unisys released I'm joined this morning to discuss those results by Peter Altabef, our Chair and CEO Deb McCanna, our CFO and Mike Thompson, our COO, will participate in the Q and A session. Before we begin, I'd like to cover a few details.

Speaker 1

First, today's conference call and the Q and A session are being webcast via the Unisys Investor website. 2nd, you can find the earnings press release and presentation slides that we'll be using this morning to guide our discussion As well as other information relating to our Q1 performance on our Investor Relations website, which we encourage you to visit. 3rd, Today's presentation, which is complementary to the earnings press release, includes some non GAAP financial measures. The non GAAP financial measures have been reconciled to the related GAAP measures, and we have provided reconciliations within the presentation. I would also like to remind you that all forward looking statements made during this conference call, including any references to guidance or expected future financial performance, are subject to various risks and Certainties that could cause actual results to differ materially from our expectations.

Speaker 1

These factors are discussed more fully in the earnings release in the company's SEC filings. Copies of those SEC reports are available from the SEC along with other I mentioned earlier on Unisys Investor website. Unisys does not assume any obligation to update the information presented on this call, except as Unisys deems necessary and then only in a manner that complies with Regulation FDs. With that, I'd like to turn the call over to Peter.

Speaker 2

Thank you, Mikaela. Good morning and thank you for joining us to discuss Unisys' 2023 Q1 results. We had a strong start to the year with a solid quarter of revenue growth and margin expansion, putting us on track to meet our full year financial guidance. Unisys is continuing to focus on our next generation solutions and we are also seeing more interest from our clients In areas of growing importance to them, such as artificial intelligence, cybersecurity and data analytics. These conversations are leading to new growth opportunities, including land and expand opportunities within next generation solutions, We saw sequential pipeline growth of more than 30%.

Speaker 2

We expect these higher margin opportunities to contribute To TCV in the back half of the year and set the stage for future growth and margin improvements in our solutions outside of license and support, which we call ex LNS Solutions. Macroeconomic uncertainty persisted during the quarter with Some clients being incrementally cautious of new investments and our financial services clients being cautious in general, Although, we are not seeing any impact to our L and S Financial Sector Business. Overall, our revenue base is resilient as our solutions are largely supportive of our clients' mission critical systems. Our renewal rates remain strong And our revenue is benefiting from strong signings in the back half of twenty twenty two. We also saw an increased volume of small and mid sized new logo Opportunities with faster sales cycles and ramps to revenue and healthy new scope signings with our existing clients.

Speaker 2

Similar to last quarter, I will focus on total company and ex LNS performance and provide an update on our next generation solutions and portfolio initiatives, after which Deb will provide a more detailed discussion of our financial performance. Looking more closely at our Q1 performance, total company revenue versus a year ago increased 19% on a constant currency basis And 16% on a reported basis. Our strong growth was driven in part by a near doubling of license and support revenue Due to the timing of license renewals concentrated during the Q1 as we expected, we also had a good quarter of growth in ex LNS Solutions. Ex LNS revenue was $380,000,000 during the quarter, Increasing 5% in constant currency versus the prior year period. Growth was driven by strength in DWS and double digit growth in SS and C, while C and I faced some headwinds from a higher mix of financial services clients Our leading indicators remained healthy during the quarter.

Speaker 2

Ex L and L CCV increased 9% year over year, although ACV declined 5% year over year Due to the specific mix in the quarter, we experienced a modest slowing in new logo activity with incremental client caution Our ex LNS TCV increased 26% year over year, driven by solid expansion and new scope activity with existing clients. We believe there is a growing appreciation in the marketplace and with existing clients For Unisys as an innovative partner who can collaborate to solve a company's most critical challenges. We are continuing to penetrate Our existing client base with our next generation solutions of modern workplace within DWS, Digital platforms and applications within CA and I, specialized services and next gen compute within ECS and certain micro market solutions within business process solutions. These next generation solutions So expansion and NuScope TCV increases of 16% and ACV increases of more than 40% year over year. There were exciting wins throughout the company in the Q1 and many of those highlight how we are expanding into new scope of work with our existing clients through a combination of next gen and more traditional offerings.

Speaker 2

In our DWS segment, Unis has signed numerous new scope engagements with an existing healthcare client. This healthcare client is a hospital system that provides critical care to underprivileged communities in more than 20 states. As part of these new scope engagements, Unisys will set up our largest with VIP service for physicians and nurses, we will also provide modern device management capabilities, including hardware and software asset management in partnership with ServiceNow. In our CA and I segment, we signed 2 new scope engagements With an existing technology services client who operates infrastructure on behalf of state and local governments. As part of these contracts, Unisys has expanded its footprint with Google Cloud, allowing us to provide more of these services to the state agencies.

Speaker 2

Unisys is partnering with Dell Technologies to provide recovery services, including the Dell CyberVault solution During the quarter, our SS and C team inside of ECS let a significant managed services expansion win with a leading global life services company that will process millions of lab samples for patients around the world. This engagement strengthens our relationship with an important client Notably, this has been a 40 year L and S client relationship, highlighting the tenure and depth of our company relationships. In addition to specialized managed services, our SS and C teams are leveraging decades of experience and data In the industries of the clients we serve to provide data analytics, application and modernization and industry solutions Financial Services and Travel and Transportation clients among others. Within ECS, we invest heavily in innovation for license and support clients and are already taking some of this IP and productizing it in areas where we see broader market demand. For example, our modular cargo offering which is available in the market today improves efficiency of air cargo operations with real time tracking and control from initial booking through warehouse and flight management.

Speaker 2

As we engage with clients in collaborative discussions of their business challenges, our pipeline activity has increased. Ex LNS pipeline increased 14% sequentially and is up 10% versus the prior year. On a sequential basis, our ex LNS new logo pipeline increased 27% and is 60% higher on a year ago basis. We're also seeing an uptick in larger opportunities in the pipeline that if converted will benefit 2024 revenue. Our next generation solutions are providing strong points of entry and are well positioned to play a prominent role In helping CIOs and CTOs implement solutions in cybersecurity, data analytics and artificial intelligence.

Speaker 2

These capabilities have led to a number of land and expand project engagements that are improving our ability to contract on value rather than cost. In the aggregate, our pipeline for next generation solutions is more than 15% larger than a year ago. Modern workplace remains an area of high priority for our clients. At the end of the Q1, the pipeline for these solutions has grown more than 1 100% sequentially. As we move past the pandemic, providing an employee experience that can sustain more permanent hybrid and remote work models is one of the highest priorities of many of our clients, especially as they look to find efficiencies through decreasing real estate footprints, improving productivity and retaining talent.

Speaker 2

We're leaning into our modern workplace offerings and making investments in the next generation of PowerSuite, our management platform powered by artificial intelligence. These investments will improve the speed and ease of implementation and decrease the time to value realization for our clients. Through native API integrations within our automation IP and artificial intelligence scripts, we will decrease the level of custom engineering work needed for our clients and ensure they get an immediate benefit from automation. Our digital platforms and applications pipeline grew 15% sequentially limited by lower activity In addition to our application development and modernization capabilities, our GP and A teams are seeing an increase Financial fraud detection and content intelligence. This is allowing us to shift to higher growth areas of the market that are more aligned with cloud investment budgets.

Speaker 2

While some of this work is long term, many of these engagements are shorter cycle project work with the potential to lead to larger digital information and transformation contracts. Efficiencies in our go to market operations are also driving pipeline growth. Opportunities are progressing through the pipeline at a faster pace. Another driver of our pipeline is the broader distribution of our solutions that we are beginning to achieve through our partner ecosystem, We're just starting to support a variety of new selling motions and is allowing us to leverage relationships, technology and development resources Moving to profitability, we delivered strong gross margins in our ex LNS solutions, which expanded by 3 10 basis points to 14%, Primarily as a result of delivery efficiencies in CA and I and SS and C. We are continuing to see gains from automation throughout the organization as we optimize our talent distribution.

Speaker 2

As we continue to strengthen our business units, we are becoming increasingly selective of the margin profile of the work we choose to take on. We continue to remain focused on rightsizing margin dilutive legacy contracts as they came up from renewal and are optimistic we can continue to secure fair price increases while preserving our long standing client relationships. We are also lowering our delivery cost to workforce optimization and evolving our talent acquisition approach to increase the speed and lowering the cost of fulfillment. We're deploying our internal talent marketplace that leverages machine learning and artificial intelligence, We also continue to see a decline in voluntary attrition, which was 16.4% in the Q1 versus 18.6% a year ago. Retaining talent is a key element of our strategy and we remain committed to delivering an Last month, we were honored to be included on Forbes' list of best employers for diversity for the first time.

Speaker 2

In addition, we are executing both our own ESG strategy and we are going to market with an innovative business process solution To help our clients with their ESG efforts, particularly in the area of supply chain, where government regulation is on the rise. The Unisys ESG Orchestration Manager enables organizations to manage the whole ESG supply chain process This is just one example of the types of innovation we will speak more of at our Coming Investor Day on June 15th in New York, and I look forward to seeing you in person then. With that, I'll turn the call over to Deb

Speaker 3

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 supplemental earnings materials posted on our Investor Relations site. I will also provide information both including and excluding license and support solutions to allow investors to isolate the portion of ECS, which includes lumpy revenue recognition based on the timing of license renewals, Cloud Applications and Infrastructure Solutions and Enterprise Computing Solutions. As Peter mentioned, it was a solid start The year driven by strong renewal rates and revenue growth from new business secured during 2022 and price increases secured within our xLMS solutions as we continue to strengthen the Unisys value proposition for our clients.

Speaker 3

While client sentiment is mixed, largely due to macroeconomic uncertainty, We are seeing solid sentiment in DWS and increased engagement around certain solutions, such as cyber and integrations work within CA and I. Our pipeline remains healthy, and we are seeing solid new scope TCB and ACB with existing clients, which will convert to revenue as we move through the year. For the Q1, company revenue totaled $516,000,000 an 18.9% increase on a constant currency basis and 15.6% as reported. The double digit growth is largely driven by the timing of license renewals within L and S, which was expected to have a high concentration in the Q1. Excluding L and S revenue, constant currency revenue growth for the Q1 With 4.6% and 1.7% as reported, driven by high single digit growth in DWS and the specialized service and next gen compute portion of ECS.

Speaker 3

Now for some segment detail. Please note that as I speak about the segments, I will be Discussing revenue in constant currency. Digital Workplace Solutions revenue in the Q1 grew 7.7% as the benefit from recent strong new business wins and expansions with existing clients began to convert to revenue. Additional benefit was seen of non strategic contracts in DWS and the Q1 is more reflective of the underlying mid single digit Constant currency growth we have been achieving in the segment. Revenue in our Cloud Applications and Infrastructure Solutions segment declined 1.4% year over year, where we saw some caution around volumes and cloud investments, particularly with Financial Services clients, Which account for more than 15% of the segment's revenue.

Speaker 3

During the quarter, we saw an uptick in shorter cycle sales in systems integration, Software licensing and permitting and cybersecurity advisory around attack and threat discovery. We had another solid quarter in terms of pipeline activity with CA and I pipeline increasing 17% sequentially Nearly half of segment pipeline comprised of DP and A next gen opportunities. Enterprise Computing Solutions revenue, which includes licenses and support And SS and C increased 60.1% year over year. Specialized services and next gen compute, which are our next gen solutions within ECS, Grew revenue 11.9 percent year over year, driven by application services. We are continuing to make investments in our passenger and cargo transportation Solutions as well as our Quantum Logistics offerings to grow our recurring SaaS revenue streams from SS and C.

Speaker 3

These SaaS offerings already account for more than 10% of SS and C revenue and leverage the significant data and decades of experience Our ECS teams have within Financial Services, Travel and Transportation. L and S revenue grew 90.9% year over year, driven by ClearPath Forward license renewals that occurred in the Q1. Our L and S client base has Large concentration of clients in the financial services who run mission critical applications and compute on our ClearPath Forward operating system. Within L and S, we are not seeing any material impact from volatility in the financial sector. As we mentioned last quarter, we have a high level of visibility into L and S revenue on a multiyear basis, though the timing of license renewals are driven by our clients and can be difficult to predict with precision.

Speaker 3

However, we continue to expect L and S revenue of $350,000,000 for the full year, with 2nd quarter L and S revenue expected to be approximately 75,000,000 Additionally, there has been no change to our outlook for low single digit LNS revenue growth in 2024 and low double digit growth in 2025, though the exact timing of license renewals is difficult to predict with precision Moving to leading indicators, total contract value or TCV Grew 2% year over year, driven by strong renewal rates and expansion with existing clients, offset by lower new logo TCV. ACV declined 18% year over year, driven by the mix of license renewal bookings in the quarter. Excluding the impact of license and support, TCV was up 9% and ACV was down 5% on a year over year basis due to the mix of renewals that occurred in the quarter relative to the prior year. Our trailing 12 month book to bill ratio is 1x for both total company and our XL and S solutions. Our pipeline grew 15% sequentially and 6% year over year.

Speaker 3

Given our solid first quarter performance, strong renewal rates and With existing clients, we are reiterating our full year guidance for total company revenue in the range of negative 3% to negative 7% year over year, Which continues to assume Exelonus revenue in the range of negative 1% to positive 4%. License and support revenue boosted our growth in the first quarter as we expected, but renewal levels are expected to be lower on a year over year basis for the remaining three quarters. And this renewal timing dynamic is The driver of our overall revenue decline despite the growth we are expecting in the remainder of the business. 1st quarter gross profit was $159,000,000 Reflecting a 30.8% gross margin versus 19.6% in the prior year. The strong expansion was due to higher license renewals in L and S.

Speaker 3

Additionally, the prior year gross margin included impact from non recurring expenses associated with charges on certain CA and I contracts. As a reminder, these charges were related to subcontractor underperformance and delivery of solutions we no longer subcontract. We are making progress on expanding margins in our external L and S solutions where gross margin was 13.8% versus 10.7% in the prior year. We achieved incremental delivery efficiencies in CA and I. The margins were down on a sequential basis, primarily due to the nonrecurring benefit from surplus IP address sales in the Q4 of last year.

Speaker 3

Across the organization, our teams are committed to bringing down the cost of delivery, More efficiently allocating talent, implementing cost of living adjustment clauses on existing contracts and negotiating pricing that reflects the value of our solutions. We see an opportunity to deliver consistent long term gross margin expansion through these processes, which are gradual by nature. Looking at margins by segment, DWS gross margin was 11.9%, contracting 90 basis points year over year due to advanced staffing to support work signed in the back half of twenty twenty two. We expect margins to improve in the segment sequentially through the year As that revenue continues to ramp and we realize delivery efficiencies. 1st quarter CIE and I gross margin was 13%, Expanding 760 basis points year over year.

Speaker 3

Expansion was driven by the previously mentioned charges in the Q1 of 2022 As well as delivery efficiencies as we increased our use of automation and continued to increase our leverage of lower cost labor market. ECS segment gross margin was 66.7% versus 52.1% in the prior year quarter due to higher license renewals as well as revenue growth outpacing costs in the SS and C portion of ECS. Our non GAAP operating margin was 11.6% versus negative 3.2% in the prior year. We are continuing to remain focused on diligently managing SG and A, which we held roughly flat year over year. Adjusted EBITDA increased significantly to 98 $200,000 versus $34,200,000 in the Q1 of 2022 and our adjusted EBITDA margin expanded 11.30 basis points to 19%.

Speaker 3

1st quarter GAAP net loss was $175,400,000 which included a one time Non cash settlement charge of $183,200,000 This charge is related to the purchase of annuity contracts totaling $265,000,000 which we executed in March. Because this purchase was made by the pension trust for our U. S. Qualified defined benefit plan, There was no impact on the company's cash position. This purchase was part of our continued strategy to transfer the company's pension liabilities to 3rd party insurers over time through annuity contracts purchased with planned assets.

Speaker 3

Excluding the impact of the annuity purchase as well as an additional approximately We've got a number of questions. We've got a number of questions. We've got a number of questions. We've got a number of questions. We've got a number of questions.

Speaker 3

Non GAAP earnings per share was $0.51 versus a loss of $0.41 in the Q1 of 2022. We are reiterating our full year profitability outlook for a non GAAP operating margin of 2% to 4% And adjusted EBITDA margin of 9.5% to 11.5%. While we significantly exceeded these levels in the Q1, This is largely due to the timing of LNS revenue in the Q1, which is expected to be materially lower in the remaining quarters of the year. However, we continue to expect more than 250 basis points of aggregate gross margin improvement across our DWS and CA and I segments, And margins should improve throughout the year as price increases are implemented on existing contracts and renewals and as we see increasing benefit Capital expenditures totaled $20,000,000 in the Q1, relatively flat on a year over year basis and reflecting the ongoing execution of our CapEx light strategy. We continue to expect full year capital expenditures to hold relatively flat year over year between $80,000,000 $90,000,000 Free cash flow was negative $7,500,000 in the quarter compared to negative $51,700,000 in the prior year quarter, Largely due to higher technology collections in the quarter.

Speaker 3

Despite the full year revenue decline, we expect due to license renewal timing, we continue to expect Full year free cash flow to be in line with 2022 at approximately negative $75,000,000 Adjusted free cash flow in the first quarter With $20,100,000 improving by $47,000,000 year over year. On March 31, 2023, our cash position of $391,900,000 was essentially unchanged from levels at year end. Our balance sheet and liquidity remains strong with a net leverage ratio, including all defined benefit pension plans of 1.7 times as of quarter end. Looking ahead to the Q2, due to the cadence of L and S revenue during the year caused by renewal timing, we expect overall company revenue to in the low double digits year over year with 2nd quarter L and S revenue expected to be approximately $75,000,000 And ex LNS revenue expected to be roughly flat on a sequential basis relative to the Q1. We expect a modest non GAAP operating loss in the range of $5,000,000 to $10,000,000 driven by the timing of L and S renewals.

Speaker 3

Our second quarter outlook puts us on track to achieve our full year guidance. Please remember that the timing of contract signings is difficult to predict with precision And the upfront revenue recognition of license revenue means timing of these contract signings within our ACS segment can have an outsized impact on our revenue and operating Briefly touching on our expected cash pension contributions to our U. S. Qualified defined benefit plans, While there is volatility in estimates of pension contributions due to financial market conditions, funding regulations and actuarial assumptions, Which are updated only once a year at year end, we estimate that the amount of our 10 year contribution forecast at 1st quarter end has modestly decreased to approximately $570,000,000 to $590,000,000 from the approximate $650,000,000 forecast at 2022 year end. This is due to a combination of positive asset returns and the impact of the annuity purchase executed in the Q1.

Speaker 3

Cash contributions to our U. S. Qualified defined benefit plans are still expected to begin in 2025 and continue through 2,032. With that, I will turn it over to Peter for some final remarks before we open the line for questions.

Speaker 2

Thank you, Deb. In closing, we are making progress on our key strategic portfolio, go to market and cost efficiency initiatives Operator, would you please open the call for questions?

Speaker 4

Thank you.

Operator

We will now begin the question and answer session. Our first question comes from Rod Bourgeois from DeepDive Equity Research. Please go ahead.

Speaker 5

Okay. Thank you. Hey, so congrats on the front loaded progress toward the full year targets. I want to start by asking about your license renewal pattern. You clearly had license renewals in Q4 and you've now also reported a year over year surge in licenses in Q1.

Speaker 5

So is Unisys in an extended period of early renewals? Or was the Q1 licensing activity somewhat more in line with what you had expected. So I'm just looking for any color on the latest licensing patterns, which would be really helpful. Thanks.

Speaker 6

Rod, this is Peter. Thanks very much for the question. I guess the answer is yes and yes. So we had a slightly better quarter than we expected on the LNS renewals, but it was largely in line with what we did expect. As we went through last quarter discussing about what the L and S progress was going to be over the year, we knew it was really lumpy.

Speaker 6

We knew The Q1 was in fact going to be our best quarter and it was our best quarter. It was a little better than we thought, but not marginally so. That's why Deb is being very Careful to set expectations for the rest of the year. We do not think that the L and S revenue as a whole is going to be any larger than what we laid out at the end of the last quarter for all of 2023. In terms of the rest of the business, and we really are working in a concerted way to kind of separate LNS from what we call ex LNS.

Speaker 6

And the reason for that is just the lumpiness of LNS. As you can tell, we had a little better quarter than we expected this year. We had a little better year in 2022 on LNS than we expected. We simply don't have control over those items. And so they're going to be lumpy from year to year, they're going to be lumpy But it is still somewhat outside of our control.

Speaker 6

Ex LNS is the rest of the business And the driver in ex LNS for us is what we call those next gen solutions. We had a good quarter in next gen solutions, but we actually expect better next gen solution performance as the year gets stronger. So just to give you an example, when we think about pipeline, total pipeline growth for the company was up 6% year on year and 15% sequentially. That's very good for us. But NextGen pipeline was not up 6% year on year, it was up 16% year on year.

Speaker 6

And next gen pipeline was not up 15% sequentially, it was up 34% sequentially. So we really do believe That an important way to look at the company is through that ex LNS, and we expect to make continuous progress on that year over year. Quarters can still be a little lumpy, but that is where we think we will make the steady advance with the company and within X LNS, the growth effort is really within the next generation piece. So, Rod, hope that helps answering the question.

Speaker 5

Yes, yes, definitely. And so my follow-up is kind of a longer term question, Which probably is also a fitting topic for the Analyst Day. But I want to ask, given that your outlook is saying The next three quarters are expected to have soft license revenues just due to the timing and lumpiness there. Will you during that time be making special efforts to kind of lay groundwork for fundamental improvements for Unisys after 2023. So just any color on what you're doing in terms of longer term building up of the fundamentals?

Speaker 6

So that's a great question too, Rod. I'm going to turn that over to Mike, who is really working with all of our business teams to do exactly that.

Speaker 7

Great. Thanks, Rod, for the question and good to speak with you again. Yes, as you know, I mean, this is something that we've been working on for a multitude

Speaker 6

of years and continue to work on.

Speaker 7

I think we really have the Genual improvement in margin, frankly, not only just over the remaining portion of 2023, but beyond 23. Some of the major efforts there as we've talked about in some previous quarters is the continual Development of AI and ML and the efficiency of delivery, we continue to work on right shoring in low cost locations and support of the organization, we continue to clean up and fix, I'll say legacy contracts and improve their margin profile. And we continue, as you know, to push to higher Mix shift from a revenue point of view, which has not gone impact on the margin side. Deb and I are partnering on SG and A reductions. So all of those things in my mind are core tenants to the continual improvement of the business fundamentals and We certainly will have some more dialogue and give a little better and more detailed picture in Investor Day of how we plan to do that because it is a little bit different per business unit and in the company overall, but that's has been the plan and continues to be the plan.

Speaker 5

Okay, great. And just one final, hopefully a quicker one. The 15% sequential pipeline growth, I'm just looking at that Number and also knowing that there's been some macro impacts in the last several months in the industry, What's driving that sequential pipeline growth over the last 3 months?

Speaker 6

You know what, Brad, this is another great question. When I look at our performance and talk to both Deb and Mike and to our leaders, and you kind of get into that pipeline growth. The area of our Pipeline growth that has been most accelerated is modern workplace. And interestingly, that is the area where we had the most Revenue uptick in the ex LNS business. So DWS driven by Modern Workplace clearly has the most pipeline growth for us.

Speaker 6

Now somewhat you might say somewhat disappointingly, when you look at the profitability of DWS, The gross profit of DWS actually went down year on year. And while that is a bit of a disappointment, it is very understandable. Revenue for that team increased over 7% year on year. Whenever you have revenue increasing, you always have a little bit of a short term head to profit. I think even more than the revenue, we are really gearing up for that very, very large increase in pipeline.

Speaker 6

So We're staffing up. We want to we are a little bit getting out of in front of our headlights on that because honestly, We think we need to do that to get to the revenue portfolio that we're showing. So I would say to you, it is that growth is in NextGen Solutions. And within NextGen Solutions, modern workplace looks very promising for us, And it is already showing that in the revenue growth in the Q1.

Speaker 7

And Rod, if I could add a couple All things to that. I guess the first word I would say is volume, right? We're not looking at situation where there's some And all this thing where there is this one big deal driving that pipeline, right? That is pretty consistent volume across all of our businesses. And we are starting to see Some real penetration from a cross sell perspective.

Speaker 7

We have talked historically about our cross sell penetration being in about 3rd bucket, at this quarter, we're actually closer to about 40%. So we are starting to see that penetration, which is driving expansion and new scope and in some cases, as Peter just mentioned, highly focused on modern workplace. So, It's been pretty good. And as you know, it's kind of on the tail end of a lot of the marketing efforts that we've done. We've launched our branding at the end of Q4, lot of marketing campaigns going on and the reality is they take a little while to take root, right, and start to see the benefits of those enhanced efforts.

Speaker 7

So, we're thinking we're aligned pretty nicely to our strategy and continue to press forward there.

Speaker 5

Very helpful. Thanks.

Operator

The next question comes from Joe Vafi from Canaccord Genuity. Please go ahead.

Speaker 4

Good morning. This is Balazsani on for Joe. Thanks for taking our questions and thanks for all the Maybe I can start on the macro. Clearly, macro remains tough. Clients may not be doing full renewals or taking on piecemeal work.

Speaker 4

Have you noticed any shift in how your clients are thinking about their investing in their business today versus let's say 1 or 2 quarters ago, Any sort of shift in their approach there?

Speaker 6

Yes. This is Peter again. I'm going to Turn that over to Deb to work through the numbers on that a little bit with you, but let me give you my perspective. There are some changes, and I'm just trying to categorize those. By industry, as we look at the numbers and we think about how Clients are acting.

Speaker 6

I would say we had what we think is a perceptible decrease in client volume And actually in mind share, in the Q1 in financial services outside of our L and S business. So L and S does a good amount of financial services work and that's running financial services back office to some extent front office And that did not change. But when we're talking about project work around financial services, it was later in the quarter, but it was pretty perceptive. That whole industry has been distracted by whether it's First Republic or SVP or others. And so I don't think it was a surprise to see our pipeline and level of activity somewhat distracted.

Speaker 6

We expect that to come back and we expect that to come back quickly, but it was distracted. When we look at our business as a whole stepping out of that one piece of a sector, I would say the big change over the past 6 months and what you hear more of in our discussion in mine and in DEB's is really a strengthening interest around data analytics and AI. And you see us talking about data analytics and AI, But it shouldn't surprise anybody. So every one of our next gen solutions has a good amount of data analytics and AI embedded in it, that's what makes them next gen solutions. So it's not as if we are new to that.

Speaker 6

But I would tell you that clients want to hear about that more. And so we are focusing on it from a if you will from a marketing standpoint more you're going to see about more of that on our website. You're also going to see somewhat more focused concentration on that as we go forward. But again, it's not as if we don't do it today and haven't done a lot of it. But I would say that's probably the biggest change, is really kind of a More and more of an emphasis on data analytics and AI, but that's a change for like all of us as we read the paper every day.

Speaker 6

Deb?

Speaker 3

Yes. No, I think Peter covered it. I mean, I think in my remarks, what I had mentioned, the CA and I probably saw the biggest impact Where we saw that decline 1.4%. And again, I think that was, as we said, largely driven by some caution in volumes and cloud investments. So, and particularly, as Peter mentioned, with financial services clients, Which for CA and I are about 15% of that segment's revenue.

Speaker 3

So I think we are seeing that, but we're I think Peter summed it up.

Speaker 6

Yes. Paolo, I think that was a really great question and

Speaker 2

thank you for asking it.

Speaker 4

Thanks for the color, Peter, in that. And maybe I can follow-up on the next gen solutions. It's clearly very good And if I heard it correctly, deals may be moving through the pipeline at a faster pace. What do you think is driving this faster sales cycle here?

Speaker 6

Yes, I'm going to let Mike take that. Just a couple of quick comments. I said that and it does appear that's the case. I will tell you, I think Mike has led a brilliant effort on our team to get this to happen. And the work he's done on the process back office of just how we push through deals, how we evaluate them sooner, how we make decisions on them sooner is really strengthening the company.

Speaker 6

And then of course, to some extent, the deals As you can see, are a little smaller and that means they have to go faster. But Mike, over to you.

Speaker 7

Thanks, Kyle, for the question. Very helpful. So, Yes. I think from a perspective of velocity through, we've done quite a bit in the back office to establish kind of or rapid pricing, but if you think about it, it's really more about not having to have the level of variability in all of the clients, Right. So, a little bit more of a standardized offering now that our portfolio has kind of evolved a bit, right?

Speaker 7

We're able to leverage more of that and obviously that helps with our pricing. The other thing is a lot of our penetration, especially as I mentioned, The increase in cross sell and the dip into some of the new logos are smaller based solutions and they typically come to revenue sooner And there are point of spear types of solutions. So, if we talk about penetration in cybersecurity as an example, That is something where we can price it very quickly. A lot of them are time and material based. They go to revenue in a sooner cycle.

Speaker 7

And our goal is really about landing and expanding, right? So getting in, dealing with some apps modernization or migration, as an example, in the cloud space and then broadening that expansion into managed services and the rest of the infrastructure. So, I think it's a little bit of what we've done in the back office. It's a little bit about our portfolios in general and their maturity. It's a little bit about the size of the deals and the types of things that we're actually pursuing in NextGen just Come to market quicker and the contract terms are a little shorter.

Speaker 4

Got it. Thanks for all the color, Mike and Peter, and good luck this quarter.

Operator

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

Speaker 8

Hi. Thank you for taking my questions. I have a follow-up on that commentary around the increase in the small to midsize opportunities. Is that something you deliberately are going after because they may have a faster decision cycle within their organizations? And did you also say that those Compress are normal at the shorter term than larger deals.

Speaker 6

Yes, Anja, thanks for that question. It's a phenomenon that we have been remarking on for years, and it just continues. So and that is that as we measure contracts, new contract signings, the average duration of the new contract It's shorter than the ones that had preceded it. Now there's a lot to take away from that. So in part, that's an average number And you're dealing with a lot of contracts.

Speaker 6

So averages can be a little deceiving. But what is underlying that, which I don't think is deceiving Is that our offerings have become more of the moment. Our offerings are more important to drive current revenue and current margin for our clients. And that means our clients need them more urgently. So it's not a question of putting in a deal and doing it for 3 or 5 years.

Speaker 6

Those are fine. But it's like, hey, I want this done within a year and I want to be able to see the and then if I like it, I'll renew it. And that's a challenge we're ready to live up to. So Mike, over to you on that.

Speaker 7

Yes. Look, I think it is intentional, Anya, for sure. When we think about the types and size of the deals that we're looking at for penetration purposes, We've had a renewed focus in mid market, as an example, which are companies from our perspective are the $2,000,000,000 to $5,000,000,000 range. It's quicker decision making, it's smaller type projects that get to revenue sooner. And those are areas where we can ultimately provide kind of full stack solutions to clients in that space.

Speaker 7

So, I think it has been very intentional. And To a large degree, some of these services are SaaS based models, right? So, they typically move into annual cycles as opposed to The historic models that were 3 to 5 years, as Peter alluded to, in their signings. So some of it's the behavior of the client and some of it is intentional in our next gen solutions.

Speaker 8

Okay. Thank you. And sorry if I missed this. Maybe you commented on it already, but the gross margin was helped by the LMS this quarter. So How should we think about the gross margin in the coming quarters?

Speaker 3

Yes. So, hi, Anja, it's Deb. The coming quarters, because you're right, L and S, because it was a strong L and S renewal quarter, that drove a lot of The strength. So what we the guidance we gave for Q2 is non GAAP operating loss negative $5,000,000 to Negative $10,000,000 for Q2. And then in total, we talked about that the XL and S, the margin, The gross margin we're expecting to grow 250 basis points.

Speaker 3

So there will be improvement kind of in that ex LNS over But the LNS, you're right, will be driving some of the lumpiness in that profit over the next three quarters.

Speaker 6

And that's why we've done such a focused work really Starting last year, at giving you data that is both LNS and exLNS as well as total company, Because we want everybody to see how the pieces are put together, but we also want everybody to see that that LNS number increases and decreases Almost in unexpected ways, although we have a general view as to how it will play out. But most of our focus on growth and focus on margin expansion is in the ex L and S space.

Speaker 3

And I should clarify the 250 basis point improvement It's CA and I and DWS because there's that SS and C part that already has higher margins.

Speaker 6

That's right.

Speaker 3

Just to clarify.

Speaker 6

We just want more of it.

Speaker 3

Exactly.

Speaker 8

Okay. Thanks for that clarification. Yes.

Operator

The next question comes from Matthew Galinko from Maxim Group. Please go ahead.

Speaker 9

Hey, good morning. Thanks for taking my questions. Can you talk about any expectation for attrition from legacy lower margin contracts that are coming up in 2023? I know we had some material impact a couple of years ago, but particularly in the environment we're in today, is there potential for more of those to just be sunset and create a material headwind for Unisys revenue or is that something that you're not concerned with this year?

Speaker 7

Hey, Matt, it's Mike. Good to speak with you again. Look, I'll sum it up quickly and I'll give you a little bit of color. It is something that we are not overly concerned about For this year or frankly in future years. A, for this year because we really don't have any contracts that are up this year of the magnitude that would be a concern.

Speaker 7

But more importantly, what we've actually seen over the course of the Q4 and the Q1 It's our ability to get price increases on the contracts that we were concerned about. And I think a lot of that has to do with The quality of service that we've been providing for these clients for decades, right? So, it's a heck of a lot easier of a negotiation from a price increase point of view when you're delivering Gold Glove service for multiple decades. So, we've not had problem from a pricing perspective in increasing those, we don't have any imminent ones that are coming due that we're concerned about. And that's actually an area of land and expand for us and we've seen that in a couple of instances already.

Speaker 7

So, I think we're in pretty good shape, unlike what we went through in 2021 with the carryover of those exits in 2020.

Speaker 9

Perfect. Thanks. And my follow-up is on the marketing investments and campaign, I guess, What should we be looking for as a gauge or indicator that those are having its desired impact? And I guess what timeframe We'd be looking at to be able to gauge some sort of impact, whether this year or next year?

Speaker 6

Yes. So Matt, that's a great question. I think there's really almost 2 different ways to look at it. From our perspective in terms of operationally, We're looking at how many people are coming to the site and how often they're staying. But when you look at it, Just kind of an operationally, it's doing really well.

Speaker 6

I think people are saying I think today it is almost 4 times as long And we're getting twice as many people who are either, we think, clients or prospects. So operationally, we're really making progress there. When you think about how should you look at it, It's pretty clear. Is it helping us get the revenue? Is it helping us get the margin?

Speaker 6

Is it helping us develop pipeline and getting to win rates? So I think the proof is in the pudding as far as our shareholders are concerned and those have to get to revenue and profit. But from our standpoint, we really are we're seeing some success. Mike, any thoughts to that?

Speaker 7

Yes. No, Matt, Great question. And look, the easiest answer is the front load of that is the pipeline, which we've already seen some expansion on. That has to turn into TCV and ACV based on higher win rates. So, we're seeing not only The length of time people are spending on the site, but actually who is spending time on that site.

Speaker 7

We put in a new lead generation program on the back of that, which helps us further qualify Some of those leads, we have some 3rd party, what you would almost consider inside sales as a back end of that Should qualify those leads even further. And so from our point of view, it's really the conversion of those leads. The second piece of your question was time. The other thing there is we have to be a little bit of have some patience here, right? This is not the type of thing where you put some new information on your website and that turns into a lead in a week or a month or a quarter, Right.

Speaker 7

So, it takes a little bit of time for that to happen. But I will tell you, I speak to clients all the time, prospective and current. The view on the brand, the view on our ability to generate breakthroughs and experience breakthroughs, The dialogue around the market awareness of our solutions, the number of people participating on our The increase in pipeline, those are all attributes from our point of view that says it's moving in the right direction.

Speaker 6

Yes. And just I found some of the data there. Just again, March was the single highest month of web traffic we've ever had. We've had in the Q1 4 times more clients and prospects visit our website than a year ago, and those clients Prospects are staying longer. So again, from I think from Deb and Mike and my perspective, that's a lot of progress.

Speaker 6

From your perspective, it has Show up in new sales and new revenue and increasing win rates.

Speaker 9

Terrific. Thank you.

Operator

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

Speaker 6

I want to thank everybody for joining us. Again, between now and the next quarter, we will have our Investor Day, June 15 In New York City, we are sending out invitations to people, but if you don't get an invitation, that is an oversight. So please reach out to Mikaela Porowski, and she will get you invited. So we're looking forward to seeing you all on June 15 in New York. And thanks very much.

Operator

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

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Earnings Conference Call
Unisys Q1 2023
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