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Edited Transcript of UIS earnings conference call or presentation 24-Apr-17 9:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Unisys Corp Earnings Call

Blue Bell Apr 25, 2017 (Thomson StreetEvents) -- Edited Transcript of Unisys Corp earnings conference call or presentation Monday, April 24, 2017 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Courtney Holben

* Inder M. Singh

Unisys Corporation - CFO and SVP

* Peter A. Altabef

Unisys Corporation - CEO, President and Director

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Conference Call Participants

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* Francis Carl Atkins

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* James Eric Friedman

Susquehanna Financial Group, LLLP, Research Division - Analyst

* Joan K. Tong

Sidoti & Company, LLC - Research Analyst

* Joseph Anthony Vafi

Loop Capital Markets LLC, Research Division - Analyst

* Yuwai Lee

Susquehanna Financial Group, LLLP, Research Division - Associate

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Presentation

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Operator [1]

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Good day, and welcome to the Unisys First Quarter 2017 Results Conference Call. At this time, I would like to turn the call over to Courtney Holben, Vice President of Investor Relations at Unisys Corporation. Please go ahead.

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Courtney Holben, [2]

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Thank you, operator. Good afternoon, everyone. This is Courtney Holben, Vice President of Investor Relations. Thank you for joining us.

Earlier today, Unisys released its first quarter 2017 financial results. I'm joined this afternoon to discuss those results by Peter Altabef, our President and CEO; and Inder Singh, our CFO.

Before we begin, I'd like to cover a few 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 as well as other information relating to our first quarter performance on our investor website, which we encourage you to visit. Third, today's presentation, which is complementary to the earnings press release, includes some non-GAAP financial measures. The non-GAAP measures have been reconciled to the related GAAP measures, and we've provided reconciliations within the presentation.

Although appropriate under Generally Accepted Accounting Principles, the company's results reflect charges that the company believes are not indicative of its ongoing operations, and that can make its profitability and liquidity results difficult to compare to prior periods, anticipated future periods or to its competitors' result. These items consist of pension and cost reduction and other expenses. Management believes each of these items can distort the visibility of trends associated with the company's ongoing performance. Management also believes that the evaluation of the company's financial performance can be enhanced by use of supplemental presentation of its results that excludes the impact of these items in order to enhance consistency and comparativeness with prior or future period results. The following metrics are often provided and utilized by the company's management, analysts and investors to enhance comparability of year-over-year results as well as to compare results to other companies in our industry non-GAAP operating expenses, non-GAAP operating profit, non-GAAP diluted earnings per share, free cash flow and adjusted free cash flow, EBITDA and adjusted EBITDA in constant currency.

From time to time, Unisys may provide specific guidance regarding its expected future financial performance. Such guidance is effective only on the date given. Unisys will generally not update, reaffirm or otherwise comment on any prior guidance, except as Unisys deems necessary, and then only in a manner that complies with Regulation FD.

And 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 the actual results to differ materially from our expectations. These factors are discussed more fully in the earnings release and in the company's SEC filings. Copies of those SEC reports are available from the SEC and, along with other materials I mentioned earlier, on the Unisys investor website. And now I'd like to turn the call over to Peter.

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Peter A. Altabef, Unisys Corporation - CEO, President and Director [3]

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Thank you, Courtney, and thank you all for joining us today to discuss our first quarter 2017 financial performance. I'll begin on Slide 4 of the presentation with an overview of the key highlights for the quarter.

We believe our first quarter results demonstrate continued progress against our strategic goals. We saw significant expansion of margins, including services gross margins and services operating margins, reflecting progress towards our goal of improving profitability within services and the company overall and helped by a particularly profitable transaction in the quarter. As we have discussed, we are executing a strategy to present integrated solutions to specific industries with deep domain expertise, software or IP and leverage -- leverageable solutions which are customized for this specific industry. We have put special emphasis in several of these industries where we believe we have deep expertise. In the first quarter, our revenue from these focus industries grew 5.9% year-over-year and accounted for 43% of total revenue. In the quarter, we also continued to see positive trends in some of our key leading revenue indicators. Total Contract Value, or TCV, for the business overall was up 26% year-over-year. New business TCV, which includes new logo and new scope of business, was up 62% year-over-year. Overall win rates measured by deal value were up year-over-year as were new business win rates. Win rates within our focus industries were up year-over-year and were higher than those for the business overall.

While the overall pipeline was essentially flat year-over-year due to an ongoing focus on improving the quality of deals in the pipeline, the current year pipeline for our key focus industries was up approximately 24% year-over-year.

Also consistent with our vertical strategy and focus on improving revenue trends, we launched a number of new vertically oriented software solutions that I'll discuss more later.

We're also pleased to have completed a $440 million senior secured notes offering earlier this month. Inder will go through our financial results for the quarter in more detail shortly. But first, I'd like to provide an overview of the business during the quarter, beginning with a look at our services and technology advances and then followed by our go-to-market results.

We continue to evolve our services delivery capabilities to provide next-generation solutions. We expect that these changes will not only address our clients' new and future needs but will also improve the efficiency of our delivery and help to enhance our profitability. I'll cover 3 examples of this work: automation and artificial intelligence, analytics and consulting.

We are focused on using automation and artificial intelligence within our offerings both to enhance quality and effectiveness of service for our clients and to improve the cost of delivery. During the first quarter, within our infrastructure-managed services business, we launched our cloud management platform to our North American cloud environment. This platform enables our clients to implement a hybrid cloud approach using a highly software-driven and automated solution that requires minimal operational support. We expect to roll out this offering in EMEA during the second quarter followed by our other regions.

Analytics is increasingly important to the company. This quarter, we launched Machine Learning as a Service, a new offering that enables organizations to predict changes in business conditions and quickly evaluate potential responses. It combines a library of machine learning algorithms with a suite of proven methodologies and processes that analyze and extract important details and insights from clients' data. From this, it generates analytics that forecasts future business and operating conditions for clients and recommends future actions to facilitate and support decision-making. This new service is available as a part of the Unisys analytics platform.

Lastly, within our services business, we continue to ramp up our consulting capabilities with additional consultant hires in the first quarter. Consulting provides an opportunity both for in-year revenue associated with specific consulting projects but also creates land and expand opportunities since its gives us an initial entry point for a broader dialogue with clients who may benefit from other offerings we provide.

Moving to technology which, for us, is largely proprietary software. Over the last 2 years, we have undertaken efforts across a number of fronts to improve the performance of this business, including creating a roadmap for our ClearPath Forward clients to upgrade to our newer generation and software-based ClearPath Forward offerings. We believe this has made a meaningful impact with clients. And although we are still expecting technology revenues to be down for the full year, we are pleased to report technology revenue growth for the quarter this year on a year-over-year basis.

Within our technology business, as we've discussed, we have been developing new solutions as well as reimagining and modernizing existing solutions. We're also looking beyond best practices in a specific industry to provide to that industry applicable innovations from other environments. We believe that these offerings better position us to address the needs of clients within our focus industries, which is a key element of our strategy to improve revenue and margin trends over time.

For the first quarter of 2017, we launched a number of new offerings which I'll highlight along with an update on some of these offerings that were launched in 2016 as I discuss key developments within our sectors during the quarter.

With respect to our sectors, our U.S. federal business had a strong start to the year with revenue up 6% year-over-year. In the quarter, the U.S. Internal Revenue Service selected Unisys to continue our work: updating, operating and maintaining the system used by the United States government to verify and monitor excise fuel tax filings. We also signed a new scope contract in the first quarter to provide application modernization and operations services to support a federal law enforcement agency's national security mission. Additionally, we signed a new logo contract with a partner at Social Security Administration to provide an anti-fraud enterprise solution.

Within our public business, last year, we announced the launch of Digital Investigator, our updated crime investigation management system used in our justice, law enforcement and border protection focus industry. We're pleased with the progress we have seen to date. Although revenue is still small, in the first quarter of 2017, it was up significantly relative to what the legacy version of this offering had generated in the prior year and with a pipeline for the offering up 6x that of the prior year.

A key public contract in the quarter was with the New Zealand Transport Agency, which has renewed us to support its driver and vehicle registry platform. During the first quarter, we also signed a new logo contract with the United States State Government for their gaming agency to create a modern, collaborative operating environment that digitizes the records and documents, enabling easy and effective access to information needed to regulate gaming activities across the state. Finally, we also signed a managed services contract extension with the city of Chicago.

Our commercial sector launched 2 new vertically focused software offerings in the quarter. Our life sciences and health care focus industry launched Active Insights med device, a comprehensive integrated medical device management platform that provides companies within health care and life sciences with the ability to seamlessly monitor all of the medical devices within their organization.

Our travel and transportation focus industry launched Digistics which offers a new holistic and integrated cargo logistics solution that allows carriers to streamline freight management and improve their operational efficiencies. Our largest contract of the quarter was in the life sciences and health care area with Catholic Health Initiatives, CHI, the nation's third-largest nonprofit health system, to provide end-user and workspace for services for CHI's 90,000-plus employees across the United States. We also signed a new logo contract in the first quarter for our cloud and infrastructure business to complete a significant digital transformation project with a major European mechanical engineering group.

And finally, we signed a contract with Hitachi Data Systems, or HDS, for end-user and workspace support in the United States and Canada. Under the contract, we are augmenting HDS' employee support team so that they are in a position to better expand and improve delivery of warranty services to HDS customers. These contract awards extend the relationship that was established last year when we executed an agreement to support HDS in Asia Pacific.

Within our financial services sector, our commercial and retail banking focus industry launched Elevate, an end-to-end digital banking software platform and suite of applications designed to help financial institutions to deliver instantly secure omnichannel banking experiences to their customers. This offering was launched in EMEA and Asia Pacific in the first quarter and will launch in the United States and Canada and Latin America in the second quarter.

In the first quarter, Unisys signed a new contract with the largest financial services group in Latin America to provide automation services for its branch network as well as maintenance and support services for the bank's ATMs throughout Brazil. Our financial services business in EMEA also signed contracts to provide additional processing capabilities for one of the U.K.'s largest retail and commercial banks.

We continue to focus on differentiating ourselves in the market by incorporating security in everything we do. We believe that our Stealth offering is an important part of this effort, both as a standalone solution and by integrating it as a differentiator for our broader set of offerings.

For example, we recently migrated our services management platform to a public cloud environment. In doing so, we were able to seamlessly layer Stealth into the new Microsoft Azure environment. We are also developing an adaptive security architecture in partnership with LogRhythm to help clients reduce the time from detection of a network security threat to response. The software-defined solution combines LogRhythm's threat identification features with Stealth's micro-segmentation capabilities. We expect to launch this offering later this year.

Additionally, during the first quarter, we signed a contract with a legal -- with a leading global payments provider for Stealth security software as well as application services to support the company's digital transformation efforts.

With that, I'll turn the call over to Inder.

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Inder M. Singh, Unisys Corporation - CFO and SVP [4]

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Thanks, Peter. Hello, everyone. Thanks for joining us this afternoon. In my comments today, I'll provide comparisons on a GAAP and non-GAAP basis. Just to remind you, the non-GAAP results exclude pension expense, cost reduction and other charges.

Turning to Slide 6. We're pleased with our results for the first quarter of 2017 which we believe demonstrate continued progress against a number of goals that are key to our overall business strategy. We saw expansion of both GAAP and non-GAAP operating margins for the company overall as well as adjusted EBITDA margin, and revenue was roughly flat on a year-over-year basis. We are reaffirming guidance for the full year for revenue, non-GAAP operating profit margin and adjusted free cash flow. And I will discuss these in more detail later.

We're continuing our focus on improving profitability within our services segment and are pleased to see gross margins and operating margins for this segment expand by 400 basis points each year-over-year this quarter.

With respect to technology, while we still expect full year revenue for this segment to be down slightly year-over-year, we are pleased to report revenue growth of 10% in our first quarter.

Lastly, on this slide, as part of our long-term strategic plan and consistent with our goal of actively managing our balance sheet and pension obligation, we completed a $440 million senior secured notes offering earlier this month, which I will speak more about shortly.

We also have worked to improve our other operating balance sheet metrics such as DSOs, which improved by 2 days year-over-year in the quarter.

Turning now to Slide 7, some more detail on our first quarter results. Our revenue for the quarter came in at $665 million, roughly flat year-over-year, as reported and on a constant currency basis. Additionally, GAAP operating profit margin was up 370 basis points year-over-year to negative 0.4%, and non-GAAP operating profit margin was also up 340 basis points year-over-year to 6.3%. This highlights continued progress on our goal of improving profitability and was helped by an especially profitable services transaction in the quarter, which helped revenue and margin.

For the first quarter, diluted earnings per share was negative $0.65 compared to negative $0.80 in the prior year period, and non-GAAP EPS was up to a profit of $0.30 compared to a profit of $0.11 in the prior year period.

With respect to earnings per share, please keep in mind that the share count used in calculating non-GAAP EPS was approximately 73 million for the first quarter of 2017, whereas it was approximately 50 million for first quarter of '16. And lastly on this slide, adjusted EBITDA was up 41% year-over-year in the quarter to $84 million, representing a 370 basis point expansion in adjusted EBITDA margin to 12.7%.

Turning to Slide 8, you can see a breakdown of our first quarter revenues by segment, geography, sector and type. I won't go through all the numbers on the slide, but I'll point out that the percentages are largely consistent with what we saw a year ago as well.

Turning to Slide 9 for a more detailed overview of revenue by region and sector for the quarter. In line with the revenues for the overall company, U.S. and Canada revenue for the quarter was relatively flat as growth in technology helped offset modest declines in services revenue in the region. EMEA saw a relatively stable quarter on a constant currency basis. Asia Pacific was also helped by currency and had a solid technology quarter, again, offsetting modest declines in services revenue. Latin America was helped by currency and saw services revenue growth in the quarter while technology faced a tough year-over-year comparison.

Now I'll make a few comments on the sector breakdown for the first quarter. Our federal business had a solid quarter with revenue up 6% year-over-year, reflecting relatively flat services revenue and a strong technology quarter. Financial services saw growth in both services and technology helped by growth in our commercial and retail banking focus industry. Public saw growth in services revenue while facing a tough year-over-year compare in technology. And commercial saw a strong technology quarter, offset by weakness in services.

Moving to our segment results, please turn to Slide 10. As we have previously discussed, improving the profitability of our services segment has been a key focus. We are pleased that in the first quarter, we saw an increase of 400 basis points in our services gross margin and in our services operating margin, both of which were also helped by a particularly profitable transaction. Services backlog ended the first quarter at $3.7 billion. And of this amount, we would expect $510 million to convert into revenue in the second quarter of 2017.

We are pleased that our technology segment was up 10% in the first quarter of 2017, helped by the timing of a few deals. Although, as we mentioned, our financial guidance still assumes this segment to be down for the full year. As we have said before, we typically see a first half and second half revenue split for technology of 45% and 55%. And currently, we expect this year to be directionally similar.

Slide 11 highlights our first quarter cash flow. As we have previously disclosed, in the first quarter of 2016, we had received a $40 million payment from one of our government clients that had been due in the fourth quarter of 2015, and this boosted reported cash flow in the first quarter of '16. Additionally, as we mentioned in our last call, we saw some early payments in the fourth quarter of 2016, again, mostly from some government client. The combination of these 2 items largely account for the year-over-year change in the cash flow metric shown on this slide and for the first quarter of 2017.

I would also note that the first quarter is typically a seasonally weak cash flow quarter since we pay out bonuses and commissions during this period.

In keeping with our long-term plan of transitioning to a more asset-light business model, our capital expenditures were down slightly year-over-year and, as I noted previously, we saw improvement in DSOs year-over-year. We ended the quarter with $300 million -- $302 million in cash.

As we announced last week, in April, we completed a 5-year senior secured notes offering to raise $440 million at a coupon of 10.75%. This debt raise is consistent with our long-term strategic plan and our goal of actively managing our balance sheet and pension obligation. We have said on prior calls that we monitor the capital markets on a continual basis for opportunities to enhance our liquidity, and we're pleased to have been able to take advantage of such an opportunity. Given that strategy, we included an assumed increase in interest costs as we prepared our full year guidance range on adjusted free cash flow so that if such an opportunity presented itself, we would not have to revise guidance. We expect to use the proceeds from this offering to continue to invest in the business and to address our pension obligations in the coming years. We have also discharged the remaining outstanding senior secured notes -- senior notes due in August of 2017.

In conclusion, we are pleased that the first quarter was a strong start to the year and showed progress against many of our key strategic goals. Based on our performance this quarter and expectations for the rest of the year, we are reaffirming our full year 2017 guidance for revenue of $2.65 billion to $2.75 billion, which is a year-over-year decline of 1% to 5% on a constant currency basis; non-GAAP operating profit margin of 7.25% to 8.25%; and adjusted free cash flow of $130 million to $170 million.

As we look to the rest of the year, we must keep in mind the potential for quarterly variability, including the fact that the second quarter this year faces a tough year-over-year comparison as the prior year period was a very strong quarter for technology, and tech revenues in that segment were up more than 30% in second quarter '16.

With that, I will turn the call back to Peter.

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Peter A. Altabef, Unisys Corporation - CEO, President and Director [5]

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Thank you, Inder. We'd now like to give everyone the opportunity to ask any questions that they may have. Operator, may we please open the line?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Joan Tong with Sidoti & Company.

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Joan K. Tong, Sidoti & Company, LLC - Research Analyst [2]

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I do have a couple of questions here. First off, I want to ask about the service gross margin. Obviously -- as well as operating margin. Obviously, it's very strong compared to the last year. It does seem to me that you're restructuring effort is paying off. But outside that, are we talking about like some one-time things here as you mentioned like transaction being particularly profitable? Can you just give us some color what's really causing such a strong performance on service margin?

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Peter A. Altabef, Unisys Corporation - CEO, President and Director [3]

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Yes, Joan. That's a great question. This is Peter. I'll take the first part of that question and then give it over to Inder. I think both of us reflected in our comments the fact that there was a transaction in the first quarter that we felt was particularly profitable for us. Because of that, it had the effect of incrementally increasing margins. Those services margins would have been increased over last year without that contract, but that contract did help. To put that in context, we had expected that contract to be signed sometime during the year. So it's really just a question of when, and it happened during the first quarter. So yes, we were benefited by it, and we thought that it was important enough for us to single it out in our remarks, but the gross margins would have increased without it.

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Inder M. Singh, Unisys Corporation - CFO and SVP [4]

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And just to add to what Peter was saying, this is a contract that, frankly, we've had for a period of time. And what we benefit from in the quarter was some software that was part of it as well. As you know, Joan, it's been a focus of ours to improve on contracts that either have low margins or to renegotiate some of these contracts. So it wasn't a surprise to us that we were able to be successful in demonstrating the improvement of the profitability of this contract. So we hope that the direction is going to be higher. But of course, we benefited in this quarter, and you saw the results reflected in the very strong gross margin and the operating margin.

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Peter A. Altabef, Unisys Corporation - CEO, President and Director [5]

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Joan, you said you had a second question, and please go ahead.

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Joan K. Tong, Sidoti & Company, LLC - Research Analyst [6]

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Sure, sure. The second question is really -- like, first of all, just thank you so much for the chart #4, giving us a lot more color in terms of how to think about your business, the focus industries, like what is the trajectory in terms of like TCV growth as well as like the pipeline growth. So if I were to ask you, just overall, where the business is concerned, are you still looking for booking -- kind of like bookings growth grew a little bit but the backlog is still like kind of flat. So for the nonfocus business, are we going to see sort of like things starting to stabilize like going forward just looking at the pipeline, and just some color there would be helpful.

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Peter A. Altabef, Unisys Corporation - CEO, President and Director [7]

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So Joan, let me start again and then hand it over to Inder for his view as well. And let me start with some color on the pipeline. So I made some references in the call that the pipeline -- the overall pipeline was essentially flat and -- but our win rates had increased. So let me just explore that a little more. Obviously, the TCV signings in the quarter were up 26%, which we think are very strong. If we look out for the entire year, well, if we look out now for the entire pipeline, the entire overall pipeline is down about 1% from where it was last year. And if we look at the pipeline of deals even in the year, it's down about 3%. So I said it was essentially flat, you could pick your 1% or 3%, but that's really looking at the overall pipeline. If you look underneath that, there are a couple of ways to view it. With respect to the focus industries, the focus industry pipeline is up about 24%. And we think that's important because we think our win rates -- and our win rates are higher in our focus industries than in the nonfocus. Secondly, when we really dig into what makes up the pipeline, even though, let's say, the overall pipeline is between 1% and 3%, depending on how you look at it a year ago, the makeup has changed pretty dramatically. So this is a year of less renewals. So if you -- renewals happen for most company -- most clients every 3 to 4 to 5 years. This happens to be a low renewal year. Now we are doing very well with clients in getting them to renew. Last year, our renewal rate was 95% in terms of getting existing clients to renew. So there's a very, very higher win rate by value associated with renewals, and there's simply less of it. So for us to maintain a pipeline and maintain sales or TCV of about equal to last year, that means the other things in the pipeline has to step up this year. That's new logo, new scope and expansion. We actually expect significant increases in new logo, new scope and expansion over what we had last year. And that will kind of make up for the fact that this just isn't as big a renewal year as we had. So we think, overall, if our TCV over the entire year is kind of consistent to what it was last year, that's actually a very big improvement for us because that means that the new business TCV is going up markedly because we just have a low year in expansion. Now with respect to your question about, well, what about the business that is outside of our focus areas? Obviously -- the focus areas for us were 43% of revenue, and they grew 5.9%. So if you do the math, you could see the nonfocus areas continue to underperform against the focus areas. That's why they're focus areas. We cannot say they could grow 5.9% every quarter, I doubt they will. We had a very good quarter in focus areas this quarter. But the general idea is we are putting more and more investment there, and we are -- that is the focus of a lot of the new solutions you heard in my discussion. That said, some of the things we're doing around automation about consulting, about analytics, relatively early days on those, but that will help all of our industries not just the focus industries. So we do expect the nonfocus industries to stabilize over time, but we're putting relatively more money into investments in the focus industries.

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Joan K. Tong, Sidoti & Company, LLC - Research Analyst [8]

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Okay. If I may just sneak in one more, and then I'll jump back in the queue, just really a follow-up on my first question regarding that particular transaction. Was it a consulting project? Or is it like an outsourcing project you just started like to recognize revenue?

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Peter A. Altabef, Unisys Corporation - CEO, President and Director [9]

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Yes, it's an existing client in the cloud and infrastructure space, although there is applications work attached to it.

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Operator [10]

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And we'll take our next question from Frank Atkins with SunTrust.

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Francis Carl Atkins, SunTrust Robinson Humphrey, Inc., Research Division - Associate [11]

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There seem to be a little bit of confusion around the $440 million issuance as we look at kind of what's going on with the stock price in the last few weeks. Can you walk us through kind of the logic? Why now? Why go for liquidity given the rate? And then kind of how that fits into your plan for kind of strategic management of the balance sheet relative to cash flow?

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Inder M. Singh, Unisys Corporation - CFO and SVP [12]

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Sure, Frank. So this is Inder. So as we talked about on prior calls, we've always had a strategy of enhancing our liquidity and being opportunistic about capital raises to address not just sort of near-term needs but really long term needs, right? If you look at the way we ended last quarter, we had a very strong liquidity position, it was frankly sufficient to redeem the bonds that are due in the rest of this year. And so this was more of an opportunistic way for us to set ourselves up for the next few years. If you think about increasing pension contributions over the next 5 to 10 years, it's part of our strategy to ensure that we're able to generate the operating cash flow, to invest that in growth of the business and then also to work towards retiring the pension obligation. So in a rising rate environment, it was not lost on us that it might make sense to do a capital raise now versus some time from now. And as you can tell from the guidance we provided you at the beginning of this year, back in January, we had assumed that at some point that could happen. And we were pleased to see that, that actually took place. We were able to raise the $440 million. It's not that we need that tomorrow for anything. However, it does allow us, as I said, to invest in the business and also to address future pension obligations.

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Francis Carl Atkins, SunTrust Robinson Humphrey, Inc., Research Division - Associate [13]

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Okay, that's helpful. And also, as we think about the convertible, in my view, there's some short interest around that. One, do you think that's accurate? And does it bother you? And do you expect to address that in any fashion going forward?

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Inder M. Singh, Unisys Corporation - CFO and SVP [14]

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Well, as you know, when that convertible was announced early last year, Frank, that convertible was -- came along with a capped call transaction. The results of the capped call transaction was that those, in some cases, that went long to convert also took a short position to do a fair trade and basically risk arbitrage. So I don't see that short interest necessarily as a negative indicator. It is simply those investors hedging their bet, if you will. And as you saw, through the end of last year, that convertible actually performed quite well, and the holders of the convertible saw sort of the bonds trade well above par value. Over the longer term, if you think about it, the dilutive effect of the convert on the equity is essentially factored in. And as we reported non-GAAP results, you saw that we had 73 million shares we reported this quarter versus 50 million this quarter a year ago. And even then, we were able to grow earnings per share. So in essence, that debt is pseudo-equity at this point in time. I hope that helps.

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Francis Carl Atkins, SunTrust Robinson Humphrey, Inc., Research Division - Associate [15]

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Yes, that's very helpful. And then last one for me, can you talk a little bit about the financial services sector? We've seen mixed results in that sector from some of the peers. Where are the areas of strengths and -- or any weaknesses that you're seeing within financial services?

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Peter A. Altabef, Unisys Corporation - CEO, President and Director [16]

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Yes, Frank, thanks, that's a very good question. We had a good quarter in financial services. We grew both services and technology revenue. Going out in the future, I have to tell you, we are enthusiastic about all of the solutions that we are just launching. The reception to the Elevate solution, which is our financial services new solution, has been beyond any of our thoughts going into it. We -- as I mentioned, we launched it in Asia Pacific and EMEA. We have not yet launched it in the Western Hemisphere. And we've already got people from Latin America, in particular, already asking, "Hey, how quickly will it be here?" And we're actually already beginning to work with some Latin American customers on the Elevate solution even before we launch it. So I feel -- I think Elevate is going to be a big deal for us in terms of the future of our financial services outlook. We spent a significant amount of time and energy developing it. And what it really does, and again, it's a comment I made in my remarks, it's an example of taking lateral thinking into financial services. We kind of have a view and look, we've been representing financial services companies for decades and decades, and they all kind of follow -- many of them look at best practices in the industry and try to tick and tie and get the best practices across the board, and that's great. But if everybody is trying to get to the same best practices, it means over time, everybody kind of hits the middle of the road. And our view is to look across to other industries that might be a little more innovative and then to apply those solutions to financial services. And when you do, you really apply heavy iron because financial services spends more money on IT than anybody else. So in this particular case, our solution is an omnichannel solution. So it borrows from the omnichannel idea in retail, which is you might start a transaction in retail on an iPad or iPhone or a browser, but you might wind up solving that or completing that transaction either in the store or on a different iPad or a different browser app. And the data -- and your, if you will, your outbox stays. That's what we're doing here with Elevate. So you might start a mortgage application in one channel and complete it in another channel, which is very unusual in today's financial services where these channels tend to be very rigorous and really quite siloed. So we're excited about it. We think it's a very innovative approach. In terms of financial services, in general, banks did pretty well the first quarter. And as you're seeing the earnings coming on, the earnings, in general, are pretty strong. And we think that ought to encourage IT spending by the banks. We'll see if that thesis holds true, but that's what we would see.

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Operator [17]

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And our next question comes from James Friedman with Susquehanna Financial Group.

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Yuwai Lee, Susquehanna Financial Group, LLLP, Research Division - Associate [18]

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It's Jonathan on for Jamie. I have a question on U.S. federal. You guys had mentioned a strong technology quarter in that sector. Can you go into a little more detail on that?

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Peter A. Altabef, Unisys Corporation - CEO, President and Director [19]

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Yes. I mean, in general, we did actually well across the board in U.S. federal. Revenues up 6%. I wouldn't say it was a strong technology quarter, but I wouldn't say it was anything crazy out of the ordinary. It was good numbers from a relatively weak quarter the year before. For us, I think the bigger tailwinds, if you will, in federal, would be our strength in Homeland Security, and we do continue to see that as an area of focus for the government. And we are fortunate, we think we have the right solutions at the right time there. So we continue to be pretty bullish about our federal business in practice. I wouldn't make too much out of the technology year-to-year numbers.

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Yuwai Lee, Susquehanna Financial Group, LLLP, Research Division - Associate [20]

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Got it. That's helpful.

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James Eric Friedman, Susquehanna Financial Group, LLLP, Research Division - Analyst [21]

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Yes, if I could just follow up here, it's Jamie. I apologize for my voice, it's allergy season. But I just want to ask a housekeeping question maybe for Inder. So this was the first quarter that we saw kind of a benign raise in neutral currency, and that was a little different than we had calculated, but that's more art than science. I was just wondering what was -- if you could just look to a couple of the moving parts, Inder, is that Australia or Japan or Venezuela? How did that work?

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Inder M. Singh, Unisys Corporation - CFO and SVP [22]

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Yes, I mean, the 4 currencies, Jamie, that we are the most exposed to are the U.K. pound, the Brazilian real, the Aussie dollar and the euro. Of those 4 currencies, the ones that -- the 2, frankly, that played the most role for us were continued weakness in the U.K. pound, consistent with what you've been seeing post-Brexit. And then, interestingly, a strengthening of the Brazilian real. So those 2 things are what caused the currency impact to be relatively benign. It doesn't mean that's a trend, it's just what we saw in the quarter.

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James Eric Friedman, Susquehanna Financial Group, LLLP, Research Division - Analyst [23]

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Interesting, okay. And then if I could just follow up with one more. Peter, a while back you had announced that border enforcement -- BEMS contract. I know it was more like a scope opportunity. But in general, could you update us as to how you see the company positioned and where you are in that journey in the border enforcement opportunity?

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Peter A. Altabef, Unisys Corporation - CEO, President and Director [24]

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Yes, Jamie, so there's 2 elements to that for us. There's the U.S. side and the global side. On the global side, we are bullish about border opportunities. As I think I had mentioned in the call before, we do have some work underway with the EU on that, we have some work underway in Asia Pacific and we are in conversations in the U.K. We expect to have a new solution that is specifically targeted to outside the U.S. market on border security called LineSight, which we intend to launch by the end of this year. In terms of the U.S. border security market, again, that is pretty much Homeland Security. And as I mentioned earlier, we are very active in moving on work there, and we think we are doing a good job, frankly. Does that answer your specific question, Jamie? I want to make sure I'm responsive.

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James Eric Friedman, Susquehanna Financial Group, LLLP, Research Division - Analyst [25]

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We had followed the BEMS vehicle about a couple of years ago. It was always IDIQ, indefinite delivery/indefinite quality, I mean, in fancy language. But I was just trying to figure out where -- but you may have encompassed that in your answer.

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Peter A. Altabef, Unisys Corporation - CEO, President and Director [26]

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Well, there -- I -- given -- let's just put it this way, given all of the things going on in border security, I would not expect a huge new contract this year. I would expect a lot of project work because I think that the agency is just involved in a lot of different projects. So I think there isn't going to be one big bang, I don't think there's going to be one big bang renewal. I think you're going to see a lot of projects. And that actually might take away from a TCV number, but from an ACV number and from an ongoing revenue generation, we think that's actually a better answer.

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Operator [27]

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And we'll take our last question from Joseph Vafi with Loop Capital.

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Joseph Anthony Vafi, Loop Capital Markets LLC, Research Division - Analyst [28]

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Sorry if there's a little background noise. Just I had kind of a high-level question around business moving forward and business that you're going after, the focus areas and the nonfocus areas and just wondering how you strategically look at, say, potentially a large infrastructure maintenance piece of business that is going out for RFP now. It could be pretty big, you have a good chance of winning it, but it might have some upfront capital requirement and it may not be in the direction that the company is going. How do you look at that opportunity now given what you have ahead of you in terms of repositioning the business and looking out to pension obligations and the like?

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Peter A. Altabef, Unisys Corporation - CEO, President and Director [29]

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Yes, Joe, that's a great question. I guess the first way to answer that is never say never, right, and every deal is going to be looked at on its merits. I would say that as Inder referenced in his comments, we are really focused on a more capital-light approach. We are really focused on moving a lot of work into the public cloud environments, using CMP, which is our new hybrid cloud platform. We think, frankly, in many cases, that's the right answer for the client. So we think the right answer for the client lined up with a capital asset-light approach. I will tell you, we also have very strong relationships with partners, and some of those partners are in more hardware-intensive industries than we are. And so we're not so much shying away from a contract like that as making sure, if we were going to investigate a contract like that, we'd really be doing it hand-in-hand with some partners whose job it really is to handle some of the more capital-intensive businesses.

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Inder M. Singh, Unisys Corporation - CFO and SVP [30]

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Yes, I would just add to that. I would say that I agree with everything that Peter said about asset-light model, it remains our focus. We just reaffirmed guidance for the full year for adjusted free cash flow. That assumes CapEx to be essentially flat year-over-year, Joe. And I would also say that I would not draw any inferences between the $440 million capital raise and the need for any more capital this year, if that's kind of what you were thinking. We certainly will be opportunistic in looking at deals, as Peter said, and never say never to a large attractive deal. But it is not our intent to drive up CapEx in any way. Moreover, as Peter pointed out, we've moved and started to move more and more clients off of our own data center infrastructure onto the Microsoft Azure cloud exactly to drive down CapEx. So the capital raise is not because we're facing any sort of opportunities that we can see here in the near future that would require additional capital. I just want to make sure I clarify that.

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Joseph Anthony Vafi, Loop Capital Markets LLC, Research Division - Analyst [31]

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Got it. No, that's clear. I was just wondering how you're philosophically looking at business opportunities. And would you say that you're managing the business -- and it's great to see margins go higher. But if you looked at the business overall, are you managing -- would you say the #1 way you're managing the business is for margin or for cash flow?

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Peter A. Altabef, Unisys Corporation - CEO, President and Director [32]

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Well, one of the -- if we look at this as kind of a multiyear effort, Joe, I would say in the first couple of years -- I've been at the company now a little over 2 years, we just didn't have a cost structure that we felt we were comfortable with. And so a lot of the cost takeout has been to get a more robust cost structure in place. I think where we are now and certainly where we expect to be by the end of the year is really to have a more robust cost structure. So I think we have more insight into our true cost now than we had before. I think we have more insight into the road map of the technologies we're applying now, this year, around automation and around AI, around analytics and what that does to our costs. So I think you're seeing a shift for us where, clearly, margins are still important and cash flow is still important. But while I would say we were less focused on revenue growth and on new sales while we had to get the foundation of our offerings aligned, that foundation is coming onboard. You're seeing a significant number of new solutions for us. We launched 3 of them this quarter. That's a very big number for us. And we didn't do that not to get revenue out of them. So I would tell you we are very much open for business and looking to grow revenue over time.

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Joseph Anthony Vafi, Loop Capital Markets LLC, Research Division - Analyst [33]

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Great. And then just one final one. I think probably you had the high-yield offering being kind of probably seriously contemplated when you announced your Q4 and provided guidance for '17. And obviously, you didn't change your cash flow guidance even though you're going to have higher interest costs this year. I was wondering if you could provide some commentary on the cushion that you might have been able to gain in that guidance to not have to change guidance now and if you could relate that to your cost-reduction effort because, I guess, in that initial guidance, we didn't really see a lot of the benefit of the cost takeout in this year's cash flow guidance. So if you -- I don't know if that's clear enough, if you can connect the dots between the conservative guidance, the increased interest costs this year but then benefits from the cost takeout that's been ongoing. And that's all I've got.

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Inder M. Singh, Unisys Corporation - CFO and SVP [34]

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So just on the cash flow guidance first off, right? I mean, when we provided the cash flow guidance at the beginning of the year and we look at the midpoint of what we guided this year versus the midpoint of what we had guided a year ago, that was directionally higher. We realized and it's not lost on us that we had a very strong cash flow quarter last -- cash flow year last year. We continue to have a laser focus on cash flow, as Peter noted. I mean, margins and revenue are important, cash flow is also very important. Assumed in our guidance was the possibility that we could do a debt raise at some point in time, not clear to us exactly when that would have happened. But the reason we didn't have to change the guidance, frankly, was because we already assumed that. The capital -- the structure of the cash flow guidance that we gave, therefore, hasn't changed. It isn't as if we are benefiting on one side and using the benefit on the cash flow to do something else in cost restructuring. We're on track by virtually every metric when we look at the guidance that we provided, whether it's cash flow, cash from operations, working capital. You can see the results we had in the first quarter. And so reaffirming guidance basically to us is a comfort from the fact that we're executing the way we thought we would. The timing of the financing, of course, is never certain but we felt comfortable at the beginning of the year that if the opportunity presented itself, when we saw the Fed begin to raise rates, it wasn't lost on us that it might be a good idea to try to raise capital earlier in that interest rate cycle rather than later in that interest cycle. That's the only thing that drove the timing.

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Peter A. Altabef, Unisys Corporation - CEO, President and Director [35]

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Joe, thank you, and appreciate it. I think this is the first call where you've asked questions, and we greatly appreciate that.

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Joseph Anthony Vafi, Loop Capital Markets LLC, Research Division - Analyst [36]

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Thank you very much for the opportunity, Peter.

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Peter A. Altabef, Unisys Corporation - CEO, President and Director [37]

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Ashley, any other questions in the queue? If not, we've actually only got 3 minutes, so I guess we -- unless you've got another question in the queue, Ashley, I will close it down.

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Operator [38]

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We have no further questions at this time.

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Peter A. Altabef, Unisys Corporation - CEO, President and Director [39]

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All right. Well, listen, thank you. I'd like to thank everyone for joining the call. As Inder and I both discussed, we're pleased with the progress the business made during the first quarter. And that includes, obviously, the focus verticals and also the new solutions that we announced over the quarter. We appreciate your time. We are available after this call and for one-on-ones, and we have continued to put more and more data onto our website. So if there are any other follow-ups besides those that have already been scheduled, please contact Courtney, and we'd be happy to have those discussions with you. With that, we look forward to this call next time this quarter.

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Operator [40]

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And once again, that does conclude today's presentation. We thank you all for your participation, and you may now disconnect.