Q4 2023 Unisys Corp Earnings Call
Participants
Michaela Pewarksi; Vice President, Investor Relations; Unisys Corp
Peter Altabef; President, Chief Executive Officer, Director; Unisys Corp
Debra McCann; Chief Financial Officer, Executive Vice President; Unisys Corp
Mike Thomson; President and Chief Operating Officer; Unisys Corp
Rod Bourgeois; Analyst; DeepDive Equity Research
Anja Soderstrom; Analyst; Sidoti & Company
Arun Seshadri; Analyst; BNP Paribas Securities Corp
Presentation
Operator
Good day and welcome to the Unisys Fourth Quarter 2023 earnings conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Michaela Pewarski, Vice President, Investor Relations. Please go ahead.
Michaela Pewarksi
Thank you, operator. Good morning, everyone. Thank you for joining us this morning. Unisys released its fourth quarter and full year financial results. I'm joined this morning to discuss those results by Peter Altabef, our Chair and CEO; Deb McCann, our CFO; and Mike Thomson, our President and COO, who will participate in the Q&A session.
As a reminder, certain statements in today's conference call contain estimates and other forward-looking statements within the meaning of the securities laws. We caution listeners that the current expectations, assumptions and beliefs forming the basis of our forward-looking statements include many factors that are beyond our ability to control or estimate precisely. This could cause results to differ materially from our expectations. These items can also be found in the forward-looking statements section of today's earnings release furnished on Form eight K and in our most recent Forms 10 K and 10 Q as filed with the SEC we do not by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events. We will also be referring to certain non-GAAP financial measures such as non-GAAP operating profit or adjusted EBITDA that excludes certain items such as post retirement expense, cost reduction activities in other expenses. The company believes are not indicative of its ongoing operations as they may be unusual or non-recurring. We believe these measures provide a more complete understanding of our financial performance. However, they are not intended to be a substitute for GAAP and non-GAAP measures have been reconciled to the related GAAP measures, and we have provided reconciliations within the presentation. Slides accompanying today's presentation are available on our investor website So with that, I'd like to turn the call over to Peter.
Peter Altabef
Thank you, Makela. Good morning and thank you all for joining us to discuss the Company's fourth quarter and full year results. Our fourth quarter performance capped a successful year for the Company. Despite ongoing macro economic uncertainty, we delivered on our targets and progressed toward our long-term goals in 2023, we grew full year revenue by 1.8% as reported and 1.6% in constant currency. Our non-GAAP operating margin was 7% for the year and adjusted EBITDA margin was 14.2%. All of these metrics were above our original guided ranges and above the upwardly revised ranges we provided last quarter. Excluding license and support revenue grew 4.9%, both as reported and in constant currency in 2023. During the year, we strengthened our foundation for growth in multiple ways. First, we demonstrated strong client loyalty. Renewing 96% of the contract was more than 1 million and TCV that came up for renewal in 2023. We also improved our new business signings and pipeline in 2023. New business TCV grew 18% from the prior year, and we grew our new business pipeline by 19% during the year. We also built awareness for our solution portfolio with clients, partners, industry analysts and advisers. For instance, we improved our ranking in nearly half of the major 2023 analysts and adviser reports that had included Unisys in the prior year. We also forged several new partnerships, including two arrangements with consulting partners that are expected to drive referrals to Unisys as their preferred solution integrator. At the same time, we strengthened and expanded key relationships with hyperscalers, OEMs and other alliances.
Finally, we made investments in innovation to expand our next-generation solutions and advance industry specific solutions such as Unisys logistics optimization. These accomplishments supports future growth and advance us toward our long-term goals.
Before Dave reviews our fourth quarter and full year financial results, I will provide an update on some of our leading indicators and key strategic initiatives beginning with client signs. Fourth quarter TCV increased more than 300% sequentially and more than 50% year on year, resulting in a full year TCV increase of 3%. Excluding LNS, fourth quarter TCV was up more than 300% sequentially and 135% year for year, bringing full year XL. and S. TCV growth to 27%.
Fourth quarter new business TCV, which consists of expansion, new scope and new logo, increased approximately 50% sequentially and 80% year over year. New business TCV during both the quarter and the year was primarily driven by growth with existing clients among our notable client wins for the fourth quarter was a five year renewal and new scope contract with a leading biotechnology company encompassing both DWS. and CANI. solutions. This contract includes new scope elements, including communication and collaboration, technology support, software, asset management and mobile expense management.
Turning to our pipeline, our total company and ex L&S qualified pipelines are relatively flat year over year, a strong result given healthy fourth quarter signings and the headwinds from fewer expected scheduled renewal signings in 2024, as shown as new business pipeline grew 19% year over year.
Within our new business pipeline, we're seeing encouraging signs with prospective clients. Our new logo pipeline is up 32% year over year, several key 2023 go-to-market initiatives have contributed to the quality and strength of our pipeline, especially our new logo pipeline. In our direct sales teams, we introduced new pricing tools, training and standardization that has brought increased rigor and speed to our proposal pricing and review processes. For 2024, we have further refined our commission structures to better align incentives with key objectives such as cross selling and growing certain next-generation solutions. Our marketing efforts are another key contributor to new business pipeline growth. Our digital marketing campaigns have improved visibility to both our portfolio and our thought leadership. This is most evident in the rankings and sentiment toward Unisys among analysts and advisors that influence client purchasing decisions. As I mentioned earlier, our 2023 ranking improved in nearly half of the major analysts' reports in which we appeared in the prior year. And we received new leader rankings from highly regarded firms such as Amazon, Everest and I and St. We were also included as a leader or major player in new IDC reports in digital workplace and application monetization. The results of our annual analyst and Advisor Perception survey which we commissioned through an independent research firm, further validate our gains with industry influencers. For example, this year more than half of respondents Unisys digital workplace market vision as better than our competitors of 28 points and almost three-quarters of respondents recently recommended Unisys to a client, an increase of 14 points in influencer advocacy.
I'll now discuss X L & M's pipeline and client activity in each of our segments. Cws pipeline is up 15% year over year, including more than 100% growth in our modern workplace pipeline. We're seeing growing interest in intelligent solutions, such as our smart PC refresh offer. We also have several large new opportunities in traditional workplace services. We believe our commitment to delivery excellence in mission critical services is differentiating Unisys within the DWS market. Our CANI. pipeline is also progressing up 3% year over year, despite more than 80% growth in 2023 sites. Demand tied to public sector digitization is leading to new opportunities. For example, we have several prospects seeking to modernize licensing and permitting as well as identity access and management platforms. We also have several opportunities to help clients modernize healthcare, higher education and Justice related record management systems. India is an emerging bright spot within CANI. where pipeline grew nearly 16% year over year. We deployed client technology officers on key accounts in the region, replicating a model we rolled out in DWS. in that region incorporating client technology officers brings thought leadership to the forefront of our conversations with these clients in the specialized services and next-generation compute portion of ECS, we expanded our product portfolio in 2023 with enhancements to our existing cargo portal and the launch of Unisys logistics optimization. We also advanced development of more early-stage industry offerings for banking and financial services clients earlier this year, we integrated unit system logistics optimization with our first pilot clients' cargo management system and completed a successful pilot using live data within a test environment. Currently, we are moving into production with our clients live environment. Given the early signs of success and strong market demand, we are rapidly accelerating our commercialization efforts and formalizing our partner pricing and channel strategy across the Company. Clients are continuing to adopt, explore and experiment with artificial intelligence, including generative AI. Our effort here centers on using AI to advance business outcomes such as accelerating revenue and product development, reducing R&D and SG&A expenses and improving customer or employee satisfaction. We're also supporting our clients' efforts to develop their own AI strategies and upskill their talent for example, in DWS, we are consulting with clients on their training measurement and business case creation for generative AI tools. We view AI as a powerful tool to help our clients and ourselves achieve breakthroughs faster, better and more efficiently than before. We are focused on expanding and infusing AI into new and existing solutions rather than selling stand-alone AI solutions at a high level. There are three key elements to our approach to data and AI. First is what we call insights and relationships. We have many high-quality clients, many of which have decades-long relationships with Unisys intimate understanding of our clients' most important business aspirations and challenges, coupled with an eye to emerging industry trends are relevant to the clients our critical to identifying the highest value use cases for AI and helping our clients navigate AI investment opportunities. This is complemented by our deep industry domain expertise.
Second is capability creation where we accelerate solutions that yield the greatest impact for our clients. This approach also includes techniques to make data actionable to enable faster realization of benefits of AI and data analytics. We continue to evolve and utilize the best tools, engineering talent, advanced models and architectures as well as those of our alliance partners.
Final element is delivery and realization here. Our clients embrace the AI powered solutions. We deliver to achieve their strategic objectives and emissions solutions. We are seeing client interest in our delivering personalized content to improve customer interactions, leveraging data and analytics and predictive modeling to increase factory or cargo productivity or synthesizing law and regulations to increase compliance internally, we're applying the same approach. We're focused on using generative AI tools to speed delivery of solutions and to improve productivity within our delivery and corporate functions. For example, our legal team deployed a new AI. tool in the fourth quarter for initial document review, which has already reduced the document and review resources required for certain matters regardless of the application, responsible AI, ethics and compliance are strong, guiding principles underlying our approach.
Let's talk for a minute about Unisys logistics optimization in general, we believe we're entering into a new period for companies such as Unisys that are nimble, have an engineering core nCUBE combined capabilities such as AI and quantum in innovative ways will bring more relevant and compelling solutions to clients. Accessible data is critical to successful application of generative AI and many of our clients are challenged by the complexity of disparate datasets siloed within their infrastructure estates. We believe we can bring clients economic value by helping them modernize their applications, minimize their technical debt and CapEx and unlock the value inherent in their data. Unisys logistics optimization is an example of that we can leverage a unique combination of advanced quantum computing expertise, AI acumen, developed through our working structuring and building data sets and decades of experience optimizing workflows within industries. We believe Unisys logistics optimization can serve as a blueprint for delivering tangible business value for our clients and for generating new revenue streams for Unisys.
I would like to conclude with a brief update on how we are attracting, retaining and developing our associates in 2023 initiatives included global AI. train and increased internal fulfillment, which setup sourcing and help reduce our trailing 12 month voluntary attrition to 12.4% at year end, down from 18% last year in 2024. We are strengthening our winning culture and sense of community. A top priority this year is the launch of a new career pathing program to empower our associates to take control of their career development. It will also enhance our mobility platform by matching associates with roles that advance them towards their career goals. We're also modifying and enhancing our recognition and rewards programs to encourage associates to acknowledge each other's successes and career milestones.
Lastly, we are launching a year-long events program to provide space for open discussions about our workforce experiences and challenges. With that, I'll turn the call over to Deb.
Debra McCann
Thank you, Peter, and good morning, everyone. My discussion today will refer to slides in the supplemental presentation posted on our website I will refer to revenue as reported as well as in constant currency, but was segment revenue growth only in constant currency. I will also provide information excluding license and support or X elements to allow investors to assess progress we are making outside the portion of ECS revenue and profit recognition is tied to license renewal timing, which can be uneven as Peter highlighted, we exceeded our upwardly revised 2023 revenue and profitability guidance and laid a strong foundation to support our future growth. Our performance this year progressed us towards our longer-term goals and demonstrates the resilience of our recurring revenue in an uncertain macroeconomic environment. We also furthered our cost initiatives, which will remain a priority in 2024 and will lay the groundwork for continued profitability and cash flow improvements.
Looking at our results in more detail, you can see on slide 5 that Q4 revenue was 558 million up 0.1% year over year or a negative 2.1% decline in constant currency. The decline was expected and driven by license renewal timing in our ECS segment. For the full year, revenue was 2.02 billion, up 1.8% year over year as reported and up 1.6% in constant currency. Excluding license and support. Q4 revenue was $413 million, up 6.8% year over year as reported, or 4.3% in constant currency for the full year XL and US revenue was 1.59 billion, up 4.9% year over year as reported and in constant currency. These SLM Solutions accounted for 79% of total company revenue and had a next-gen solutions mix of 38% in 2023.
Now let's look at our segment revenue, which you can find on Slide 6 is a reminder that the segment revenue growth rates are about to discuss are in constant currency. In the fourth quarter, digital workplace revenue grew 6.3% year over year to 139 million, driven by new business with existing clients. For the full year, DWS revenue was up 7% to 546 million growth resulted from new business signed during 2022 and strong in project revenue, particularly in the United States and Canada and Europe. Key solutions in 2023, including modern device management as well as traditional workplace services. Fourth quarter C9 revenue declined 0.5% to 139 million due to a prior year benefit from the sale of surplus IP addresses. Excluding this impact, segment growth would have been more than 2% with strong sales in our digital platform and application or DT. and A. solutions. Full year C&I revenue was $531 million, up 2.2% year over year. We had a good year of growth with both commercial and public sector clients offsetting some softness we have seen in the banking and financial services sectors where budgets have been more challenged. Many of our commercial and public sector clients embrace higher value DT. and A. solutions in hybrid infrastructure, cybersecurity and application modernization, which leverages our engineering core more of our clients view the future as hybrid taking multi-cloud approaches to infrastructure incorporating private cloud co-locations and public clouds for tailored flexibility and security, our balance of expertise in mission critical services, hyperscaler partnerships and next-generation capabilities in data, artificial intelligence and application modernization align us well with these hybrid strategies, we are optimistic about the opportunities to further grow the C&I segment in 2020 form.
In our Enterprise Computing Solutions segment, fourth quarter revenue was 203 million, a decline of 12.2% due to lower license and support revenue. This was partially offset by modest growth in specialized services and next-gen compute for the full year, ECS revenue was 648 million, down 3.9% from 2022, again, with strength in specialized services and Nextra and compute, partially offsetting a decline in L&S revenue caused by the renewal schedule. Timing, license and support revenue was 144 million in the fourth quarter and 429 million for the full year, exceeding our upwardly revised guidance of 420 million due to closings and smaller renewals earlier than anticipated.
Notable fourth quarter renewals included signings of commercial and public sector clients in the United States and Canada and in Latin America. It is important to remember that ClearPath Forward license revenue is highly dependent on the specific client contracts up for renewal and the term and consumption levels of those renewals.
Backlog was 3 billion at the year end versus 2.4 billion at the end of third quarter and 2.9 billion last year. Sequential and year-over-year backlog growth was due to both the timing of renewals as well as strength in new business signings in our digital workplace segment.
Turning to slide 7, we can see the fourth quarter gross profit was 181 million at 32.5% margin, down 160 basis points from the prior year due to the timing of higher margin elements solution renewals, excluding L&S, our fourth quarter gross margin of 16.5%, up from 11.8% in the prior year. Most of the expansion was due to the realization of savings from the prior year quarter's cost reduction charges, which we include in XL and US gross margin. Full year gross profit was 551 million, an increase of more than $22 million. Gross margin expanded 70 basis points to 27.4%, improved delivery and pricing in our accelerated solutions and the realization of savings from prior year cost reduction charges allowed us to generate 22 million of incremental gross profit despite a $50 million headwind from L&S solutions. Full year ex L&S, gross profit grew by 42% in 2023 to 240 million. This reflects a 15.1% gross margin compared to 11.2% last year. This improvement was largely driven by improvements in the C&I segment and SS&C solutions within ECS, including the realization of savings from prior year cost reduction charges, partially offset by a revenue reversal associated with the previously exited contract.
Within all other, I will now touch briefly on segment gross profit, which you will find on Slide 8. Q4 DWS gross margin was 15.3%, up slightly from 15.1%, driven by new business with existing clients, partially offset by investments we've made to modernize field service dispatch systems that were implemented late in the year and will help drive future delivery efficiency. Full year DWS gross margin was flat year over year at 14%. As we scale, we expect rising utilization, improved pricing, power growth in modern workplace and our deliberate investments to drive steady gross margin improvement in 2024 and beyond.
Fourth quarter CNI gross margin was 16.3%, down from 19% in Q4 2022, primarily due to a benefit in the prior year from the sale of surplus IP addresses. Full year C&I gross margin was 15.4%, up from 9.1% or 630 basis points in the prior year. More than 200 basis points of this improvement resulted from our cost initiatives such as labor market and contingent labor optimization and increased use of automation. The remaining 400 basis points was due to delivery improvement of certain accounts from 2020 to our focus on these key accounts help de-risk the segment from future losses and strengthening key client relationships for future growth in 2020 for our CA 19 is building out more standardized solution architectures and increasing the use of generative AI to accelerate solution development and speed revenue generation.
Fourth quarter ECS gross margin was 67.4% compared to 73.3% in the prior year, again due primarily to L&S renewal timing. Full year ECS gross margin was 61.2% compared to 64.5% in the prior year, driven by lower L&S revenue, partially offset by a 370 basis point improvement in SS&C margins driven by improved pricing as well as expansion signings with existing clients in sectors like life sciences and financial services.
Turning to Slide 9. Fourth-quarter non-GAAP operating margin was 11.5% compared to 20.2% in the prior year with adjusted EBITDA of 100 million, a margin of 18% compared to 26.7% in Q4 2022. This was driven by lower L&S profit due to license renewal timing and higher compensation costs. Full year non-GAAP operating margin was 7% versus 8% in 2022, and adjusted EBITDA was 286 million, a margin of 14.2% compared to 16.5% in 2022. The full year decline was largely due to lower gross profit contribution from our license and support solutions. Fourth quarter GAAP net loss of $165 million or a diluted loss of $2.42 per share compared to diluted earnings of $0.12 per share in Q4 2022. On a non-GAAP basis, fourth quarter net income was 35 million. Our non-GAAP diluted earnings of $0.51 per share compared to $1.22 per share in fourth quarter 2022, our full year net loss was $431 million, or diluted loss of $6.31 per share compared to $1.57 per share loss in 2022. On a non-GAAP basis, full year net income was 42 million, or non-GAAP diluted earnings per share of $0.6 compared to $1.10 per share in 2022. Fourth quarter and full year net losses were largely driven by actions we took to reduce our US pension liabilities by approximately 500 million in total using pension assets, not corporate cash. These actions resulted in two noncash pension settlement losses in the first and fourth quarters, which totaled $348 million and reflect accelerated recognition of accrued pension expense associated with the pensioners that were transferred as part of the two transactions. These annuity purchases reduce the volatility in our GAAP pension deficit and our projected future cash contributions as well as the future cost of a full pension risk transfer of our US qualified defined benefit pension plans as they lower the annuity purchase premiums that is based on total liabilities.
Capital expenditures totaled approximately 19 million in the fourth quarter and 79 million for the full year in 2024, we expect capital expenditures of approximately 90 million to 100 million supporting both L&S and Exxon has growth while keeping in line with our CapEx-light strategy.
Turning now to slide 10, free cash flow. We generated 4 million of free cash flow in the fourth quarter, bringing our full year free cash flow to negative 5 million compared to negative 73 million last year. This put us ahead of the expectations we provided last quarter of negative 25 to negative 30 million, which is largely the result of improvements in working capital and higher than expected profitability in 2024, we expect to be free cash flow positive by approximately 10 million. This reflects expectations for cash taxes to decline to approximately 50 million compared to approximately 63 million in 2023 for net interest payments that are in line with 2023 levels of approximately 20 million. Pension contributions of approximately 20 million as well as environmental, legal and restructuring and other payments of 75 million to 80 million, relatively in line with 2023.
Turning now to Slide 12. Our cash and cash equivalents balance was $388 million at year end, relatively consistent with 392 million at the end of 2022, our net leverage ratio, including all defined benefit pension plans, was 2.9 times, up from 2.1 times at the end of 2022. Leverage was higher primarily due to the increase in the GAAP pension deficit, which I will discuss shortly. Our liquidity is strong and cash balances are well ahead of where we anticipated they would be when we started the year with no major debt maturities in 2024 and no borrowings against our revolver.
I will now provide an update on our global pension plans. Our global GAAP pension deficit, which can be seen on slide 13, was approximately 700 million compared to approximately 540 million at the end of 2020 to about $70 million of this $160 million increase was related to the purchase of insurance contracts by our overfunded UK plan as a first step in eliminating the plans from our corporate balance sheet, effectively eliminating the surplus associated with these overfunded plans. The remaining roughly $90 million increase was due to the net impact of lower discount rates partially offset by returns in plan assets. At the end of the year, we report a detailed estimated 10-year expected cash contribution forecast, which you can see on slide 14, expected contributions to our global pension plans for the five year period beginning in 2020 for our 484 million, 48 million lower than our projections at the beginning of 2023. We will continue to evaluate opportunities for additional reduction in our global defined benefit pension obligations, depending on overall market conditions, which could result in material non-cash settlement charges like those we have incurred over the past few years.
I will now discuss our guidance ranges and provide additional 2024 color, which can be seen on Slide 15. Looking ahead, the revenue growth upside we captured in 2023 in both our XLNS. and L. and S. solutions creates a more difficult comparison for 2024. Specifically, we had nearly 40 million of incremental revenue and profit in 2023 from signing a multiyear L&S renewal that had been expected to be a single year renewals it is important to note that even with this contract signing in 2023, we see positive trends in the continued and in some cases, expanding use of our platforms and so we now expect 370 million average annual L&S revenue for the three years beginning in 2024, a $10 million annual increase from our previous projections of 360 million for total company revenue, we expected guidance range for constant currency revenue growth of negative 1.5% to positive 1.5%. Revenue growth in constant currency equates to revenue growth of negative 1% to 2% as reported. This revenue guidance also assumes approximately 375 million of license and support revenue and growth in our SLMS solutions of 1.5% to 5.0% in constant currency 2024. Non-gaap operating profit margin is expected to be 5.5% to 7.5%. The midpoint is slightly below our 2023 margin due to lower L&S gross profit due to renewal timing, partially offset by improvement we expect in our XLS solutions, we expect to expand our gross margin by 150 to 200 basis points in 2024, delivering on our 2024 guidance will position us for accelerating profitability and free cash flow in 2025, which is when we also expect to see a larger impact from SG&A cost savings and additional margin expansion from continuing delivery actions we are taking to improve our gross margins.
Looking at the first quarter, specifically, SLMS revenue is expected to be approximately 385 million to 390 million, which translate to low single digits growth. You know, renewal timing, we expect L&S revenue of approximately 70 to $75 million compared to $137 million in the prior year period. The first quarter is expected to be our lowest alliance revenue quarter of the year, and we expect 45% of L&S revenue in the first half of the year with the remaining 55% in the second half. Given the cadence of Allyes renewal timing, this translates to our expectation for our first quarter total company revenue decline of approximately 10%. We also expect our first quarter non-GAAP operating margin in the low single digits. I am pleased with the performance we have delivered this year and excited for what's to come in 2024 as we progress further towards achieving our operational and financial goals.
I will now turn it back to Peter.
Peter Altabef
So thank you very much. And with that, we'll turn the call over to questions.
Question and Answer Session
Operator
(Operator Instructions) Rod Bourgeois, DeepDive Equity Research.
Rod Bourgeois
Okay, great. Thank you. So first, I wanted to ask about the bookings and pipeline activity, and it's a two-part question. So your quarter to quarter and year to year bookings surges were Tom, very strikingly strong there and it also enabled some backlog expansion. So my first question on that is how did you pull that off and essentially in your turnaround progress with the main effort that's enabled that level of bookings activity? And then I'll ask a follow-up on that as well.
Peter Altabef
All right.
So that thanks for the question.
I'll take the first part of that and then let Mike take the second part of you know, we have consistently said it's a bit there is lumpiness, particularly in our renewal time. And so what we had in the fourth quarter was simply a very strong quarter of renewals and also a strong quarter of what we consider new business, which is new logos, expansion and new scope of existing clients. As I said in my discussion earlier, much of our success in 2023 was really a very, very strong new business our year, and we have indications of a much stronger new logo year in 24. So I would say, you know, we are pleased with the fourth quarter performance. It is it is lumpy, but that's kind of the way our businesses. And so but the most important element I would say to answer your question is really the growth and the pipeline quality for ex L&S. So if we if we take L&S out and say, no, that's going to go up and that's going to go down we had strength in L&S in 2023. We increased our guidance for L&S in 2020 for all that is good. And obviously, that's very important for us for cash flow and profit as well. But long term, you know that strength of XLNS. and increasing the profitability, increasing the revenue, increasing the quality of pipeline that will give us more. We hope that will give us more breathing room going forward.
Mike, any thoughts on that?
Mike Thomson
Yes. Maybe Rod, thanks for the question. Yes, look, Peter, I think you covered a good chunk of it. But I would say that is the byproduct of a lot of the hard work that we've been doing all year. You know, the macros have been a little tough and folks have been a little delayed in signing and some of those renewals came in the fourth quarter for EXL in that business. I think the things that I would call out that I would want you to take away is not only where they signing, but they ultimately signed at higher value. So our pricing power was really strong in regards to the offerings that we brought forth, there was new scope associated with those. Some of the expansion in consumption of those accounts were strong as well. So not only did we do 96% I'm saying for the year and had a very strong fourth quarter. We saw cross-selling, we saw expansion. We saw pricing power contained embedded in that so we ended up increasing revenue and increasing margin on those renewals, which, as you know, makes a stronger backlog and booking board the subsequent year or 24 as well. So we're really pleased with the execution. We're pleased with the ability for us to kind of differentiate in the market and see the acceptance of our next-gen solution by that existing base so the byproduct of a lot of hard work, I think.
Rod Bourgeois
Okay, great. And then the follow-up on that is when you have that level of bookings, it detracts some from the pipeline, at least in the near term from your commentary, it sounded like the pipeline with new logos is still strong even after the Q4 bookings on. And so I guess what I want to ask here is in your pipeline with existing clients. Do you expect that pipeline to re-expand in upcoming months? In other words, it seems like you should be heading into a period of pipeline replenishment, and I'm looking for any outlook on that front.
Mike Thomson
But yes, the European fine, I'll I'll take that one and then flip it back to you or Dave, if you want to add some additional commentary.
So with Rod, I guess the short answer is we're happy to with the base of our prospecting portion of the pipeline you're exactly right. Even though we increased our backlog year on year sign, that level of renewals and new business certainly depletes that pipeline. But we've got a great line of sight into the prospecting aspect of that. And we have a new logo, strong pipeline. We talked about some of the increase there as well. So both a new logo and expansion and we fully expect the same, it kind of levels of increases in the existing base for the things that are up for renewal in the current year as well. So again, I think pretty consistent to your question, pretty consistent with the our prospects for growth in 2014.
Peter Altabef
Yes, you're right. I don't have anything to add.
Yes, Deb and I will yield to Mike on that.
I guess the only thing I would add is when we do talk about pipeline, Rod know the fact that we have 18% new business growth in the pipeline. And you're right, a lot of that is new logo. I do expect the the new scope and to increase over time. There's a little bit of reloading of that but I'm really happy with where the pipeline is from a quality standpoint as well. So when we look at where we are in the kind of staging, we think that we're significantly better off than we were last year at this point, if I can slip one more in, I've got to ask the L and S average revenue outlook.
Rod Bourgeois
You've upped that on that, that's really important. Can you just talk about what's enabling that?
We might have seen some of the early signs of that brewing last year, but the but it's nice to see it coming through in your actual outlook now. So can you talk about the enabler of the L&S revenue outlook uptick?
Peter Altabef
Yes, I could ever have to take that.
Ironically, our FX.
Yes, I was going to start and then let you follow up on that. The The when we look at what happened in 2023, there were a couple of things that happened in the L&S. We had a better L&S year in 2023 than we thought we would have. Now. Part of that was due to a contract that we thought would be a one-year renewal and it turned out to be a five year renewal. So that was the clients doing on ours. We were happy to make that five year renewals that about one year. But beyond that, you saw increases in revenue on LNS., as you know, kind of in several of our relationships due really to consumption patterns. And so this was this was kind of an example of what we've been talking about, Roger, right? And we were able to see that in actuality in 2023 that the interesting thing about 2024, if one would assume was because we had a five year renewal instead of a one year renewal in 2023, that our L&S revenue would take a hit in 2024 for that. The reality is we are increasing our L&S expectations for 2024 and increasing the three-year average for 24, 25 and 26. And so that overcomes, first of all, the renewable value we've got to fill that and that that gap, if you will, and it goes beyond that. And that is really largely because of those consumption patterns. So we're pleasantly looking at the numbers for annual L&S. It still will be lumpy from year to year, but we do believe that that's a nice sign to see.
Dave, over to you.
Debra McCann
Right.
And I think, Peter, you covered it. I think where in the past often it would be L&M performed better, but it impacted the and the next years. And so we're happy to see that even though the events that happened in 23, that that had elements overachieving it down isn't having an impact on future years.
So I think Peter said, it'll grow.
Rod Bourgeois
Thank you.
Debra McCann
Welcome.
Operator
Anja Soderstrom, Sidoti.
Anja Soderstrom
Please go ahead and thank you for taking my questions and I have some follow-ups on the commentaries. So I am missing and the new logo has been strong and and what is what has been driving the new logo and where they're coming from? Are they replace? Are you putting someone else or?
Peter Altabef
Yes, so thanks and a very, very good question. As I said in my remarks, the majority of our new business revenue in the year, which is both new logo, new scope and expansion came from existing clients, which happens every year, frankly on, but also the same this year. We do expect new logo revenue to increase in 2024.
Now to your question about where new logo revenue comes from, it really can only come from a couple of sources. So one source is it just brand new work. So think of generative AI. consulting work or those similar projects they might not have existed before. So everyone in our business is kind of scrambling for that. And the second source is from clients that had work that was internal to their operations and they've decided to give it to an external provider like U.S. The third element is where we are competing for existing work. That is with an external provider and we kind of take that work away through the competition process.
So those are kind of the three elements. Mike, any thoughts on that?
Mike Thomson
Yes. I think the two that Peter mentioned are certainly the most prevalent there is the first time, I'll say outsource managed service component. And then there is obviously the market share component of that. And we have been aggressively active in all markets. We've seen a pretty nice uptick in Amea as it pertains to new logos.
The other piece I would add to that is also the cross-sell in our existing base, right? When we talk about new business, we are about 39 ish percent cross-sold. So we do have opportunity to grow the business in the existing base through cross-selling. But I would say the heavier two components are going after additional market share and first time outsourced or managed service contracts, as Peter alluded to.
Anja Soderstrom
Okay.
I think in terms of consumption patterns, what has been the biggest surprise to you.
Mike Thomson
Yes.
So I assume you're talking about consumption pattern in LLS with that question. But I think when we when you look at what's going on in the market, right, now and obviously, all of the efforts around A&I and building our models and need more compute and need more power. We've been seeing probably over the course of the last 18 to 24 months, continued increases in consumption. And that's why the reasons why we ultimately out are our future three year average by 10 million because it is a byproduct of what we've been seeing over the course of the last 18 to 24 months. And I think, frankly, just the natural spin off of the build-out of LL. and other more complex models and storage needs, things along that line from a compute power perspective. So really, pretty consistent. And so what we're seeing in the market overall.
Anja Soderstrom
Okay.
And your history of it.
Okay.
I will not go ahead in terms in terms of the banking and financial services has been a bit challenged. You said during the past year, what are you seeing there now? Is that easing up or?
Peter Altabef
Yes. So Dave, do you want to comment on that from a numbers standpoint and then Mike can provide some color in terms of market?
Debra McCann
Yes.
So we discussed that in our CNI section. I'm just saying that there is a little softness there where budgets have been a little challenged. And so a lot of our growth. And this year, we're drilling more commercial and public sector. So and I don't have the specific numbers in front of me, but that's that's the color around some of that CNI revenue?
I think as far as on the softness, I'm not sure, Mike, if you want to comment on any trends you've seen as different than that.
Mike Thomson
Yes.
Look, I think it's a little more just hesitancy in the macro. I don't view it as being something that is in perpetuity where they're just not spending. I think there we're just seeing more freestanding in commercial and public sectors. And I would say a little bit as the hesitancy in banking and financial services. But I would echo or at least a comment that when we look at the new logo pipeline in 24, there are plenty of folks are, you know, sector embedded in that new logo pipeline. So again, I think it's probably just an output of of macroeconomics that we're starting to see loosen a little bit.
Anja Soderstrom
Okay, thank you.
Operator
(Operator Instructions) Arun Seshadri, BNP Paribas.
Arun Seshadri
Hi, everybody. Thanks for taking my questions and appreciate all the details and the outlook today. Just wanted to understand, if you look overall at XL. and S. of revenue growth guide, given your signings, it seems like you're being somewhat conservative for 2023. I think you've guided for a pretty wide range of outcomes on top line and XLNS. and and then came in near the high end of taking a similar conservative approach. Is that a result of, I guess, hesitancy in the macro on the broader enterprise side? Do you still expect to see more?
I guess spending from the commercial and public sectors? Just some color would be helpful.
Peter Altabef
Yes, I want to thank you very much for that.
But I guess let me start and then turn it over to Dan.
So the first thing I would say is we really do not ever tried to give a conservative approach to our numbers. So our numbers are our expectations in 2023. We know we saw that were exceeding those expectations. And so we raised guidance during the year. And then, of course, the ultimate numbers came out even better than the raised guidance. But I think that is just more a function of the uncertainty in the market.
A room.
There was a lot going on in 2023 and you know, frankly, we are very pleased with the fact that we performed. You know, LNS was better than expected by XL. and S. was better than expected. We kind of outperformed our guidance across the board in 2024. We are expecting healthy growth in ex L&S and healthy growth in the profitability of Exxon and us. And that's part of really kind of what we hope to be a multiyear expansion. So turning it over to Deb, but I think we've built in for us some pretty good numbers in XL. and S. for 24. And I will go through those in detail, but I certainly hope that we ex We excel at over those, but we're starting from pretty good numbers step?
Debra McCann
Thanks, Peter.
Yes.
So for 2023, like Peter said, we saw ourselves outperforming. We raised guidance even between two three and the end of the year was very specific items were a few smaller deals came in L&S that we didn't anticipate. And then there were some uncertainties in our XL and that's revenue that we were working through. And were able to to get all of that worked through. And so that was it that enabled enabled us to come in over our guidance. So I think Peter said it well, and I think we're very comfortable kind of where we're saying for 2024 with XL and ES growth continued growth more than 150 to 200 basis points of XL and US gross margin expansion as we really look to the mix change, the mix shift towards more of a higher margin solutions as we continue delivery improvements, automation a lot of the work we're doing around SG&A to get that more normalized with our peers. So a lot of the work we're doing is really on we feel it makes us comfortable with our Q2 2024 guidance.
Arun Seshadri
Thank you. Just a follow up from me on from a cost saving standpoint. It sounds like you still expect a fairly significant margin uptick in 2025 versus 24. I just wanted to see if you could provide any context in terms of I guess, I guess numerically, obviously too early to call, but just from a from a SG&A percent of revenue and from a from a gross margin perspective, how much additional upside do you think there is in 25 versus 24, obviously, as the as the the pension contribution and ramps in 25 and that's sort of the baseline for the question.
Peter Altabef
Yes.
I mean, that's a really good question. So yes, Jeff, I think I'm going to get into just second, and that is so we have put them in charge of kind of a multiyear SG&A effort that effort started in earnest last year, relatively early last year and will extend through this year and 25 and 26. So Deb has put together a plan working with the rest of our team and that we expect will lower SG&A as a percentage of revenue over that timeframe and continue to lower it over that timeframe. So it's not a one-time thing for us or room is very well timed. It has its own project leader and we are performing according to plan. We lowered and what we thought would be SG&A spend. We will lower it again in 24 and expect to continue lower in 20 higher than 26. That is, at the same time, making more investments that our SG&A investments in things like artificial intelligence South, where we think under David's leadership, we've got a solid approach to this, and certainly we'll let Deb outline how that approach works over time.
Debra McCann
Right?
Yes.
Over.
And I would say the gross margin expansion is a little more of a slow and steady. And so we have plant that plant in XL and asked to do 150 to 200 million. And that's what we had laid out kind of slow and steady margin improvement that along with our L&S revenue, $370 million average a year, and that should add about 65% gross margin. And then as well as the SG&A efforts, Peter talked about, I think you're right, that is a little more. We expect to achieve on an annualized basis, about 70% of that by the end of this year. And so that does take because we have to do some investments in order to save. So that will as opposed to the gross margin is more slow and steady. Sg&a will kind of be more of a you'll see that more in 2025. So and then in addition to that, you get to the free cash flow that we laid out. There's other some other things on the free cash flow side that we're working, such as improving our working capital dynamics. Some of the more one-time cash flow items will start to and go down over the next few years. And so that's another important part of the formula to get us to those free cash flow numbers that we've laid out as part of our long-term targets.
Arun Seshadri
Thank you so much.
Mike Thomson
I could jump in as well.
Just just one quick comment. You had mentioned 150 million, it was 150 to 200 basis points of improvement in gross margin Yes. And if you look at the Investor Day materials that we put out, you would see in there that it infers additional improvement in basis points and 25 and 26 kind of consistent in that manner. And now we're not saying that is kind of a linear path and it's going to be the same amount every year. So we will ebb and flow a bit. But you know, as Peter mentioned in his opening remarks, we're doing quite a bit in regards to the associate base, right, scaling, right, shoring AI automation speeding up sourcing, all kinds of elements embedded in kind of managing that resource delivery. So we think that's going to yield additional benefits in years to get it aligned with the projections that we put out at Investor Day.
Arun Seshadri
Got it. Thank you, everyone. I'm going to ask one last thing on the pension cliff. It sounds like you've made a good amount of progress reducing that flip to 2026 to 29 cliff by buying some 10 to 20 million a year. Any sort of high-level thoughts on sort of your plans for 2024 in terms of further progress there?
Peter Altabef
Yes.
Jeff, do you want to a lot of share?
Debra McCann
Yes.
So where the contribution came down, and that's primarily driven by asset returns. And so, you know, there's we tried to manage that and we don't have full control over asset returns. And so we put in the slide deck and a sensitivity so you can understand that. But as we've spoken about and continue our plan to really look at continuing to de-risk the plan we took out, we had two annuity purchases in 2023. We'll continue to look at that given market and market conditions if another one makes sense. And so the goal there is just to lower the amount of liabilities using plan assets, not corporate cash to just overall lower the risk there and then the volatility of the overall pension plan.
So that's our one of our strategies, a key strategy for now.
But we're always looking at all of our options as it relates to the pension pending market conditions and what makes sense at the time.
Arun Seshadri
Thanks very much.
Debra McCann
You're welcome.
Operator
This concludes our question and answer session. I would like to turn the conference back over to Peter Altabef for any closing remarks.
Peter Altabef
Thanks, Betsy, very much. I'd like to thank everybody for joining the call. I know we went a little over today, but on the questions were really good. And so we wanted to give everybody an opportunity to ask them when you review our materials on the website, you'll see some modernization. So kind of our one-pager has been updated. It's got a different format. And even the slides that we have shown over the course of this call have some different formatting and we have even more information in the appendix to the slides. So I do hope that you take some time and look at the materials. And of course, our Investor Relations team is always available for any follow-on questions, as is Mike and Ed and myself. With that, thank you very much and appreciate you joining the call.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
