Unisys Corporation - Shareholder/Analyst Call

May. 2.13 | About: Unisys Corporation (UIS)

Unisys Corporation (NYSE:UIS)

May 02, 2013 9:30 am ET

Executives

J. Edward Coleman - Chairman, Chief Executive Officer and Member of Finance Committee

J. Edward Coleman

Good morning. I'm Ed Coleman, Chairman and CEO of your company. It's my pleasure to welcome you to this year's Annual Meeting. I also want to welcome those of you who are listening over the Internet. This broadcast is available now and for the next 30 days on the Unisys website. It can be accessed through the Investors section.

Here with me today are several members of our management team: Janet Haugen, our Senior Vice President and Chief Financial Officer; Dominick Cavuoto, Senior Vice President and President of Technology, Consulting and Integration Solutions; Ted Davies, Senior Vice President and President, Federal Systems; Ron Frankenfield, Senior Vice President and President, Global Managed Services; Quincy Allen, our Chief Marketing and Strategy Officer; David Loeser [ph], our new Head of Worldwide Human Resources; Lazane Smith, Senior Vice President, Corporate Development; Lawrence Wieser, Vice President, Global Operations; and Nancy Sundheim, Senior Vice President, General Counsel and Secretary. Nancy will also serve as secretary to this meeting.

Also here today are members of our Board of Directors: Alison Davis, Ric Duques, Matt Espe, Denise Fletcher, Leslie Kenne, Lee Roberts and Paul Weaver.

I'd also like to take this opportunity to thank Jim Duderstadt. Dr. Duderstadt is retiring from our board today and we're grateful for his many years of service on our board and his many contributions to Unisys.

You all should have a copy of the meeting agenda. We will proceed in accordance with that agenda. And as you can see, Item 7 has been reserved for questions or comments from stockholders. I would appreciate your holding your general questions or comments until then.

Now to the formal part of our meeting. Each stockholder of record as of March 4, 2013, the record date for this meeting, has been given proper notice of the meeting. A quorum is present. Affidavits relating to the mailing of the meeting notice, the proxy materials and the annual report will be filed with the records of this meeting.

A complete list of the stockholders as of the record date is on hand. It has been opened to stockholders of record for the last 10 days, and is opened at this meeting for examination by any record holder. The Board of Directors has appointed Thomas Watt and Jean Capello [ph] as the inspectors of elections for this meeting. In keeping with our policy of confidential voting, the inspectors are independent inspectors. They had been duly sworn and are present.

Now let's move on to the next order of business, the election of directors. You've seen the proxy statement listing the nominees. I hereby declare them duly nominated.

This year, the deadline for stockholders to submit director nominations was February 1, 2013. Since no such nomination was received, under our bylaw procedure, I declare the nominations closed. Before proceeding, is there any discussion concerning the nomination?

There being no further discussion, we'll proceed to the next order of business, the proposal to ratify the selection of KPMG LLP as the independent registered public accounting firm to audit the corporation's financial statements for 2013. The Board of Directors has recommended a vote for this proposal. Is there any discussion on this proposal?

There being no discussion, we'll proceed to the next order of business, the advisory vote on executive compensation. The Board of Directors has recommended a vote for this proposal. Is there any discussion on this proposal?

The polls are now open for voting. Any stockholder or proxy holder present who has not voted or who wishes to vote at this time may now do so by either holding up a ballot or proxy for an usher to collect or by going to the table at the back of the room. Only stockholders of record or proxy holders may vote at this time. Stockholders in the Unisys Savings Plan may not vote at this time since they must vote through the plan trustee.

It appears that those who wish to vote have had an opportunity to do so. Accordingly, the polls are now closed. I'll accept the voting report from the inspectors of the elections when it is completed.

While we're waiting on the results, let me comment on the progress of our company.

Over the past year, we've continued to make progress in strengthening the company's competitive and financial profile in a changing IT marketplace. In an uncertain business environment, we increased our profitability and delivered significant cash flow in 2012. Notably, 2012 was our fourth consecutive year of profitability and positive free cash flow generation, a record we're proud of and it speaks to the fundamental improvements we've made in our financial position.

We also continued to improve our client satisfaction ratings in service quality while winning contracts in both new and existing clients such as the American Red Cross, Nutreco, Royal DSM, TravelSky, the Internal Revenue Service, U.S. National Archives and the Department of Energy.

The first quarter of 2013 was more challenging for us as lower revenue in both our services and technology business impacted our profitability and resulted in a net loss in the quarter.

To move to the next level of success, we recognize that we need to improve our execution in pursuing and winning revenue opportunities while maintaining a competitive cost structure.

Today, I'll outline the actions and investments we're making to drive profitable growth and improve our cost efficiency. First, let me review our recent financial results. In 2012, we reported net income of $129.4 million, up from net income of $120.5 million in 2011. On a non-GAAP basis, excluding pension expense and debt reduction charges in both years as well as a 2011 charge related to non-income tax matters, our earnings per share in 2012 increased to $5.50 a share from $5.18 in 2011.

Our revenue in 2012 declined 4%, 1% on a constant currency basis, primarily reflecting weakness in our U.S. federal government business. Outside of our U.S. federal business, we grew revenue in 2012 when measured at constant currency rates.

As you'll recall at the beginning of 2011, we set a number of 3-year financial goals that we wanted to achieve by year-end 2013. As we look at our progress against those goals in 2012, we were pleased to achieve 2 of them. First in 2012, we exceeded our 2013 goal of increasing our pretax profit to $350 million, excluding pension expense. Also in 2012, we achieved our goals a year ahead of schedule to reduce our debt by 75% from September 2010 level.

Overall, since 2008, we've reduced debt by about $1 billion, significantly reducing our interest expense and strengthening our financial position. In terms of our other 2 stated financial goals, our progress last year was more mixed. In our services business our goal is to consistently achieve an 8% to 10% operating profit margin. We're not yet performing at this level, and to get there, we must drive profitable revenue growth while continuing to identify ways to deliver services more efficiently.

From a revenue perspective, our goals are to grow our IT outsourcing and systems integration businesses at market rates while maintaining stable revenue in our technology business, particularly within our flagship ClearPath business. In 2012, we exceeded our goal of maintaining a flat revenue in the technology business, driven by higher ClearPath sales. This was the third consecutive year that we've maintained or grown ClearPath revenue.

However, in our systems integration and IT outsourcing businesses, we did not meet our goal of growing these businesses at market rates in 2012.

Revenue continued to be a challenge in the first quarter of 2013. Our revenue declined 13% in the quarter and we reported a net loss of $33.9 million compared with net income of $13.4 million in the first quarter of 2012. Our technology revenue, which can vary significantly from quarter-to-quarter, declined in the first quarter following a strong fourth quarter of 2012 when we benefited from some earlier-than-expected ClearPath sales. We measure this business on annual basis, and we continue to target flat technology revenue overall in 2013 from 2012 levels.

In services, while we are pleased to see growth in IT outsourcing revenue for the first quarter, revenue declined for project-based systems integration services where the market for discretionary projects is soft and where we need to improve our execution.

Looking forward, we're taking actions to improve our execution around driving profitable growth in our strategic revenue areas while improving our cost efficiency.

From a portfolio perspective, we're making investments to enhance our current solutions to take advantage of the disruptive industry trends: cloud computing, consumerization of IT and mobility, cybersecurity, big data, smart computing, social computing and IT appliances.

In our technology business, we've evolved our ClearPath family's enterprise software and servers to a groundbreaking open architecture based on industry-standard Intel technology. We believe this work has put Unisys ahead of the industry in delivering modern, open, Intel-based servers that deliver mainframe-class performance, security and reliability. In 2013, we're planning additional product innovations and enhancements that will allow us to meet evolving client needs and address new mission-critical markets.

We're also targeting new markets for advanced software solutions, such as our Stealth Solution Suite of cybersecurity products. We believe the Stealth Solution Suite is unique in the market in its ability to cloak data, applications and users within a network or within a data center and we see growth opportunities in helping organizations deal with increasingly sophisticated cyber threats.

To complement and expand our data center and end user outsourcing services, we're investing in application managed services where we see the opportunity to help organizations deal with the challenge of managing their applications in an increasingly decentralized mobile and cloud-based computing environment.

We also continue to build the reseller channel to reach new customers and markets for our software solutions, starting with our Stealth Solution Suite. Currently, less than 5% of Unisys revenue comes through resellers and distributors, which is low relative to many of our competitors. We believe that establishing a strong reseller channel will allow us to address a larger portion of the IT market.

In our industry-based systems integration business, we're taking steps to improve our results by deepening our specialization within our sales and delivery teams. This involves dedicated skilled specialists to sell and deliver specific solutions to our focus industries, which are frequently based on Unisys application software such as core banking, retail delivery solutions, voice messaging solutions and other software for communications providers and airline passenger and air cargo solutions.

An example of where we've been successful with this specialized vertical industry approach is in our airlines and transportation business where we've won new clients for our next-generation AirCore airline passenger solution such as TravelSky in China.

We've also had success in expanding our cargo and cloud-based air cargo portal services. We aim to replicate this success in other focus industries.

In addition to building specialized industry skills and resources, we believe that our investments in building our application managed services capability will make us more effective in competing for systems integration projects that are part of or closely adjacent to the broader application outsourcing scope and service provider relationship.

It'll take us some time to execute the changes I've discussed in our systems integration business, especially given current softness in this market. As a result, we expect our systems integration revenue to remain soft as we implement these actions.

Finally, this quarter's results also highlight the importance of maintaining an effective and efficient cost structure. We have more work to do in this area both in terms of improving the efficiency of our services delivery and reducing overhead.

In summary, 2012 was another year of progress for the company. While the first quarter was a challenging one for us and we have much more work to do to capitalize on our solution portfolio and drive profitable growth, we're confident in our strategy and we're taking actions to build on and expand the progress we've made in recent years.

Our strategy is focused on enhancing shareholder value by positioning Unisys as a provider of mission-critical solutions and services. Our long-term goal remains to become a company known for its financial strength where the quality of our services and solutions provides ongoing differentiation and where we're an acknowledged industry leader in our 4 areas of strength: security, data center, end user outsourcing and support services, and application modernization and outsourcing.

In December 2012, our Board of Directors authorized the purchase of up to $50 million of the company's common or preferred stock through December of 2014. In April, we used about 23% of the authorized amount for repurchases of our common stock. We believe Unisys has the capabilities, the offerings and the improved financial structure needed to address opportunities in the market and to drive profitable growth and shareholder value. I look forward to reporting on our results in the years ahead. Thank you.

This brings us to Item 7 on the agenda, stockholders questions or comments. Mike McAleer and Jen Strong of KPMG, our independent registered public accounting firm, are present today and available to respond to questions.

Mike and Jen, please stand so our stockholders can recognize you.

Question-and-Answer Session

J. Edward Coleman

In order to ensure that all stockholders have an opportunity, our procedures limit those who may be recognized to speak to stockholders of record on the March 4 record date or their proxies. If you have a question or comment, please stand to be recognized by the chair. When you're recognized, proceed to the microphone, state your name and whether you're speaking as a stockholder of record or as a proxy. If speaking as a proxy, please name the stockholder. As a courtesy to other stockholders, your comments should not exceed 3 minutes. Now, who has the first question? Yes, sir. Please, the microphone so they can hear you on the Internet.

Unknown Shareholder

Edward Oakes [ph], a stockholder. Is there any immediate plans to call in the preferred stock? And if so, does it -- you get 2.5 shares of common stock for the preferred?

J. Edward Coleman

You're talking about the mandatory convertible preferred shares, which convert in March of 2014.

Are there any other further questions? Yes, sir?

Unknown Shareholder

Miki [ph] Ono [ph], stockholder. I suggest to you to use video presentation system. I must have attended more than 2,000 shareholder meeting entire April. You are the only person who never used the video screen. Unbelievable. And I can follow the pictures much more than the whatever you say.

J. Edward Coleman

I appreciate that feedback. I've frequently feel that we use PowerPoint to death. So I generally like to do this preferably, but the transcript is available online for reading so that you can go through the details of that afterwards as well.

Unknown Shareholder

Okay. One more question. Is there any reason you are using the hotel ballroom that is in your headquarter in Blue Bell?

J. Edward Coleman

Well, it's a good question. We've used -- in the time that I've been with Unisys, we've done our shareholders meeting here and it's been a convenient place for people to get to. I think it's something that we always look at year-by-year.

Unknown Shareholder

At least you can have coffee if you do it here.

J. Edward Coleman

Okay. Thank you very much. Any other questions or comments? All right. Well, thank you very much.

The final report of the inspectors of election will not be available before the end of the meeting. However, I am advised by the inspectors of election that they have counted the vote and certified the proxies representing at least 89.6% of the common stock have been received.

The preliminary results are as follows: No material change in the outcomes is expected. Each of the directors received at least 28,645,515 votes for his or her election, which represents 83.8% of the shares voted. Accordingly, each of them has been duly elected as a director.

The proposal to ratify the selection of the company's independent registered public accounting firm for 2013 received approximately 38,985,942 votes for, representing 98.5% of the shares present and entitled to vote. Accordingly, this proposal has been adopted.

The advisory vote on executive compensation received approximately 33,029,950 votes for, representing 96.6% of the shares present and entitled to vote. Accordingly, this proposal has been approved.

Since there is no further business to come before the meeting, I now declare the meeting adjourned. I thank you for attending and for your support of our company. Thank you.

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