Unisys Corp (UIS) 2002 Q1 法說會逐字稿

Good afternoon, and welcome to Unisys Corporation's First Quarter 2002 Results conference call. At this time, all lines have been placed on a listen-only mode, and we will be taking your questions and comments

.

It's now my pleasure to turn the floor over to your host, Mr.

.

Sir, you may begin.

Thank you very much operator. Hello everyone. Thank you for joining us today. I'd like also to welcome those who are listening to today's call across the Internet.

First, I'm happy to report that despite a challenging economic environment, company met the high end of its earnings per share goals for the quarter, and continued to achieve improvements in its services business.

You can find details on this on today's earning release on first call, and via Unisys investor Web site, at unisys.com/investor. With us today to talk about the quarter are Unisys Chairman and CEO, Larry Weinbach, and our Chief Financial Officer, Janet Haugen.

Before we begin today, just a few housekeeping details. First, we will be using some presentations cells today to guide the discussion. These cells are available on our investor Web site for viewing or downloading, and you can advance them as Larry and Janet make their remarks.

Second, a recording of this conference call will be available shortly after the conclusion of today's live call. The replay will be available for about ten days. You can access this replay on the Internet via the Unisys investor Web site.

Finally, please note that all forward-looking statements made in this conference call are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. These factors are discussed more fully in the company's latest form 10Q as filed with the SEC.

Now, here's Larry.

Thanks Jack, and hello everybody. Thank you for joining us today to discuss our first quarter 2002 financial results.

As you know, we released these results about a half an hour ago, at the close of trading on the New York Stock Exchange.

For those of you who are viewing our slides on the web, please turn to chart one so we can begin the discussion.

We got off to a solid start in the New Year. We met the high end of our earnings target for the quarter. A quarter what continues to be a challenging, global economic environment, particularly for capital expenditure spending.

In our last conference call in January, we said the first quarter would be similar to what we achieved in the third quarter of 2001, in terms of revenue, earnings, and orders. Our first quarter revenue of $1.36 billion was in line with that expectation. And our earnings per share of ten cents per share came in at the high end of our range due to continued sequential improvement in our services margins, and continued

control.

Our first quarter operational cash performance was also better than we expected. Despite spending about $35 million of cash for our previously announced restructuring actions, we generated 10 million of cash from operations in the quarter.

Before I get into the numbers, let me step back for a moment and review with you the overall business and economic trends that we saw in the quarter.

Chart Two in the presentation materials summarizes these trends. In January, I said that we were seeing signs of stabilization in the United States while international business conditions were weak. We saw no material change in this environment in the first quarter.

In the United States, conditions remain stable following the volatility we experienced in 2001. But we have not seen indications yet, of a broad based pick up in demand for capital spending.

Internationally, business conditions remain weak, with no clear signs of a recovery. We saw this international weakness pretty much across the board in our orders in the first quarter in Europe and Asia Pacific and in Japan.

Clients continue to closely monitor and control their spending on IT projects. Absent a clear pick up I the global economy, organizations are in no hurry to commit to new IT initiatives, particularly those that require significant capital expenditures.

The market for high-end enterprise servers remains weak as customers defer purchases of big-ticket items, and they'll defer them until they see improvement in their own business and in their own earnings.

In addition, because of some lingering economic uncertainty, it's taken a long time to close significant new services contracts, such as long-term outsourcing and management services deals. We saw the impact of this in our order levels, which were down double digits in the quarter as compared to the prior year.

However, as we indicated during our conference call in January, our first quarter would look like our third quarter of 2001. In making that comparison, our services orders are up double digits and our technology orders are down mid-single digits. Overall, our orders are up double digit.

We expect our orders to improve over the course of the year as we close deals that were pursuing in outsourcing, managed services, and systems in addition.

Despite the difficult business conditions, we were able to meet the high-end of our earnings targets for the quarter and we did it by staying focused on our value added strategy, and by continuing to make progress in improving the margin profile of our services business.

Chart Three shows key financial highlights for the quarter. Our revenue of $1.36 billion was down 16 percent from a year ago, and was in line with our expectations.

As we disclosed in the earnings release of a year ago, our first quarter 2001 revenue included more than $80 million of residual commodity sales that we have de-emphasized. Excluding these residual commodity sale, and after the impact of currency fluctuations, our revenue was down about nine percent from the year ago quarter.

Our services revenue declined 11 percent in the first quarter, primarily driven by the lower levels of commodity sales within our network services business. Excluding these commodity sales and the impact of currency, services revenue was down about five percent in the quarter.

We saw continued double-digit growth, however, in outsourcing revenue during the quarter. In addition, our systems integration revenue showed modest revenue growth as this business continues to improve.

Revenue in our technology business declined 30 percent in the quarter, primarily driven by lower sales in Japan and lower shipments of our semi-conductor test equipment, compared to the year ago quarter. And in the year ago quarter, we benefited from a significant initial shipment of this equipment.

Sales of our ClearPath Servers were down slightly in the quarter, while revenue from our ES7000 Servers was flat from the year ago period.

Turning to margins, as you can see in the chart, the big story in the first quarter was the continued improvement in our services margins. Services gross and operating margins improved significantly in the quarter.

Our services operating margins have improved steadily since the second quarter of 2001. And we've reported a services operating margin of 4.9 percent in the quarter. As you'll recall, our services margin was 0.9 percent in the second quarter of 2001, 2.2 percent in the third quarter of 2001, and 3 percent in the fourth quarter of last year.

This is an important area of focus for us in 2002. And I'm gonna spend some time later in my remarks discussing the factors that are driving the margin improvement of services and what we see going forward in this business.

As you can see in the chart, our technology margins in the quarter were impacted by the continued weakness in this market. You'll note that the year over year decline in technology operating margins is larger than the decline in technology gross margins. And this is due to the reduction in sales volume.

However, overall, we posted a gross margin of 28.6 percent in the quarter, up from 26.3 percent a year ago. And we've posted an operating margin of 5.8 percent, versus 6.5 percent in the year ago period.

One other note on margins. Our operating margins have not yet fully benefited from the head count reductions that we announced in the fourth quarter. We continue to implement these reductions, which we expect to be mostly completed by mid-year 2002.

Our Chief Financial Officer, Janet Haugen, will provide more details on our progress in the head count reductions in her remarks later. As these cost reduction actions are completed, we expect our operating margins to benefit.

At the bottom line, we reported earnings per share of ten cents in the quarter, which equal the high-end of our previously stated target of five to ten cents. Overall we executed well in the first quarter, particularly given the environment. I believe our results, particularly the progress we continue to make in our services business, demonstrate that the strategy we've been pursuing, it's working and it's yielding results.

You can see our strategy outlined on Chart Four of the presentation materials. This chart will be familiar to many of you who've attended our investor conferences in recent months. But I want to use it today to reinforce for you what we're, where we're going as a company, so you have a context for the actions we've taken and continue to take.

Our strategy simply put is to be a services-driven, technology-enabled provider, a value-added solutions for clients in the selected markets where we do business. We've been focused on this strategy since the day I arrived here four and a half years ago. Over the past year and a half, during the economic downturn, we've intensified our focus on this strategy, and we did it to protect and to maximize our profitability.

While our game plan may seem straightforward on the chart, implemented a services-driven, technology-enabled strategy is an extremely complex task. For Unisys, given our history in the computing side of the business, it's involved a major culture change. It's involved an expensive repositioning of our portfolio and our skill set. It's involved introducing new best-of-breed solutions as part of our systems integration business. It's involved increasing our base of long-term annuity revenue, and we've done it through an expansion of our outsourcing business, particularly in business process outsourcing and managed network services.

It's involved becoming more focused on our technology business, placing our emphasis on the high-end of the marketplace where we have expertise, and engineering a major transition through our new high-end CMP architecture.

The goal of this effort is to improve the consistency and the profit profile of our business by focusing on higher value-added opportunities where we can apply our services and our technology skills that deliver results for customers. This process has involved some very hard decisions.

Last year, we walked away from some $800 million of low-margin, commodity hardware sales that were draining our resources, our attention, and our profits.

Overall, since I joined Unisys, we've walked away from roughly $1.5 to $2 billion of low margin revenue. And this required us to right-size and to reshape our workforce to the new economics of the market in our business.

In 2000 and 2001, we announced headcount reductions totaling nearly 6,000 people, many of them services delivery personnel, people who's skills were either under-utilized, or inappropriate for the kind of projects required by clients.

We instituted major training and skills development programs to strengthen the capabilities of our existing workforce. At the same time, we complemented these people by hiring thousands of new employees with new skills that we need to succeed with our services-driven, technology-enabled strategy.

These new hires have included hundreds of experienced industry leaders, consultants, and principals with the ability to deal with the strategic issues facing executives of global organizations.

We've also brought on a significant number of personnel involved in our large outsourcing

. So it's been a difficult, painstaking process.

It has required laser focus, but the result I believe is that we are building a base of high-quality, value-added services and technology businesses, upon which we can grow profitably.

We began to show the results of these efforts last year, by delivering operating profits in the middle of the worst technology recession in decades, and by consistently meeting our earnings forecast within a 90 day window.

Our first quarter 2002 results continue these trends of improved profitability and consistency in our business. I'm particularly pleased, as I mentioned earlier, by the progress we're making in improving margins in our services business. This is a critical goal for us given our services-driven strategy and the fact that today, services account for more than 75 percent of our revenue, actually 77 percent in the first quarter.

Chart Five shows the sequential improvement we've made in gross and operating margins in the services business since the low point of the second quarter of 2001. As you can see, we've progressed from a services gross margin of 19.2 percent, and an operating 0.9 percent in the second quarter of 2001. But we've progressed to our current services gross margin of 21.7 percent, and operating margin if 4.9 percent.

We expect further sequential improvements in our services operating margins as we progress in 2002.

Our long-term goals, as you can see on the chart, are to bring our services gross margins up to the 25 to 27 percent range, and operating margins up to the 10 to 12 percent range.

We believe achieving these margin targets will make us equal with or better than the margins of our services peers with similar portfolios.

Because services now represent the majority of our revenue, this margin improvement in services is leading to a more balanced profit profile within our overall business.

Chart Six depicts this progress. As you can see at the low point of this second quarter of 2001, our technology business provided about 80 percent of our total operating profit, and this excluded inter-company eliminations, while services accounted for only about 20 percent of total operating profit.

In the first quarter of 2002, because of the progress we've made, services accounted for 64 percent of our total operating profit.

As you know, managing profitability in the service business is complex and requires attention to many factors at the same time. These factors include not only the standard metrics of chargeability, of rate realization, but also the quality of your people. The quality of the projects you take on, the shape of your consulting pyramid, your ability to plan, design, and profitably manage engagements. Engagements that may last twelve months or may last over ten years.

It also requires constant training and development of personnel. And it requires pay-for-performance compensation systems that are real.

Our services margin improvement has resulted from attention to all of these factors. For example, we've seen significant improvements in chargeability and rate realization over the past 12 months. Overall, however, I would attribute the margin improvement to three key factors, and you can see these on Chart Seven.

The first has been our focus on higher value-added services business, which I discussed earlier. This has been key not only because of the improved margin profile of the business we've been taking on, but also because of the discipline it has provided in our selling and delivery efforts. We no longer have people out chasing commodity-based services opportunities with low margins. And we no longer need the people to deliver and support those contracts once we've won them.

Instead we're focused on higher-margin deals and solution

, BPO, managed services, network consulting, and security. The second key factor in our margin improvement is the work we've done to resize our services workforce to the level of

business and backlog.

In 2002, we have gone through the re-sizing and we'll finish by mid-2002. In 2000, we were operating with people on the bench who we hoped and believed would be able to deploy as services demand picked up, particularly in the systems integration space. When it didn't, we had to make some tough but necessary decisions, and we took some actions to resize our services workforce. And while you never arrive at a workforce that's perfectly balanced with market demand, today I believe we have a workforce that is appropriate for our workload, and also has the right skills needed for the value-added contracts we're taking on.

The third key factor in our margin improvement has been in our outsourcing business. In 2000 and 2001, our outsourcing margins were negatively impacted when we took on almost $2 billion of long-term BPO contracts with significant start up costs. It takes time to work through these costs. And, while we're not where we want to be yet, our outsourcing margins are improving steadily.

So those are the key factors driving the margin improvement in our services business. As I already mentioned, we remain focused on this area, and we look for continued sequential improvement in our services operating margins, as we progress through 2002.

Turning to Chart Eight, the other side of the equation is that we must drive higher sales in our technology business. I believe this improvement will come with improved business conditions. The computer hardware business remains fundamentally a cyclical business. But we're gonna need help from the economy to bring up our sales volume and improve the operating margins in this business.

However, we continue to roll out new models of our high-end servers. And we believe we'll see improved demand as business conditions improve.

In our ClearPath family, we've engineered a major transition of this product to our CMP platform. As you know, we have two lines within our ClearPath systems, our IX and NX lines. We introduce the new high-end IX ClearPath Plus system late last year. The new high end NX system, based on CMP, will be rolled-out in the third quarter, and we hope to benefit from that new system later in the year.

We're also introducing this quarter new mid- and low-end models of both ClearPath Plus lines.

We also need better demand for our ES7000 systems. As I mentioned earlier, we got off to a slow start in the first quarter with ES7000 sales flat from a year ago. We clearly need to generate higher volume in this program. We believe we're being impacted by the overall weak market for high-end servers, and reluctance on the part of many organizations to take a chance on new technology in the current environment.

What we can control is our marketing efforts, and that's where we're placing our focus this year. Part of this involves product expansion. We just launched a new model of the ES7000. The

supporting new Intel,

, MP chips and offering auditioning mainframe class futures such as the Unisys server Sentinel Systems

software. This self-healing software monitors the operation of the system, automatically detects and corrects flaws, provides remote and unattended operations, and significantly improves system availability.

We'll be rolling-out additional models of the ES7000 system in 2002. And this is aimed at extending our lead in the high-end Intel market. Equally important, we've just begun an aggressive joint marketing campaign with Microsoft, and this is focused on increasing demand for scale-up systems based on Unisys and Microsoft technology.

We've proven, both through strong, benchmark results, and through real-life customer experiences, that the ES7000 running Windows Data

can handle the riggers of enterprise class computing at significantly less cost than Unix systems.

Our focus now through this joint Microsoft program, is to accelerate adoption of this technology by demonstrating proof-points, by developing world-class reference accounts, by building partnerships with major software vendors and systems integrators, and by training hundreds of people on implementing and servicing the technology.

You'll see some advertisements over the 18-month time frame of the program. But the bulk of the work is gonna be done behind the scenes, working with major corporations and with government agencies around the world, to introduce them to the benefits of this new technology. This work has already begun. And we're very excited by the potential we see for increased sales as we move through the year.

Turning now to our outlook going forward, please turn to Chart Nine.

Overall, our earnings outlook for 2002 remains unchanged from the guidance we gave back in January. Clearly, the business environment remains difficult, particularly in international markets, and we continue to deal with long selling cycles and cautious decision making on the part of clients. Opinions vary widely on how and when an economic recovery for capital expenditures will occur globally.

Regardless of the timing of the recovery, we remain focused on maintaining tight cost controls and continuing the structural improvements we've been making to enhance the profitability of our businesses.

Our earnings improvement in 2002 is predicated more on these fundamental improvements within our own operations rather than a very significant pick-up in global demand. Therefore, barring another sudden collapse in the economy, such as we witnessed in 2001, we believe we can attain our goals of about 50 percent earnings growth in 2002.

We look for our earnings to begin showing year-over-year growth starting in the second quarter. Specifically, for the second quarter, we look for earnings in the 12 to 15 cents range on revenue of $1.35 to $1.45 billion.

To summarize, I believe that we executed well in the first quarter. We achieved our game plan at the high-end of our earnings range. And we're on track to achieve our plan for the full year.

Now I'd like to turn things over to Janet Haugen for more details on our financial results in the first quarter.

Thanks Larry, and hello everyone.

As Larry said, we got off to a good start to the New Year, achieving the high-end of our targeted earnings range and generating stronger than expected cash flow.

In my remarks, I will also expand on the operating results of the quarter, and provide some details on the balance sheet and cash flow.

Starting with orders. Coming into the quarter, we anticipated that orders would be down across our businesses and both services and technology orders were down as compared to the first quarter of 2001. In services, we saw order declines across all of our businesses, with the most significant order declines in network services, reflecting lower levels of commodity hardware content from the year ago quarter.

As Larry indicated, we anticipated orders to be around the third quarter of '01 levels. And service orders, in particular, the outsourcing orders were better than we had expected coming into the quarter. However, technology orders were down more than our expectation, reflecting the weak market right now for high-end server products. We saw order declines across all our geographies.

Moving onto revenue, Chart Ten shows our revenue by segment for the first quarter. Services revenue of a

accounted for 77 percent of our revenue in the first quarter.

The decline in service revenue of 11 percent primarily reflected the lower network services revenue versus a year ago.

We saw continued double-digit growth in outsourcing, as well as modest growth in system integrations, as these businesses continued to recover.

Technology revenue accounted for 23 percent of our first quarter revenue, and declined 30 percent in the quarter. The primary driver for this decline was lower sales in Japan, and lower shipments of our specialized semi-conductor test equipment, which had benefited a year ago from the initial shipments of this technology.

As Larry mentioned, sales of our ClearPath servers were down slightly, and our ES7000 servers were flat compared to a year ago.

Currency had a two point negative impact on revenue, and we expect to battle one point negative impact on revenue in the second quarter of '02.

Moving onto margins, please turn to Chart Eleven for an overview of the trends in the quarter.

As you can see, our overall margins benefited from the actions we have taken and continue to take to improve the profit profile of our business, particularly in services. Our gross margins improved by 2.3 percentage points to 28.6 percent. The primary driver was the improvement in our services gross margins which improved 3.5 percentage points to 21.7 percent in the quarter.

Our SG&A expenses in the quarter were flat with the prior year. And as a percent of revenue, SG&A was 18 percent of revenue. We expect that SG&A as a percent of revenue will decline in the second quarter and throughout the remainder of the year, as we complete the cost-reduction actions we announced in the fourth quarter.

Let me note at this point, those cost-reduction actions are proceeding on schedule. As you'll recall, we took a charge in the fourth quarter to recover, to cover the reduction of about 3,750 positions. We completed an additional 600 headcount reductions in the first quarter. Overall, about 2,600 of the 3,750 position reductions are now complete. And you can see the impact of this in our headcount numbers, which declined from 38,900 at year-end 2001 to about 37,400 as of March 31, 2002. We expect to complete most of the remaining headcount reductions by mid-year.

Research and development expenditures in the first quarter were $65 million compared to $76 million a year ago. The lower level of R&D reflects the changes we've made in our R&D processes to improve efficiencies. We continue to invest strongly in our high-end server technologies, based on CMP architecture. Overall, R&D approximates 4.8 percent of revenue in the first quarter, and our technology R&D spend exceeds 10 percent of our technology revenue.

Our company-wide operating profit margin came in at 5.8 percent, which was down from the 6.5 percent a year ago, but up sequentially from the fourth quarter of 2001.

As Larry mentioned, we have made steady, quarter-by-quarter progress in our services operating margins since the low point of the second quarter of 2001. And this is driven of corresponding sequential improvement in our company-wide operating margins.

In 2001, our operating margins improved from 3.1 percent in the second quarter, to 3.2 in the third quarter, to 4.8 in the fourth quarter, and with our 5.8 percent operating margin in the first quarter, we're off to a good start to 2002, and we expect further improvements in our company operating margins as we go through 2002.

One other item of note on the income statement. You'll note that we incurred an other expense of 12 million in the quarter compared to other income of 13 million in the year ago quarter. This swing is primarily driven by foreign exchange losses in Argentina this quarter, compared to foreign exchange gains in the first quarter of 2001.

As our 2002 plan anticipated, other income and expense in the second quarter will include an equity loss from our Japanese joint venture NUL. This equity loss in the second quarter will include our share, approximately 20 million, of the NUL's recently concluded early retirement program, which was publicly announced in the fourth quarter of '01. In accordance with GAAP, this charge will be reflected as anticipated as part of our equity loss which will be recorded in the second quarter.

Moving to the highlights in the cash flow statement and balance sheet, please turn to Chart Twelve.

As I mentioned at the beginning of my remarks, our operational cash flow came in better than we expected in the quarter. We generated 10 million of operating cash in the quarter, which included using 35 million of cash for our recently announced cost-reduction actions. By comparison, we generated 24 million of operational cash flow in the first quarter of 2001, when we used 12 million of cash for cost-reduction actions.

Our cash flow performance was driven by good working capital management in the quarter. We reduced accounts receivable by 158 million or 14 percent, and inventories by 32 million or 9 percent from year-end levels. Our day sales outstanding for accounts receivable were 62 in the first quarter compared to 63 in both the fourth quarter and the year ago quarter. And we continue to turn inventories at a double-digit rate.

Capital spending in the first quarter was 76 million, which was up from 66 million in the first quarter of 2001. The increase in spending primarily relates to increase investment in our services business for business process outsourcing. We are expecting cap ex in the $300 to $350 million for 2002. Where we end up in this range will determine on economic conditions, and the amount of new outsourcing wins.

Depreciation and amortization were 70 million in the first quarter, which was the same as the year ago period. And for the full year of 2002, we continue to expect depreciation and amortization to be in about the $300 million range.

Our good working capital management allowed us to end the first quarter with a cash balance of 283 million, and a debt-to-equity ratio of 28 percent. We still remain from a debt-to-equity standpoint within our targeted range of 25 to 30 percent. And we did not have any borrowings against our revolving credit facility during the quarter or outstanding at the end of the quarter.

In closing, we delivered solid operational performance in the first quarter of 2002 in this challenging business environment. We achieved the high-end of our EPS target, showed continued progress and improving our services margins, focused on cost controls, and exceeded our plan for operational cash flow. I believe we're off to a good start to achieving our financial plan of the full year.

And now, I'd like to turn the call back over to Jack.

Thank you Janet and Larry for that overview of the quarter. Operator we would now like to open the call up for questions and answers please.

Thank you. The floor is now open for questions. If you do have a question or a comment, please use your touch-tone telephone and press the numbers one followed by four at this time.

We do ask that if using a speaker phone, to please utilize your handset to provide optimum sound quality.

Once again, to register to ask a question, please press one followed by four on your touch-tone telephone.

Our first question is coming from

of Salomon Smith Barney.

Please pose your question.

Thank you, and nice quarter Larry.

I think I'm hearing some slightly more positive comments on systems integration. It sounds like it's starting to turn the corner. Can you give us some more color on that particular business and then, is it still fair to expect sequential improvement in services operating margins as we go through the year?

Thanks Craig. First off, you can expect continued sequential improvement in the operating margins in our service business throughout the year. As I mentioned in my comments, we worked very hard on trying to get our systems integration business moving in the right direction. We did hit a low point in 2001, we took a number of actions. And, I think the emphasis that we have placed today on particularly looking at the nature of the assignments that we're taking on has really helped us improve our service margins.

Our quality control office is more involved in a lot of the engagements. We are not chasing engagements where we don't believe there's a good reason why someone should hire Unisys, meaning there's a differentiation.

We're spending much more time in the areas of capability and the hiring of all these new people, people with principle skills, people who were partners in prior partnerships, these people have brought a new level of capability to our project management capability here. So, we had very good industry skills. We now have brought on project management capability, and that's why you're seeing a lot of the improvement that we're seeing quarter-by-quarter-by-quarter.

As we had mentioned before, it won't happen all in one quarter, but we're very proud of the improvement over the last four quarters and you should expect to see it during the rest of the year.

Okay, thank you Larry.

Thank you. Your next question is coming from

of Goldman Sachs.

Please pose your question.

Hey guys, this is Julio sitting in for Greg this afternoon.

Just wanted to, if you wouldn't mind, Janet, going back of the revenues lines a little bit by the technology business and the services business. In particular, trying to get a sense of where the growth is gonna come in looking at the services line and then the technology line for the rest of '02.

I think, I think what you're saying is that outsourcing is pretty much driving the services area, but I was wondering what - how to look at that for the rest of the year and then also how to look at that in the technology area.

Okay, Julio, when you're looking at the systems of the services business as we mentioned, we do continue to see a nice pipeline. We are seeing delays in customers making decisions, caution with regard to large deals. But as we look out, we do see improvement happening in the systems integration business year-over-year. We're gonna have some easier comparisons given the softness in the third quarter of 2001.

We will continue, we anticipate to see the double-digit growth - nice double-digit growth in the outsourcing business. That's fueled by the backlog and the contract signings that we've had over the last 18 months, and as well as what we have in the pipeline.

As we had previously indicated, we think that the network services business will continue to be under some pressure as it goes out, and the second quarter picking-up perhaps in the last half of the year, partly because we see customers moving away from network services projects into more of the multi-year type of deals which are in our outsourcing business.

And then when we move over into technology, we believe that, as you look across our ClearPath business, that that will continue to have the seasonal skewing that you would expect to see in the technology business, and to be down slightly on a annual basis.

And we do expect to see the benefit of the investment that we're making in the ES7000 business pick-up in the second, third, and the rest of the year this year.

Okay, great. Can you also do the same for the percent of revenue - I'm sorry, not the percent of revenue, but the percent of the operating profit mix by both of those businesses? You know, obviously, the services side is improving. I'm just kind of wondering, you know, by the end of the year, where do you think those mixes are gonna be as far as operating profit contribution is concerned.

We will - as you go forward, we do expect to see this seasonality that would typically happen in the technology business with the fourth quarter being one of the strongest performing quarters. But as you go, as you go forward, we expect to see that number continue to move. I would say that the first quarter at operating margin from services about 64 percent of our total margin to be one of the best quarters with regard to services and technology mix.

And then if you go through the year, I would expect the percentage shift in the fourth quarter to still be predominantly from the services business, but technology as a percent of our overall operating margin to be higher than it is right now.

Okay, great. Thank you.

Thank you. Your next question is coming from Jim Cassine of Bear Stearns.

Hi Larry and Janet. If you go back to the Chart Seven where you gave the factors for the margin expansion and the services business, is it possible for you to rank those factors behind the margin expansion? And how much margin expansion would there be if you adjust it for the lower margin network services and the associated hardware going away? Because I'm just trying to get a sense on the core, core services business.

Thanks.

Jim, if you go to Chart Seven, you know, all three have had an impact. Obviously the re-sizing of the sales and delivery workforce probably has the greatest impact, although as Janet mentioned, we're not finally through what we said we would do, because of works counsels and so forth throughout the world. So we still have a little more work through the second quarter.

But I would say the re-sizing has the biggest impact, and then probably the focus on the higher value-added business has the second impact, and then the outsourcing probably the third of those three.

As we look at these, at these three areas though, going out, the real key for us is start off on the large outsourcing, you know, we hope we get a lot more large outsourcing contracts and if we do, obviously we'll have those start-up costs again, which we like. But I really think if you look at the core systems integration business, which I believe was your question, we have made tremendous improvements in that through a number of factors.

And one of the factors, as I mentioned before in Craig's question is, the hiring of this new talent brings in project management capability which enables us to do a much more effective job in managing these large contracts. And consequently, we are getting better results, we're beginning to get better results through that effort.

So, when we look at the impact on our operating margins on a quarter-by-quarter basis, probably the support of this new capability is as important as anything going forward.

So although the re-sizing of sales and delivery has an immediate impact, the sustainability is required based upon the people, the project management skills, the capability to provide higher value-added businesses, the getting our people to stop chasing the small stuff because it looked like they were able to create something when in effect, we really weren't making money on those deals.

And as you know Jim, I mentioned in my comments, you know, walking away from a billion five to $2 billion of revenue, is no fun. The harder part is if you think about the infrastructure costs related to it some 18 percent, we walked away from $350 million that we had to deal with. And part of the right sizing that we've gone through and the trauma that we've had to live through was getting that done.

So I think the combination of making the tough decisions and brining on the right kind of talent to move us in the direction we want to go will enable our systems integration business to grow. We expect it to grow as Janet mentioned, for the year. And, we expect to see an improvement in gross margin and operating margin in that business throughout the year.

Okay, and the margins on the outsourcing contracts in the backlog is low in the pipeline which support over ten percent of operating margins as well, adjusting for the start-up costs?

No, not in pure outsourcing itself. But, we've got our outsourcing SG&A down in single-digits. So, we don't get quite the ten percent, but we're not far off.

Thanks Larry.

Thank you.

Thank you. Your next question is coming from Joseph

of Robertson Stephens.

Yes, hi, good afternoon. Just a couple quick questions, if you'd add a little color. You mentioned double-digit outsourcing growth and modest systems integration growth. Do you have any color as to, you know, are we talking a 10 percent, 12 percent growth? And, by modest systems integration growth, if you could add a little color there as well?

Yeah, the color to modest is modest Joe. The systems integration, we have not had a whole lot of growth in our systems integration business. In the first quarter we're up mid-single digits in our systems integration business, and we broke through in the double-digits again in outsourcing. So, you know, we felt particularly good about the systems integration growth because it's been some time with all the changes we've been making in the business, that we've been able to get there.

Sure, and that's actually a pretty interesting data point. If you look across the industry where systems integration's still pretty tough. If you look at that growth, what would you attribute the kind of two or three most important things in terms of kind of turning things around there, even in this difficult environment on the systems integration side?

Well, I would come back to what I just mentioned to both Jim and Craig. Probably brining on people who have the capability of managing these contracts has enabled us not only to manage the business we have, but to go out and we do have a good

of customers, we have a good reputation in the five industries in which we operate, and we now have some people who have additional skills who can support our own people. And this is enabling us to create a better environment with those customers.

I think people look at us now with an increased skill base and systems integration, differently than they did a few years ago. When we first said, you know, services-driven, people said that's great, but we don't know you for services-driven.

Now that we are out in the market hiring - and by the way, we're not only hiring, people are coming to us from former Big Five firms, from consulting firms saying, you know, this sounds interesting. Can we play too? This has been the first time we've had that kind of people viewing what we're trying to do in the marketplace.

So, I think it's a bunch of issues, but a lot of it comes back to people. We - our focus has been pretty much the same since I came here, but we now have the capability, an enhanced capability across all of our industries to be able to make it happen. And, that will enable us to get the sales and the project skills will enable us to get the margins.

Okay, great. And then, sort of a question on the Japanese JV. Sounds like the JV will post a loss again in the second quarter. Do you have any outlook on that business past Q2 in terms of getting back to a break even level?

Yeah, actually there fourth quarter ends March 31, which you know all Japanese companies do, and we record that in our second quarter. So, we're kind of following them by a quarter.

They're having a loss because of this large early retirement and I don't want to call it a layoff, but reduction in force, because of the way they're accounting for it. And because we pick-it up in an equity method, we have to pick-it up.

We believe based on business reviews with them, that business will pick-up in this current fiscal year. They believe that they will be profitable and have shared with us their plans for fiscal 2003 for them. So, we think that once they get beyond this quarter, we should see some positive results out of Japan.

Now, we're not gonna see a huge pick-up in revenue the way we would like. But we will see them turn the corner. And again, had it not been for this reduction in force, they would have been profitable this year. Modest but they would have been profitable.

Great. And then, finally, just one more quick question. Provide some color on the ClearPath line of service. Obviously a tough economic environment, and you really do have a captive customer base there for those lines of - for those servers. Do you see business, or to what extent do you see business not signed in ClearPath as really just deferred into out quarter versus business that just won't materialize?

Well, I think the hard part of that is people who have our Legacy systems know the dependability of ClearPath. The real question is do they need more

, do they need more volume? If they need volume, it's a deferral. So, if their business comes back they'll come to us. If their business doesn't come back, then obviously it could be permanent.

From everything we hear, people are sitting on the sidelines basically saying, look, we want business to expand, we're not gonna spend the extra money in capital expenditures until we have pre-cash flow, so that we don't have to borrow, we can see it's coming through out earnings, and therefore, you know, we're just deferring these acquisitions.

At the same time, there are certain customers who are saying, hey I need the more computing power right now. And if you look at our quarter, our ClearPath was down very slightly in the first quarter in what again was a tough economic environment for hardware.

Sure, great. Thank you very much.

Thanks Joe.

Thank you. Your next question is coming from Greg Gyber from AG Edwards.

Good afternoon gentlemen. On the systems integration, we're seeing some - you've hired these I guess rain makers. How are you seeing that work through? Are you seeing a pick-up in your RFP activity, or in your win rate?

We've seen them in both Greg. You know, the first thing you have to look at is the RFP's, but one of the things I wanna mention here, that I mentioned before.

We can have twice the number of RFP's that we're putting out right now. The problem is really trying to discern where you have a competitive edge and where can differentiate ourselves. And what I see happening too often, is everyone wants to chase every deal. And I don't think that it's good business to chase every deal because as you know, it's expensive to reply to these RFP's.

So, what we have done is put in place a real tough guideline, tell us why someone should hire us, and then go out and come up with your RFP's. So, if you look at where we are today, where we are right now is we're putting out more RFP's than we did before, the dollar volume is a lot higher than it was before, out win rate is going up.

But at the same time, we are not chasing everything that's coming through. So, a lot of the stuff that we might have chased before, we're not chasing. What we are going after is better stuff and now we're getting more and more better stuff. So, we're getting it both ways and we feel pretty good about it.

Okay, I can assume from what you're saying that price that you're seeing is that it's staying somewhat descent, because I'm hearing others say that there still might be a little bit of pricing pressure in systems integration.

The pricing could be better. I mean, I don't want to lead you with we're back to full pricing, we're not in, we're not in the '98/'99 time frame. The pricing is still tough.

But, what we've basically looked at here is, and I've said this consistently, we want profitable growth. We can get all the growth you want, and we have fought it. I mean, we haven't grown in a few years, we've walked away from things because we couldn't make money at it. And yet, other than reduction in force in the fourth quarter of last year, we're profitable every quarter, we're gonna be profitable every quarter this year.

And, we are looking at this and saying, the way to enhance shareholder value is through profitability. And hopefully we're gonna get the growth along with it, but if we have to wait for the market to come back to get much higher growth, we'll do that. We're not gonna give up profitability in the interim.

So, when I look at the systems integration business, there's some stuff that's going in places that we don't want, and we're no gonna win those things.

On the other hand, if you can differentiate yourself, the pricing isn't wonderful, but it's not that bad either.

Thank you. Turn for a minute to the ES7000. I believe you indicated that sales were roughly flat, was that correct?

Roughly flat with a year ago, yes.

Now in various loss the ES7000, numerous third party re-sellers, can you sort of give any sense as to what's, qualitatively what sort of impact that had on sales? Because I presume that the sales, probably on your own sales force, probably were up were as those from third party were down.

Well, in this year's plan, we really didn't forecast very much from third parties. I think what's happened is the marketplace indicated it was gonna be a challenging time, people didn't want to spend money on someone else's product even though it may be the best product in the market. Others are talking about coming out with a product. No one's been able to do it yet. IDM talks about

, but they're talking about a four-way, we're talking about 16-32 way.

So, when you really look at what's going on here right now, I think we're getting hurt more by the inability or unwillingness of companies to open their pocketbooks from a capital expenditure standpoint than anything else.

Good. When the market returns and we get a resumption of capital spending, will you expect to have more third, you know, some of those

re-sellers resume or some new ones sign up?

I would doubt it. I think most of them are gonna try and do their own thing at this point. Everyone talks about, you know, when the next chip comes out, we're gonna have the next piece of equipment. The fact of the matter is, it sounds good, but unless you have applications to go with whatever the new chip is, no body's gonna buy a piece of hardware if there's no applications. I mean, we call ourselves a services-driven, technology-enabled, that means you gotta have the application and solution in order to buy the technology.

So, I feel like there will be people coming into the space. When IDM announced

, what they basically did was they confirmed that there is something real in this market that we've been touting now for a year. And others will come in. Frankly we hope they come in because it will just create a more robust market.

Now, you've pretty much your guidance for the year the same. Overall, have you changed it any as to how it'll apply to the ES7000 or think you're looking for about a doubling?

Well, right now, if the first quarter was any indication, I don't think we would double. We still have our hopes that this thing will increase significantly but, I'm not giving a revised forecast right now. After the first quarter I think we're gonna have to look at this thing kind of quarter-by-quarter-by-quarter. You know, it was obviously slower than we would have liked in the first quarter, yet, we felt pretty good that we were flat with the first quarter a year ago.

If I had to come out with a prediction now, we probably would be more conservative than we were before.

Okay. One last question. You said that your 50 percent increase in earnings was a predicator on a significant

in the economy. If the economy were to hold flat where it is, no real pick up in capital spending for the rest of the year, do you still think you could make your numbers?

Yes.

Good. Thank you.

Thank you.

Thank you. We have time for one further question coming from Steve

from Merrill Lynch.

Great. Thank you. Two questions, first of all, a little confused about the $20 million for the equity loss. I assume that's an incremental 20 million in the second quarter, which would be about four cents a share. Is that factored into your 12 to 15 cents? And, aside from that 20, what's been going on in terms of your equity situation with Japan this quarter and what do you expect next quarter? And then second, do you have any comment any of your verticals, for example government, transportation, so forth?

Yeah, Steve, on the 20 million, we anticipated in the fourth quarter of last year, of course we knew they were gonna have this reduction in force - that there would be a large write off that we would have to take. The way these accounting rules work, under GAAP, we are required as Janet mentioned, to record this in the second quarter as we pick-up the equity from the company for the year. So, we had no choice but to take it second quarter.

The 20 million is already included in our 12 to 15 cents. The reason we're disclosing it is because it could be four cents a share and it's a large number and we want people to be aware of it. And we will also put it in our 10Q. But it is already factored into the 12 to 15 cents.

As far as the equity goes in NUL, we continue to like the investment. Our investment is a little over 210 million. As of last week the market value was 201. I think at March 31, the market value was 189. So, you know, it's very very close to market. It's been way above - market's been way above cost for a long time in Japan. Last about nine months since the technology bust, it's come down.

So, we're very comfortable with that. It's you know, right now, we're within $10, $11 million of cost versus market.

As far as verticals go, obviously if I had to tell you which is the slowest vertical, you probably could guess - telecommunications as an industry is probably the slowest and is probably at this point the one that's in the toughest shape.

We are seeing some pick-up in our financial service practice, our public sector. We're getting a lot of activity in that business. And, surprisingly, some spot things in our CRM practice and our commercial practice.

So, that's where we're seeing some healthy proposal activity and revenue at this point. But I would say that transportation and telecommunications are the two which not surprisingly are the softest, Steve.

Operator?

Thank you. At this time we will be taking no further questions. Do you have any closing comments?

Yeah, I would just like to thank everybody for tuning into this conference call. I hope you come away with the feeling that in a tough environment, all of us at Unisys worked hard. We came in two cents over what the street estimate was, and at the high-end of our range.

This is the fifth quarter in a row that we've been able to forecast 90 days out what we were able to achieve. We've given you our view of what we think the second quarter looks like, and we continue to go to market. We continue to look at the margins that we are generating and to get further enhancement in those margins.

We appreciate your interest in our company. So, thank you and bye-bye.

Thank you all for your participation. That does conclude your teleconference. You may disconnect your lines at this time.

Thank you. Have a great evening.