Unisys Corp (UIS) 2002 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to Unisys corporation third quarter 2002 conference call.

At this time all lines have been placed in the listen-only mode and the floor will be opening for your questions following the presentation.

It is now any pleasure to turn your floor over to the host Mr. Jack McHale.

Thank you very much Operator and hello everyone and thank you for joining us today.

I'd also like to welcome those who are listening to today's call across the internet.

Unisys just released its third quarter 2002 earnings, which are at the high end of our earnings target in what continues to be a very difficult market setting.

You can find today's earnings release on First Call and on the Unisys investor website at www.unisys.com/investor.

With us today to talk about the quarter are Unisys's Chairman and CEO, Larry Weinbach and our Chief Financial Officer Janet Haugen.

Before we begin just a few housekeeping details.

First we will be using some presentation cells this afternoon to guide the discussion.

These cells are available on our investor website for viewing or down-loading and you can advance through them as Larry and Janet make their remarks.

Second, a recording of this conference call will be available shortly after the conclusion of the live call.

The replay will be available for about ten and you can access the relay on the internet by the Unisys investor website.

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 let me turn the call over to Larry.

Thanks Jack and good afternoon everybody.

Thanks for joining us today and to discuss our third quarter 2002 financial results which has Jack mentioned we issued a half hour ago after the close of trading on the NYSE.

For an overview of the third quarter please turn to chart one of the presentation materials.

Unisys turned in another strong performance in the third quarter.

In what continues to be a very challenging global economic environment.

Our earnings per share came in at 18 cents which was at the high end the range that we provided back in July.

Our net income in the quarter nearly tripled from the year ago period.

It was our second straight quarter of substantial year-over-year earnings growth.

We also achieved $57 million of cash flow from operation is - a $132 million improvement from a year ago.

Perhaps the biggest story in the quarter was in our orders.

We showed strong double digit growth in orders over the year ago quarter while we continue to see a lengthened decision-making cycle among clients on large IT services projects, we were able to close number of very significant contracts for us and I'll talk about that a little later.

We're now two years into the current downturn in IT spending and over the course of this period, Unisys has met or exceeded our quarterly earnings targets for seven executive quarters.

In addition as I'll discuss later, we remain comfortable with our full year 2002 outlook for about 50 percent growth in EPS over last year's 48 cents before special items.

This was our outlook coming into 2002 - last January.

And we stuck with it through what has been a very difficult and unpredictable year for the IT services industry.

I believe that this consistency shows the dedication and it shows the tenacity of our employees as well as the strength and soundness the strategy that we've been we've been pursuing that is to focus on higher end services and technology opportunities.

Opportunities where we can add value for our clients and at the same time achieve returns that improve owner profit profile.

We continued to be highly disciplined in the opportunities that we pursue in the marketplace.

We've stayed away from low margin commodity business both in services and in technology.

And haven't allowed ourselves to fall into the revenue-for-revenue's sake trap.

We continue to take a reasonable approach in how we book orders and how we account for our long-term outsourcing contracts.

Our CFO, Janet Haugen, will talk more about this later.

We also continue to be relentless on expenses.

We want to make sure that we have our cost structure aligned with the realities of the marketplace.

So we're executing well against our value added strategy.

And it is delivering results during a very volatile time for the industry.

Chart two shows key financial highlights on the third quarter.

Starting at top line, we reported revenue of $1.33 billion which was down 3 percent from year ago levels.

Foreign currency exchange didn't have any real impact on our revenue in the quarter.

As you can see in the table, we saw only slight revenue declines in both our services and technology businesses.

So we continue to weather the downturn well as we focus on profitable segments of the market.

I'll provide a bit more detail on our services and technology segment performance a little later in my remarks.

Turning now to margins, we continue to see results from our focus on higher margin business.

Our overall gross margins improved to 30.3 percent, a 2.7 percentage point improvement over a year ago.

Our operating margin more than doubled from a year ago to 7.2 percent.

We saw gross and Operator margin improvement in both services and technology businesses.

Both of these businesses are benefiting from our strategic focus on higher margin opportunities.

Given the economic environment, we continue to tightly control expenses.

We reduced selling general and administrative expenses (SG&A) by 8 percent in the quarter.

At the bottom line, we record earnings per share of 18 cents in the quarter.

And that was at the high-end of our targeted EPS range and up from 7 cents a year ago.

Our cash flow performance in the third quarter was better than expected.

We generated $57 million of operating calf in the third quarter, a strong performance.

By comparison, we used $75 million of cash from operations in the third quarter of 2001.

Later in the call, our CFO, Janet Haugen, will provide more details on our financial results including balance sheet and cash flow performance.

But right now, I'd like to step back from the numbers and highlight some of the market trends that we saw in the global business environment in the third quarter.

Chart 3 provides an overview of these trends in the quarter.

Overall, we saw no material change in IT spending patterns in the third quarter.

Conditions haven't materially improved but neither have they materially deteriorated.

Geographically the US and Asia-Pacific appear to have stabilized while Continental Europe and Latin America have softened.

It remains a very tough business environment and marked by long selling cycles and intense competitive pressures, the same as it's been throughout 2002.

With the continued uncertainty in the market, clients remain focused on return on investment.

Cash is king.

And organizations are targeting their IT dollars on projects that will cut cost and improve their efficiency with some short term results.

As a result we continue to see p strong interest in outsourcing, particularly business process outsourcing and managed network services.

Another area of interest right now is the area of security.

Since the terrible tragedy of 9/11, organizations have that been placing security at the center of their IT plans and we're beginning to see some significant contract awards in the security area.

Most notably, the landmark homeland security contract that we received from the Transportation Security Administration (TSA) in the third quarter.

On the other hand, project based businesses such as systems integration, and net integration, remain soft industry wide, as clients did he fever discretionary purchases.

The hardware and software markets also continue to be we can industry wide as customers continue to focus their spending on maintaining and enhancing their mission critical systems.

We're maintaining our profitability and technology by staying focused on high-end enterprise service sales.

Make no mistake, however, despite the economy, there's no lack of good, profitable business to be won in this marketplace.

And we won our fair share in the third quarter.

Back in July, I told you that we were actively pursuing about a dozen large IT services proposals of about $100 million in revenue owner more.

We closed two of these contracts in the third quarter and another early in the fourth quarter.

Of the dozen or so proposals that I mentioned, so far we have lost only one deal.

We also saw one other proposal withdrawn as the client decided not to pursue the project at this time.

So overall, I'm pleased about the success rate that we're seeing.

Chart 4 provides an overview of our major contract signings in the third quarter.

First, we received a groundbreaking, multiyear contract from the US Transportation Security Administration.

It's a contract to build a nationwide IT infrastructure for the new agency.

In essence we are building the communications backbone that this agency needs to help ensure the safe transport of people throughout the nation's transportation system.

This contract has the potential to be am billion dollar contract.

It's significant not only because of its size and importance to the nation's homeland security efforts but also because it demonstrates the kinds of skills Unisys brings to the security market.

As I've said in the past, information security is not a technology problem.

It's an integration problem.

There's a great deal of leading edge technology that you can apply to solve security challenges.

But all that technology is useless it's woven about the fabric of the organization's processes, policies and enterprise wide network.

These are challenges Unisys has had a great deal of experience in solving and we've done it for organizations such as AIG Insurance, London Scotland Yard and government agencies in the Netherlands, Malaysia, Spain, South Africa and Costa Rica.

One of our key goals going to 2002 was to expand our security program and drive greater recognition of our capabilities in security.

And with the business that we're starting to win, I believe Unisys is emerging as a leader in this dynamic emerging market.

We were awarded 2 initial task orders under the TSA contract.

These two task orders are worth a total of $244 million over the first 14 most of the project.

Work began immediately in August and we received a limited amount of initial revenue on the TSA contract in the third quarter.

We expect the revenue stream to begin to ramp up in the fourth quarter and into 2003.

Let me note that consistent with our policy in booking orders in the third quarter, we only booked $23 million of the $244 million of initial task orders.

That's because the $23 million was the amount funded as part of the government's year 2002 fiscal budget and that budget ended on September 30.

Janet will talk more about this in her remarks and let me add that we do expect to receive additional task orders over the term of the 3 year base contract and two 2-year extensions.

The RFP for the contract stated a potential billion-dollar value.

Another significant contract that we received in the third quarter was 3-year contract extension valued at about $250 million with the Commonwealth of Pennsylvania and extends our outsourcing work for the Commonwealth out to 2009.

The entire amount of this contract was included in our orders for the quarter.

Our relationship with the Commonwealth of Pennsylvania began in 1999 when the state became the first in the nation to outsource its IT infrastructure operations.

The Commonwealth continues to be an innovator in its use of technology.

And we're very pleased to be continued part of their success.

Our ongoing relationship with the Commonwealth of Pennsylvania is an excellent example of the kind of win-win long-term relationships that we focus on in our outsourcing business.

As you all know, we're highly selective in the business we go after in the outsourcing market.

We're focused on opportunities where the client is looking for a partner not just a vendor.

Where value is delivered not necessarily the lowest price, and the value is the key factor in winning the deal.

We work diligently to make insure our outsourcing contracts are structured fairly upfront for both parties.

In our view most clients are willing to grant you an acceptable margin so long as they view you as a partner and they're confident they're receiving something of value.

Over the long run, we believe this is a much better formula for success than under-pricing the contract at the beginning and trying to make a profit on change orders.

In a win-win relationship, both parties benefit.

Since we were awarded the initial $500 million contract with the Commonwealth of Pennsylvania some three years ago, the contract has grown significantly and the state continues to view Unisys as a strategic partner.

The Commonwealth in turn has saved tense of millions of dollars by consolidating its IT processes with us.

Another good example of relationship based business is the work we're doing for American Express Bank in New York.

American Express Bank is a long time user or of our payment processing systems and services.

Last September, following the 9/11 events in the World Trade Center Unisys moved quickly to help American Express Bank to shift its entire check processing operation to our disaster recovery center in another part of the state.

The success of this undertaking and the client's long-standing confidence in Unisys resulted in a decision by American Express Bank in the third quarter to outsource its check processing to Unisys under a five year multi-million-dollar BPO engagement.

These were some of the deals that we closed in the third quarter.

In addition, we began the fourth quarter on a strong note by closing two large service contracts.

And you can see these on chart 5.

The first of these is the a 7-year contract valued at about that $80 million to provide mortgage processing for Rammer's home loans, the second largest non-bank mortgage originator in Australia.

This deal he is valued at about 146 million in Australian dollars.

What's exciting about this deal is that it's our first BPO contract for mortgage processing in Australia and one we hope to leverage for additional mortgage processing business around the world.

Also, in early October we were selected for a three-year contract valued at approximately $50,000,000 to provided managed services for a Germany government agency.

Unisys will provide this new client a wide range of infrastructure services including network consulting and management, service desk, asset management, equipment provisioning and hardware and software services support.

This contract, which will be signed shortly, will also enhance our standing in the Germany marketplace.

So in what had been a very tough period for contract signings in the IT service industry overall, we've land add number of significant contracts with marquee clients and I believe this a testament to the value that we're bringing to these organizations.

Let me add that even after signing these contracts, our pipeline of proposals remains very strong.

We continue to add new proposals to the pipeline and we hope to land additional large contracts particularly in BPO in the fourth quarter.

Moving on, I'd like now to drill down a bit deeper into or two businesses at Unisys, services and technology.

And I want to provide some highlights of our performance in each segment in the third quarter.

For an overview of our services business, please turn to chart 6.

Given the market's focus on return on investment and desire for cost and process efficiencies, we continue to see strong growth in our outsourcing business.

At the beginning of this year, I announced that one of our top priorities in 2002 was to continue our strong growth in outsourcing and we are achieving that goal.

Our outsourcing growth is being driven by growth in BPO.

We continue to solid phi our strong market position in payment processing while we're expanding into additional transaction processing areas such as mortgage processing, insurance processing and remittance processing.

In systems integration and consulting our business remains soft - in line with the entire industry.

Clients remain reluctant to fund new strategic integration and solution products with economic conditions so uncertain.

However we continue to see an increase in request for proposals for these type of projects.

With a strengthened portfolio of solutions and the new people and the skills that they've been able to bring into this business over the last year, we believe that we will be in a good position to benefit when spending picks up.

Demand also remains weak in our network services business.

We continue to see clients delay decision decisions on the rollout of new IT infrastructure projects.

However, we continue to shift our focus to longer term managed service contracts under which we manage the client's infrastructure for them on an outsource basis and we account for this annuity business in our outsourcing revenue.

As with our systems integration business, we see an increase in request for proposal (RFP) for network integration and consulting projects worldwide.

And as economic conditions stabilize we expect this business to pick up as well.

Turning now to our technology business, please advance to chart 7 for an overview of this business.

While the market remains weak for hardware and software purchases, we continue to weather the counsel turn by staying focused on high end, mission critical enterprise servers.

As I mentioned earlier, despite what's happening in the market in general, our technology customer revenue was down only 3 percent in the third quarter.

And we had a strong profit showing from our technology business.

We saw continued to see good initial demand for our new generation of ClearPath Plus enterprise servers.

We've completely refreshed our ClearPath line of servers over the past year or so.

Our ClearPath systems are based on our cellular multiprocessing architecture, which offers customers greater flexibility and price performance over previous models.

With the CM based clear path models or customers can run on the same platform, standard Intel-based applications alongside their existing legacy applications.

The system can incorporate up to 32 Intel or Unisys designed chips in up to 8 partitions, which makes the new system extremely power testimony.

Also because all applications and partitions make use of a same shared memory architecture and the same advanced systems management software, the new ClearPath models are also extremely efficient in how hey use resources.

In addition to the solid ClearPath performance in the quarter, we were encouraged by modest growth in sales of our ES7000 servers over a year ago.

We're beginning to benefit from our introduction of new ES7000 systems and from our ongoing marketing efforts with Microsoft top promote the advantages of scale-up of enterprise solutions based on standard Microsoft and Intel technology.

During the third quarter, we rolled out a number of new ES7000 models that give customers greater choice and greater flexibility.

Our new lower end Aires ES7000 line offers customers capabilities at a lower price point.

This system scales up to 16 processors, and it narrows the price with 8-way Intel servers from IBM, HP and others.

While providing a growth path to hire end ES7000 systems.

Our Orian line is a high-end system that scales up to 32 processors and provides all of the enterprise class functionality that clients need to take on mission-critical transaction intensive applications on an Intel based platform.

For both the Aires and Orian lines we announce the new systems in the third quarter, systems that make use of Intel's new Itanium 2 chip line.

These systems are currently available for beta test sites as we await the production release of Microsoft Windows dot-net server.

Finally in technology we saw good growth in sales of our specialized equipment in the quarter.

This segment includes a number of specialized products, including payment systems and our semiconductor test equipment business, among others.

Our third quarter growth in this area was primarily driven by our payment systems business.

So overall, despite the weak environment for hardware and software spending, I believe we're executing well in our technology business and we're doing it by staying focused and by continuing to roll out innovative new products that meet client requirements.

Moving now to our financial outlook, please turn the chart 8.

As I mentioned earlier, we are not changing our view for our 2002 earnings.

While the economic environment remains challenging, and we don't see any real prospect for a near term rebound in IT spending we're sticking to our focused game plan and believe we can achieve our target of about 50 percent growth in our 2002 earnings per share over the 48 cents we earned in 2001 before special items.

Specifically, we look for full year 2002 earnings per share in the 67 to 70 cents range on a full year revenue of between 5.5 and 5.6 billion dollars.

Please note that it is our policy in past years, we plan to provide our 2003 financial outlook in early December following business reviews that we are conducting this fall.

So let me conclude that in this environment, it's all about execution.

And the management team at Unisys is executing our strategy day in and that day out.

And now I'd like to turn the call over to Janet Haugen for more details on our financial results in the quarter.

Thank you Larry and hello everyone.

I appreciate the opportunities to speak with you today.

In his remarks, Larry spoke about consistency and execution.

And these are two themes I would like to comment on today in my remarks.

As CFO, I speak regularly with Unisys people around the world who work with clients on a day-to-day basis and I appreciate the challenges they're facing in serving client needs and winning business in this economic environments.

Even with these challenges, Unisys people are staying focused and disciplined and it is paying off in terms of improved profitability, financial consistency, and predictability.

In my remarks today, I would like to cover two areas.

First, some additional details on our financial results for the quarter.

And secondly, in response to recent investor questions, I'll cover our order booking rules and our accounting for certain service contracts.

Please advance to chart 9.

Let me start with an overall perspective on geographic and market sector trends that we saw in the third quarter.

From a geographic perspective, our most resilient geographies from the third quarter were the United States and Asia-Pac.

Most of our large service contract signings in the quarter came in these regions and our technology business also performed reasonably well in these regions in the quarter.

Europe, particularly Continental Europe, further softened in the quarter as economic conditions there continued to be difficult.

In addition, we continue to face challenges in Latin America due to the to the economic and currency issues there.

Brazil underwent a sharp currency devaluation in September and it reduced our anticipated revenue by about 7 million.

From an industry perspective the government sector, particularly the US federal government is showing the most strengths as agencies work to enhance security and improve operational efficiency.

And financial services we're seeing a mixed environment.

Outsourcing opportunities are holding up fairly well in this current environment as financial institutions work to cut costs and that improve productivity; but project based work for financial institutions is down.

The weakest markets for us right now continues to be communications and airlines and this is consistent with the global trends in these industries which been heavily impacted by the economic downturn.

Please advance to chart 10.

In discussing how our places performed in terms of orders in revenues let me start with orders.

We saw substantial double-digit growth in the United States in the third quarter.

This was driven by the large public sector contract signings that Larry mentioned.

International orders showed low double-digit declines in the quarter.

We saw order gains in Japan and Asia-Pacific which were offset by order declines in Latin America and Europe.

We continue to enjoy a strong pipeline of services proposals and although we still see delays in customer decision-making we've gotten off to a good start in the fourth quarter with the contract signings that were mentioned earlier.

On a revenue basis, our US revenue increased three percent in the third quarter, led by growth in our public sector business.

Revenue from international markets decline 8 percent in the quarter.

Internationally we saw strong growth in our Asia-Pacific operation is which was offset by revenue declines in Latin America and Europe, particularly Continental Europe.

Compared to the prior year, currency had no really impact on our revenue in the quarter as currency strength in Europe was offset by currency weakness in Latin America.

We expect currency to have about a 1 percentage point positive impact in the fourth quarter year-over-year.

Before I move on, I would like to make a brief comment about our practices for booking orders at Unisys.

Generally speaking we book all signed contracts as orders except in our federal government business, where we only book task orders that have been awarded and funded as orders.

We also only book the initial term of contracts.

We do not value potential options or extensions.

The value of contract extensions are booked when the contract extension has been signed.

So when we talk about our orders in any given period, we are speaking about the value of signed, base period contracts with the exception for federal government awards which are booked as I just described.

When we receive an overall award in the federal government for which a task order has not yet been funded, we place these orders in a separate category that we report as unfunded backlog in our annual form 10-K.

So as an example of our practice, with the TSA homeland security contract that we received in the third quarter, Unisys was awarded 2 initial work orders valued at $244 million, over the first 14 months of work.

Of this, we book $23 million as orders in the third quarter, since this was the portion that was funded under the government's fiscal budget that ended on September 30.

We expect to book the remaining $221 million of work orders in the fourth quarter since this work is to be funded when the government approves their fiscal 2003 budget that begins on October 1st.

We believe these practices result in an accurate and a consistent picture of our orders in any given period.

Now, moving onto our expense trends, please advance to chart 11.

We continue to aggressively control costs.

We reduced our SG&A expenses by 8 percent in the quarter.

As we continue to benefit from cost reduction actions and process improvements throughout the company.

SG&A expenses represented 18.1 percent of revenue in the third quarter, compared to 19.1 of revenue in the third quarter of 2001.

We continue to work towards our SG&A target in the 17 percent of revenue range.

And we believe we will get there with improved economic conditions and volume.

Our head count at the end of the quarter was about him 36,500.

This is down about 2,400 positions from the beginning the year.

And is net of new hires and employees who have joined Unisys as part of our new outsourcing contracts.

R&D expenditures in the second quarter were $66 million compared to $73 million a year ago.

As I noted in my remarks last quarter our lower R&D levels in 2002 reflect changes we have made in our R&D processes to improve efficiencies, consolidate software development initiatives and make use of lower cost offshore development capabilities.

We continue to invest in our high end server technologies and in key solution programs within our industry practices.

R&D represented 4.9 percent of overall revenue in the third quarter.

R&D related to technology approximated 15 percent of our technology revenue.

At the operating profit line we reported overall operating profit of 7.2 percent in the third quarter.

This was up 4 percentage points from our 3.2 percent operating profit margin in the year ago quarter.

Two other comments on the income statement.

First, we had other income of 10 million in the quarter compared to other income of 4 million in the year ago quarter.

And this change primarily reflects higher foreign currency exchange gains, principally from Brazil.

Second, our pretax income in the third quarter of 2002 included 37 million of pension income, which was down 5 million from the year ago quarter.

Please advance to chart 12.

Move into the cash flow and balance sheet highlights.

As Larry mentioned we generated $57 million from cash from operations in the third quarter of 2002 compared to an operational cash usage of $75 million in the year ago quarter.

This was $132 million dollar improvement in our operational cash flow for the quarter.

This includes the use of $24 million of cash in the third quarter of 2002 for restructuring actions, compared to $13 million in the third quarter of '01.

We achieved this improvement in what is typically our seasonally weakest cash quarter of the year.

Our capital expenditures were 80 million in the third quarter, slightly below the 83 million we spent a year ago.

We continue to increase the percentage of our capital spending that is invested in revenue generating projects, particularly outsourcing.

We invested about $59 million in revenue generating capital in the third quarter, compared to about $47 million in the year ago quarter.

Depreciation and amortization was 71 million in the third quarter of '02 compared to 72 million in the year ago quarter.

We ended the quarter with no borrowing against our resolving credit facility and 166 million of cash.

Our total debt as of September 30 was 863 million, which was down 32 million from a year ago.

Our debt to capital ratio at the end the third quarter was 28 percent, which continues to be within our targeted range of 25 to 30 percent debt to capital ratio.

We continue to look for full year 2002 operational cash flow of about 150 million.

And this is after absorbing full year cash payments of about 120 million for restructuring actions.

Our expectations for CAPEX for the full year of 2002 is in the 325 to 350 million range and our expectation for depreciation and amortization is in the 280 to 300 million dollar range.

Finally, in light of the recent interest in the use of percentage of completion accounting for long-term contracts, we received many investor questions.

And I'd like to review our accounting policies and practices that we have followed for many years.

First, our accounting for servicing contracts is outlined in the first footnote to our annual financial statements and there are no changes to those policies.

We account for our systems integration services based on the contractual nature of the project.

In its simplest form - a time and materials based contract - the systems integration revenue is recognized as the work is performed and the costs are experienced as incurred.

For long-term fixed price systems integration projects, approximately 35 percent of our third quarter systems integration revenue, the revenue and profit is recognized under the percentage of completion method using the cost to cost approach.

For these contracts, revenue and profit in any given quarter is based on estimates of the total projected contract cost.

These estimates are continually reevaluated and when necessary revised throughout the life of a contract.

Any adjustments to revenue and profit due do changes in estimates are accounted for in the quarter in which that change occurs.

When these estimates indicate that a loss will be incurred, a provision for the total expected loss is recorded when that loss becomes evident.

Now revenue on our outsourcing services are recognized as services are provided based on contractual terms.

Contractual terms can either be a fixed amount for the services period, a variable transactions amount, or a fixed amount based on minimum and maximum transaction levels.

Cost on outsourcing services are generally expensed as incurred.

In some cases, we may have a systems integration project that is part of an overall outsourcing arrangements.

That systems integration portion is recognized on this the percentage of completion method only if the customer is obligated to pay for this work absent delivery of outsourcing services.

Otherwise, the systems integration work is capitalized and amortized over the outsourcing contract period.

In closing, this was a very solid quarter for Unisys.

In a very tough environmental we continue to show good execution of our value added business strategy as well as tight cost control.

We again significantly increased or profitability and we also showed strong order growth and cash flow improvement.

I continue to be pleased by the discipline and focus we are showing throughout our operations as we work through this tough economic period.

Now I'd like to turn the calm back over to have Jack.

Thank you Janet and Larry, we would like now open the call up to for questions.

Thank you sir.

The floor is open for questions.

If you do have a question or comments please press the numbers 1 followed by 4 on your touch-tone telephone.

We do ask if you have a speakerphone to please utilize your handset to optimize sound quality.

Please press the #1 followed by 4 on your touch-tone telephone.

Our first question is coming from John Jones at SoundView Technology Group.

Please pose your question.

John Jones at SoundView Technology Group: Good morning, nice quarter, Larry.

Could you talk a little bit about what impact the delay in the federal budget is going to have on that business and from where you sit, how long can you proceed through the quarter without getting-- without being affected?

Without being affected by a lack of a budget approval?

John, we had very minimal amount of revenue in the third quarter because it was really in a startup phase.

We can get through Thanksgiving under the amounts that have already been approved.

But the government has certain requirements of what needs to be done by the end of November and the end of December.

Therefore, we believe that there will be additional funding.

Remember, that the way that the budget is now being funded is they basically are funding at the same levels as they did in 2002.

That's these ongoing budgets that they come forward with.

So we still have a fixed amount that goes forward for us.

And we could get ourselves up to about $45, $50 million dollars of revenue under that before we would need a new budget authorization.

So we feel that we shouldn't be constrained by that.

Also, given the fact of that congress itself set these deadlines, we have talked to the folks in TSA and the government and don't feel that will be a hindrance.

Again, if this thing should go on, I would say into mid-December or beyond, there would be a question of what kind of funding they would go forward with.

John Jones at SoundView Technology Group: A clarification if I could.

Percentage to completion accounting if you did the math it looks like it's only 9 to 10 percent of your total revenue.

Secondly, last quarter you gave out of a details on your two businesses, breaking out your hardware and a couple of segments and your services into outsourcing systems integration, etceteras.

Are you going to do that again this quarter.

Well, first on the first part, your math is right.

The 35 percent would amount to about 10 percent of our overall services business.

I just want to comment on that, John, that Janet said that was based upon the third quarter of '02.

Obviously as different contracts come in, we would see different percentages and different quarters, but given what's going on in the marketplace now, not too many people are signing up for long-term contracts and therefore, that's a pretty fair number.

John Jones at SoundView Technology Group: Okay.

On the revenue by segment, we do have some figures we can share with you.

If you look at the services business, and the technology business, they both were down about three percent year-over-year.

But if you look at the individual pieces, outsourcing was up double-digit in the quarter.

The systems integration business was down, actually outsourcing was up about 12 percent.

The systems integration was down about 12 percent.

That's the weakest part of the business.

Our next network service business is down because, again, we were just about out of where we're going to be with this low commodity kind of hardware but we're down about 12 percent in the quarter.

And core maintenance, which is an industry issue, is down about 4 percent.

Our servers are up -- are down about 7 percent and our specialized much technology up about 8 percent.

So all over - if you run through the math on that - it comes down to about 3 percent down in services, 3 percent in technology.

With the real strengths in services coming in outsourcing.

John Jones at SoundView Technology Group: Okay.

Thank you.

Thank us, John.

Your next question he is comes from Joseph A Vafi at Jefferies & Co .

Joseph A Vafi at Jefferies & Co: Hi.

Good afternoon.

Great earnings performance this quarter.

Just a few companies on the TSA contract and federal government business in general.

Do you have the number, how big federal government services was a percentage of overall revenue in the quarter?

: You know, the pure federal government, I don't have that number.

Our public sector business, typically runs somewhere around 30 percent, a third of the business, and I would estimate the federal government is about 10 percent of our total business.

Joseph A Vafi at Jefferies & Co: Okay.

And then if you look at the TSA contract over the next couple of years, would you expect that contract to have the same type of margin contribution as some of your other federal government business.

: Yes.

You know, if you look at the size of the contract, and the nice thing about winning a large contract like this, the selling and administrative costs in the selling effort are one time, Joe. and therefore we do get a benefit.

Although the gross margin may not be where we would like it in the private sector, the operating margin would meet our goals.

And I think I've said on this call many times before, we are manage the business today on an operating margin percentage rather than gross margin.

It doesn't mean we don't look at gross margin.

But we know if we're going to be successful we have to get the SG&A to match the kind of margins we can get in each business.

So for example, our outsourcing SG&A has got to be down in the 8, 9, 10 percent range.

Federal government business has got to be under 10.

And we try to come up with an SG&A rate against each part of our business.

Joseph A Vafi at Jefferies & Co: Very good.

And then, on the gross margin line, I know Janet kind of talked about a goal of 17 percent on the SG&A line.

Take out the seasonality in the business.

Do you see any more improvement capacity here on the growth profit line, assuming kind of flattish top line performance over the next few quarters, use that as an example.

: Well, we think, we think there's some gross margin but not a huge increase in absolute dollar gross margin without an increase, Joe, in absolute revenue.

On the other hand, when we look at the operating margin, we're still not satisfied.

We think we can do better.

Our goal is over a period of time to get up to the 10 to 12 percent operating margin.

And we still have a way to go there.

So we think we can continue to make improvements even if the revenue was relatively flat.

But in the gross margin area, I think it would be more difficult without a big increase in revenue dollars.

Joseph A Vafi at Jefferies & Co: Okay.

And then finally, I was wondering if Janet could go through the cash flow expectations and the capex expectations again.

Sure.

Joe, I had mentioned that our cash flow expect is for the cash from operations to be about the $150 million range.

And that our capex for the quarter to be in the 325 to 350 range.

Yeah.

Obviously, Joe, both of those numbers are for the full year.

Joseph A Vafi at Jefferies & Co: Right.

Exactly.

Very good.

Okay.

Thank you.

Thank you.

Your next question is coming from Ashvin Shirvaker (ph) of Salomon Smith Barney.

The third quarter, alignment.

The question is on the sizing and profitability of systems integration business.

Given the continued declines in that business.

Do you foresee any further cuts here?

And if not, what kind of steps are you taking about that reallocating resources, what are you doing to manage the continued decline?

: Well, Ashvin, we don't see any more cuts.

Obviously, as a company, we continue to monitor the kind of performance that's required going forward and we do have a pay for performance program within Unisys.

But as we look at the systems integration business, we have gone out in the market as you know, and hired about 100 people so far this year, people with systems integration skills.

We're taking those people and using them not only in systems integration, we're doing some front end consulting.

We're also using them in our outsourcing business.

Because one of the things we're finding, outsourcing as a stand-alone is only when someone is looking for the lowest price.

What we're trying to do is create the value-add by making sure that we can give them both a front end as well as a back end.

The front end being the consulting and systems integration.

And that's how we're adding value to our outsourcing business.

We acquired a very, very small company called R2A.

So small it's just a few people.

But the reason for doing that was they had a very good reputation and have a good reputation in the transportation industry.

And we're putting out now some thought leadership in the transportation industry because even though the industry has challenges there's still a lot of needs that they have in going forward.

So we're finding that by coupling some of our fronted end systems integration consulting skills together with what we're able to do from an outsourcing and some of the applications that we have in an outsourcing environment that we are being more successful.

So we do not see a layoffs at this point.

We think that, although the trend is down in systems integration, it's down across the board, we took the actions that we needed to take a year ago.

We continue to be very, very prudent in how we go about hiring people.

I think Janet mentioned in her head count numbers that we're down about 2500 people.

If we don't have any new outsourcing contracts which we anticipate we will, but if we didn't, you would see that same kind of very tough cost control position coming into the end the year.

Okay.

And follow-up question if I may.

Separately on the state and local side of the public sector.

Would you characterize the expected budgetary shortfall in that area as more of a risk near term or a longer-term opportunity or both or how would you look at that.

: There's no question right now, Ashvin (ph), that I look at the federal government as being more opportunistic for us and for everybody in the industry than state and local.

We continue to do a lot of business in state and local.

One of the issues that most states have is they're trying to become more efficient because even as their revenue is going down, they still want to be able to deal with the citizens, their customers, on a more efficient way.

So we are seeing more requests for projects than we would have thought given the shortfall in tax revenue that's being achieved.

I think long-term, there's a great opportunities in all government and this is not only in the United States, but around the world.

But right now, the state and local government will not be as robust in the short term as the federal government.

Okay.

Great.

Thank you.

: Thank you.

Thank you.

Your next question he is coming from Don Young of UBS Warburg.

Don Young, UBS Warburg: Thank you.

And good evening.

First I would like to ask just in general, Larry, the BPO outsourcing the item processing or payment processing was a hot area.

It also sounds like in your technology sales it was hot, too.

I'm wondering if there's anything in particular going on there other than your big push into it which is relatively new.

But is there any fundamental change or shift that's driving that?

The second thing, just quickly, I didn't catch what you said happened in orders in technology.

If you wouldn't mind repeating that.

Then third, although you don't want to give any guidance on next year on 2003, what is your general feeling for the way IT budgets in general are likely to shape up.

Do you have any read at this point from your meeting were clients, thank you.

Okay, Don.

On the first part in the BPO the payment processing, I'm not so sure that we're seeing a fundamental shift in how the business is done.

What we're finding that more and more institutions, recognize that it could become a core to a Unisys and not a core to them.

And therefore, in looking at this business, we can do it faster, cheaper, better than they can do it themselves.

If you remember, Don, this thing we set up in the UK and now we have it in Australia and we're looking at other parts of the world where we have kind of a unique competency here and because we also have the hardware, we can bring to bear things on a faster basis and really make them hum.

So, I don't think it's a shift in the nature of what best done I think it's a recognition of our competency and our capability to bring to market.

As far as the orders in technology goes, the orders are basically flat - I think they were down maybe close one percent or one percent - but they were basically flat in the quarter.

On your third question, on 2003 guidance, we are going through as we do every year at this time our strategic planning process.

We meet with our Board in December, at which time we he have a multi-day meeting where we take them through the strategy for the next three years with particular emphasis on '03 and the budgets in '03.

So, in December we will give guidance on '03 as we do every year.

As far as my discussions with clients, I'm going to be on the road for almost a month starting next week.

Most of the clients are sitting with needs but not sure that they want to open their pocketbook yet.

And what I mean by that is, there are things that they would like to have done, the RFP's that we're seeing continue, but they're not sure that they're going to have the earnings and the cash flow that will enable them to do what they want to do without borrowing money.

And right now I don't find a whole lot of people wanting to go borrow money for technology projects.

So, what we are seeing in the budgets are things like the BPO outsourcing because there is a good pay back and it is value-added.

On some of the managed service contracts where he can show them that your logistics around the world because of multiple clients makes it easier for them to operate.

Those are the kind of things that they're trending towards.

But I don't see at this point a huge increase in the budgets for 2003, although, I do see a building up of demand but I'm not sure they're going to open up the vents yet.

So, it's-- as we go into the year, if you remember what we said early on this year, we said that we were going to forecast the year 2003 very, very straight.

We were not looking at any kind of growth in revenue.

And that's what we did in 2002.

We haven't crossed the bridge in 2003 yet, but we are looking at this marketplace and we're very concerned that the economy may not pick up.

So our goal will be once again, to take a good hard look at it and by Thanksgiving time put together our final plan.

Great.

Thank you, Larry.

Thanks, Don.

Thank you.

Your next question he is coming from Steve Milonovich (ph) of Merrill Lynch.

Steve Milonovich (ph), Merrill Lynch: Thank you.

Could you talk a bit about the pension income which is still fairly significant and I know you don't want to guide next year but what are the assumptions that are going into that that pension income.

How might those changes.

If you were to take that out of the operating profits for services and technology, do you know how that would look in would they be roughly equal in those two areas?

Well I can give you the first part of that.

The pension income is as Janet mentioned the 37 million in the quarter down 5 million from a year ago in the quarter.

The assumptions that we use are 9.5 percent on earnings.

We have a 15 year history of earning in excess of 10 percent but we did for this year, 2002, bring it up down from 10 to 9.5 ask our discount rate is at 7.5 percent, Steve.

As we look to 2003, obviously, a lot of it will be dictated by what the marketplace is.

One of the things we have to look in the discount rate is what the bond rates will be over the life of the employees that we have so we can match up the maturity with the employment base.

And that's something that we'll have to look at, whether it's 7 and a half or 7 or some other number, we're not sure at this point.

The other thing that we need to look at is what the earnings rate ought to be.

I said on the last call in response to a question that USA had published an article which said, they thought that next year would look something like 8.75 percent with a 7 percent discount rate.

For us, that would take about another $30 million pretax off of our income.

So we don't look at this as being a major had your tell for us, from that standpoint.

We will not make the decision on what to do until after the year end because we're required to make the decision once a year and our determination date is December 31 which means we'll get the information from the actuaries sometimes in the first quarter.

So, we're looking at where the market is right now.

If the market stays where it is, we would anticipate taking that earnings rate down and probably somewhere in the range of 9, 8.75, something like that, Steve.

But I don't want to cross that bridge at this point until we know where the year winds up.

Okay.

That's fair enough.

You indicated that there were I think 12 contracts over 100 million you were pursuing.

Got 3, lost one, one was withdrawn, are there 7 left and any senses how they're going to go in the fourth quarter.

: Let me say, there are 7 left and some additional ones so we're back in the 10- 12 range again.

And we certainly hope that we'll there will be additional wins.

If you listened to the wins we just talked about, three of them came in this quarter.

It's hard to say.

The timeline has taken longer.

We've been working on these for sometime.

We felt very good that a number of them came to fruition in the third quarter.

And we are certainly anticipating that some of them will close in the fourth quarter.

If they do, it will mainly affect our orders.

It will not affect our revenue to any big extent, Steve, nor our earnings because there will be a ramp-up in those outsourcing contracts.

Is there anything unusual going on for reserve contracts.

Of the contracts ending the first part of your Commonwealth which you've had the additional business.

Did you get the kind of margins on that that you were expecting.

: Yes, we did.

It didn't end.

It was going towards end of 2006.

We have an extension to go from 2006 to 2009.

This was based on what we're able to do by consolidating all these various data centers they all a all over the state, brought them together, made it up a much more efficient process, and as you know the State of Pennsylvania has would be a number of much awards.

We have had one of the industry gurus look at our perform and given us high marks in the state of Pennsylvania.

We feel very good about that.

But this was an addition in addition that they gave us.

To put it in perspective, of when I talk about a win-win and want to go work with clients, the original contract was about $500 million.

Since that contract was signed, we got over 100 million of additional add-ons that they gave us.

We were there going a good job, they were happy.

Now we got another $250 million.

This shows you the impact, if you develop the right relationship and do the right job for a client.

And that's where I come to the win-win.

There's got to be value for both parties.

Thank you.

: Thanks, Steve.

Thank you.

Your next question is coming from Peter Lebey (ph) of SunBank Securities Limited (ph)

Thanks.

Larry, let me ask you a question about systems integration.

It would seem to me, we have an area of substandard returns, you were probably focusing less resources to that.

Are your competitors doing the same thing?

Is there gaining or losing market share?

How should we look at the SI market?

Well I think Peter, we are very fortunate at Unisys because we have a breadth of skills beyond systems integration.

If we were a pure systems integration house or pure executing systems integration, we would not be happy campers at the moment because this business is not doing very well.

I said we were down about 12 percent in the quarter.

Many of our pure play competitors are down much more and going through layoffs and having a to deal with a lot of things that none of us like to deal with.

I do think in the short to near term, we will see substandard returns because what happens when the market gets weak is people begin to cut prices so we're seeing some price cut.

It's the most foolish thing to do.

It keeps you alive with some cash but it ruins your business long-term.

Because of our, as I mentioned before, our capabilities in outsourcing and being able to bring the resources together, we have taken a lot of those folks, we've asked them to work on systems integration and outsourcing together.

We find today that most of the wins, Peter, in outsourcing got generated first by our consulting systems integration people and because we have that skill, we think that we can put it to very good use.

Today I would not want to start up a systems integration business from scratch, because the market just isn't valuing it.

Longer term, you still are going to need systems integration.

Longer term, you still need to take the various applications out there and put them together, whether they're surrounding legacy systems or building new systems.

And it won't be building them with new systems from scratch.

But it will be taking various applications through integration.

So I think there will be a market.

There's probably an over-capacity right at the moment but again I want to come back and say from our position, the fact that we started almost from the time I got here to put a very strong emphasis on outsourcing has served us well.

I'll give you one statistic.

Outsourcing today is the largest piece of our service business.

Remember, not too long ago, we really weren't in the outsourcing business.

Our balance sheet didn't allow it.

But in the third quarter, 36 percent of our services revenue came from outsourcing.

So we've come a long way.

We continue to focus on that.

We continue do focus on BPO outsourcing.

And by focusing on BPO it doesn't require you to use your balance sheet and therefore have some of the cash strains.

And just to make a point, we hope in the year 2003, even with the kind of market we're looking at, that we'll have positive cash flow, free cash flow, in after capex in 2003, at the end of the 2003.

Great.

Thanks a lot.

Thanks, Peter.

Thank you.

Your next question is coming from James Kusain (ph) of Bear Stearns.

Thanks.

Hi, Larry and Janet.

Larry and Janet can you break out services revenue by vertical.

You touched on what's going on in the airline business and communications, but can you elaborate on some of the other verticals you're focusing on in the service arena.

About a third of the business is in financial, Jim, a third in public sector which includes federal and state and local.

On a global basis, we put it all together, all the government business in that area.

The rest of the business in commercial, transportation, telecommunications makes up the other third.

If you look at those three businesses, they're kind of spotty.

In the telecommunication business it's sure a tough business right now.

Yet, we continue to have the resources there, particularly, with voice messaging and when customers need some additional support, we have both the systems integration capability, the application, the hardware.

If you look in the transportation business, there we've been doing work.

We've had a number of items in the press regarding R2A, this little consoling company that's now part of Unisys.

And we just put out a very interesting report showing what the airlines would have to do in order to compete with Southwest Airlines and we are getting a lot of consulting and add-on opportunities through the transportation industry because of this.

In the commercial sector, even though systems integration is down in the commercial sector we're doing all right.

And it's profitable.

It's growing.

The base is small, but it's growing.

So we feel pretty comfortable in that business.

I think right now, the one business which kind of goes up and down is the financial services industry.

We would like to see a little more ability to sell into the financial services industry but we're really concentrating now on BPO which seems to be more on the top of their screen than some of the other things.

Okay.

And Larry, can you review your targets for operating margins in the services business?

Does your significant success on the federal side change that?

The much operating margins we're looking for at 10 to 12 percent, not gross margin, operating margin.

Is that the company as a whole or is that services?

That's services.

When we look at what we're doing in the federal, we'll be may push us to the 10 rather than the 12 but it's not going to be far from there.

When we look at these contracts, we're not looking for three and four percent margin, operating margin because after tax basis it doesn't give you a return.

You can't get your cost of money back.

We're also not looking for revenue for revenues sake.

We are looking for a 10 to 12 in the services business and about 12 to 14 in the technology business.

So no real change. .

No sir.

Thank you Larry.

Thank you your next question he is coming from Greg Geiger of A.G. Edwards.

Couple of questions.

But first, let me congratulate on being one the few technology companies that is still holding to their year beginning guidance.

If we look at the TSA contract, I assume that's going to be recorded on a percentage completion basis?

No.

The contract on the TSA is not going to be on done on the percentage of completion basis.

It follows the accounting practices that I commend on in my comments.

There is not a systems integration - a small portion of systems integration in that contract and that will be accounted for as a distinct element in percentage of completion.

The majority of the TSA contract is managed network services which is in our outsourcing business and is accounted for in my comments.

Good.

When you talked about the improved operating margins you got during the quarter, you said some much it came from a mixed change toward a higher value added businesses and some came there tight cost control.

Can you give us some approximate idea of just what the two contributions were for those two factors for service and for technology.

Have you looked at it in that manner.

: Greg, I would be hip shooting if I gave you percentage on the two.

What we've done, though, is we've really looked at the cadre of people.

We have some very significant training that's taken place for the people.

But we also have what I call the pay for performance program where people need to be able to handle the work at the level that we want to do.

If they can't, then opportunities should be elsewhere.

But probably can't make the hurdle that we have to go through in the service business at Unisys.

So, I think we have had, in addition to what we did last year, we are running at about 12 percent turnover right now which is low for this industry.

But it is 12 percent, about 6 percent of which is voluntary and the rest involuntary.

And that of course improves your margins.

The second thing we're doing, I mentioned we went out and hired about 100 people from Big 5 and other consulting firms who really understood the service business.

And what we've basically said to them is, we do not want to go after any kind of body shopping.

We don't want to go after any of the kinds of contracts where there is no value add.

And therefore, we are just not accepting that.

The one part of our numbers, and I appreciate your comments about holding to the year, from a revenue standpoint, our revenue is going to be down year-over-year.

But what I said in the beginning the year, it was more important for us to have profitable revenue than just to have revenue.

We have really looked at these assignments.

If we can't add value and it just taking on business, taking on the risk and not having any reward for the company, we have walked away from it.

But as far as how much of that is from higher margin versus people, anything I give you would be hip shooting.

Okay.

Thank you.

Could I ask you one last question about the overall pricing environments?

I assume a systems integration pricing is still under pressure.

There have been reports that some of your other competitors in the outsourcing area have started to slice their prices back.

Anything you can comment on there, what are you seeing in terms of pricing.

The nice part about our outsourcing, Greg, the only ITO outsourcing is typically Unisys equipment or Unisys shops.

We're not seeing a lot of price cutting in that.

On the other kinds of IT outsourcing, we do see them being commoditised and when it becomes commoditised there is pricing pressure.

We typically win in BPO not because people like the way we look.

But because we do have good solutions, we can take you and that show you the solutions and where they're operating today.

If you've got a good solution and it's a Unisys solution in many cases, then we can get the right kind of margins.

If we had to go out and say, we'll do your outsourcing and now we're going to go get a commodity kind of solution, then you would get yourself under pressure so we've stayed away from that.

And so far, so good.

Okay.

Thank you very much.

Thanks, Greg.

Our last question for today is coming from Greg Gould of Goldman Sachs.

Thanks.

I wanted to follow up on that pricing question.

Another aspect would be the capital intensity Larry, are you seeing any trends in the BPO deals or in the ITO deals you're doing?

First off, in the ITO deals, we're not doing very many Greg.

We stay away from them.

We do not want to use our balance sheet in order to win deals.

I mean, there's other industries that are facing similar issues on balance sheet but we don't think the way you win a deal is because the size of your balance sheet or the fact that you're willing to finance something for somebody.

So we are doing everything in our power to make sure we don't get ourselves in trouble by using our balance sheet, taking on a large credit.

Has that pressure increased or decreased or stayed the same, Larry.

On the IT, we don't really try to play, Greg, in that market to the same extent.

I can tell you from colleagues in other companies, that there is a lot of pressure on IT right now.

And some of the big deals that have been very visible in the newspaper, there's a tremendous amount of upfront cash that's required.

There's low margins and one has to question whether you're really going to earn your cost of capital if you put that much capital up front and you have to figure out how your going to amortize it against the deal.

In the BPO, there's some cost pressures but there are two kinds of clients in BPO.

I tried to make that distinction before.

One kind of client really looks at BPO as a value-add where you can really do something for them.

Another one looks at it is how do I get the lowest cost.

And I'm going to get you down to the lowest cost possible and then we'll go fight about change orders.

We're trying to stay away from that.

We're trying to look at these things on the basis that we do have a value proposition.

And we can provide that proposition.

There are firms out there who try and help clients deal with some of these outsourcing deals.

In many cases, those firms are looking at the lowest possible price.

The client thinks they got a good deal and the client finds out that the change orders are enormous.

We don't really think that's the right away to go and at this point, we have tried to stay away from that, Greg.

But there's no question, if this downturn conditions continues, there will be a lot more price pressure.

Okay.

And just one other question.

In the technology side of the business.

How was the linearity of the bookings in the quarter.

How did that compare with prior quarters?

You have to understand in this quarter there's no such thing as linearity.

In the third quarter ever year, and it's not just this year Greg, it's every year.

The third quarter is just terrible.

Europe is on holiday for at least a month or two months.

All the activity takes place from Labor Day through September 30.

I'll tell you this quarter was no different.

So, we saw a lot of activity in the last three weeks of the quarter.

But there were parts of the early part of the summer where we could have gone to sleep in the technology business, so to speak because it was just quiet.

But, that was the same as prior years, correct.

Same as if you looked at, I really haven't produced it day-by-day but looking at it week by week which is the way I look at it, it was the same plotting as it was in '01.

Thank you.

Thank you, everybody.

I appreciate your interest and appreciate your continuing to follow Unisys.

We had a good quarter.

We all feel pretty good about it.

And we appreciate, again, your listening into this call.

Thank you.

And goodbye.

Thank you all for your participation.

That does conclude your teleconference.

You may disconnect your lines at this time.

Have a great evening.