Unisys Corp (UIS) 2003 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Unisys Corporation first quarter 2003 result conference call.

At this time all participants have been placed on a listen only mode and the floor will be open for your question and comments following the presentation.

Thank you very much, operator.

Good morning, everyone and thank you for joining us today.

Earlier this morning, Unisys reported its first quarter 2003 financial results.

In a very challenging business environment, we achieved our targeted revenue and EPS range for the quarter.

We also achieved substantial growth in our orders as our success and momentum in the business process outsourcing market continued to gain speed.

You can find today's earnings release on first call and on Unisys investor website.

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 just a few housekeeping details.

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

The presentation is complementary to the earning release that we issued this morning.

These cells are available on our investor website 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 the live call.

You can access this replay on the internet by the Unisys investor website.

Finally, please note that all forward looking statements made in this conference call are subject to the various risks and uncertainties that could cause actual results to differ materially from expectations.

These factors are discussed more fully in the company's periodic reports as filed with the SEC.

Copies of these SEC reports are available from the SEC and from Unisys investor website.

Now let me turn the call over the Larry.

Good morning, everyone.

And thank you all so for joining us today and giving us an opportunity to discuss our first quarter 2003 financial results.

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

Unisys delivered another solid consistent performance in the first quarter of 2003.

And what continues to be a very challenging business environment.

We reported a 20% increase in our first quarter earnings per share and we achieved our targeted earning range for the quarter.

We also achieved substantial growth in our first quarter orders by winning a number of significant multiyear contracts.

We achieved these results despite two significant challenges.

First, the current geopolitical and economic environment add a greater uncertainty to the already unsettled global business climate.

Because of this uncertainty, clients continue to be cautious in their spending plans, many organizations are deferring capital projects and we saw the impact of this in our short-term project based service business in the quarter.

The other challenge in the quarter was overcoming a significantly lower level of pretax pension income.

As we discussed in our last earnings call in January, our pretax pension income will decline significantly this year from $144 million in 2002 to about $30 million for the full year of 2003.

A decrease of $114 million.

In the first quarter of 2003, our pretax pension income was about $6 million, that's down from about $38 million in the first quarter of 2002, a reduction of $32 million.

We account for pension income as an offset to expenses where appropriate within our income statement.

As a result, the lower level of pension income impacted our reported margins and our earnings in the first quarter as it will throughout this year so we were working upstream against some tough currents in the first quarter, a continued weak economy, geopolitical uncertainty, and the drag of lower pension income on our earnings.

Yet, we were able to overcome these challenges and achieve double digit earnings growth in the first quarter.

Chart 2 shows our financial results for the first quarter of '03.

Our revenue came in at $1.4 billion which was up about 3% from our revenue in the first quarter of 2002.

Currency had a 4 point positive impact on our first quarter 2003 revenue as the U.S. dollar weakened overall against global currencies.

In terms of business segments, our services revenue grew 6% in the quarter.

We continued to achieve double digit growth in outsourcing with a ramp-up of our contract with the transportation security administration contributing to this growth.

Customer revenue in our technology business declined 7% from the year ago quarter as the spending environment globally remains weak for hardware, and software purchases.

However, our technology business had a strong profit performance in the quarter.

And we also saw a double digit in sales of our ES7000 family of Intel based servers.

As you review our reported margins and earnings in the quarter, please keep in mind that they reflect the $32 million reduction in pretax pension income compared to the first quarter of '02.

When you factor out pension income in both 2003 and 2002, our operations were significantly more profitable this quarter compared to last year's first quarter.

This is particularly evident at the operating margin line which is a key metric we use in measuring and monitoring our performance at Unisys.

In order to compare the profitability of our operations in the first quarter of '03 with the first quarter of '02, we've included a few charts showing our operating margins in the two periods both including as well as excluding pension income.

Chart 3 shows this comparison for the company overall.

Including pension income, our overall operating margin in the first quarter was down slightly from a year ago.

Excluding pension income, however, you can see on the right-hand side of this chart that our operations were significantly more profitable in the first quarter of 30 over the year ago period.

Chart 4 compares operating margins in our services business in the two periods.

Again, excluding pension income, you can see that our services operations were more profitable in the first quarter of 2003.

Finally, chart 5 shows a comparison of operating margins in our technology business both including and excluding pension income.

Turning now to chart 6 in the presentation.

Recognize, as I mentioned, that we started the quarter $32 million pretax, $21.4 million after tax, in the hole because of pension income compared to the prior year.

So you can see in this chart the impact of the lower level of pension income in the quarter and our operating earnings without taking into account pension income.

So we continue to improve the profitability of our operations and we've done this and will N what continues to be the most challenging IT spending environment in decades.

Our offshore strategy is progressing according to plan.

We have about 250 dedicated people in India working on application development in systems integration.

This number will increase to about 1,000 people by year end 2003.

In addition, we've begun to utilize offshore capability in our outsourcing work and this effort will also expand significantly during the year.

Chart 7 of the presentation materials summarizes the demand trends that we saw in the quarter.

Overall, the first quarter of 2003 continues the trend that we saw through much of '02.

From a geographic perspective, the United States continued to be our strongest market.

This was driven by strength primarily in our U.S. federal government business.

Internationally, business conditions in Europe, particularly continental Europe, remains soft and we saw a continued economic and currency pressures in Latin America.

From an industry perspective, our strongest market continued to be the public sector.

Particularly the U.S. federal government.

Strength in this market during the first quarter offset softness in other global market sectors.

Including financial services, transportation, and communications.

Within the public sector space, federal government agencies are placing a high priority on enhancing their IT infrastructures to deal with security issues and delivering improved services to citizens.

Over the past couple of years, we've put new leadership in place in our federal business and we did it to strengthen our capabilities and capitalize on growth opportunities.

And this team is doing an excellent job in enhancing our profile and our presence in the federal market.

Our contract with the transportation security administration which began last August continues to ramp up.

We also continue to win other important contracts from federal agencies.

For instance, we recently were engaged to build a web based system for the U.S. department of agriculture.

Our system will allow USDA employees to process funds online for farm programs and rural housing.

We received the first $7 million task order opportunity contract which has a potential value of more than double that amount.

We also eventually received a five-year, $16 million contract from the U.S. coast guard finance center and we're going to appropriate technical support services to its Oracle financial systems.

This department is a new Unisys client.

Also in the first quarter, we won two significant outsourcing contracts from U.S. city governments.

I'll provide more details on these wins later in my remarks.

Digging down a bit deeper into our portfolio, please turn to chart 8 for a summary of the demand trends that we are seeing in our service business.

Here, too, the trends are consistent with those we saw through most of 2002.

Given the business environment, organizations are focusing their spending on enhancing and optimizing their existing infrastructure, especially their mission critical systems and applications.

They continue to look for ways to improve the efficiency of their operations.

Cut costs, and reduce their capital requirements.

This is driving continued interest and demand for business process outsourcing and managing infrastructure services.

Conversely, demand remains soft for a new IT project and solutions requiring systems integration consulting and other project based services.

This is not surprising since organizations will frequently cutback on their shorter term project work during uncertain economic periods.

We saw these trends play out in our services business in the first quarter as double digit growth in our outsourcing business offsets slight revenue declines in systems integration and consulting and in infrastructure service project work.

Our outsourcing revenue grew 20% in the first quarter of '03.

This follows the 11% outsourcing growth we achieved in '02 and it shows the kind of success and the momentum that we're having in business process outsourcing and manage infrastructure services.

We also continue to build our backlog of annuity based services contracts.

During the quarter, we added to our base of multiyear recurring services business by closing more than $800 million of outsourcing contracts.

Chart nine shows some of our major contract signings in the first quarter.

Our largest win in the quarter was a 10-year BPO contract valued at more than $450 million to take over management and processing of 2.4 million life and pension policies for royal and SunAlliance in the United Kingdom.

We won this contract against significant competition.

We won it on the strength of our life and pension solution, the expertise of our people and our in depth understanding of a financial services industry.

This new contract will significantly increase processing volumes at our UK subsidiary, Unisys insurance solutions limited where we already handle the administration of about 1.4 million life and pension policies for Abby life.

With the addiction of royal and SunAlliance we'll now be processing more than 4 million policies for U.K. insurance policy.

We expect work to cut over to about 1700 royal and SunAlliance employees will be joining Unisys where they will become part after growing BPO operation with significant opportunities for career advancement.

We also won two major outsourcing contracts from US city government agencies in the first quarter.

The city of Minneapolis awarded us a seven-year contract valued at approximately $56 million to provide a full range of outsourcing services.

We'll be managing the city's complete IT infrastructure from it's data center to its distributed desk top network and Mobil die vices where now the city's strategic partner for IT services.

Also in the first quarter we received a three-year contract extension from the city of Chicago to continue managing the city's distributed IT infrastructure.

The with the extension is valued at about $35 million over the initial three-year term.

If all options are exercised, the contract value could increase to about $56 million over five years.

We also received a four-year, $37 million contract to become the new Medicaid fiscal agent for the state of West Virginia.

The contract which was competitively bid includes four one-year options.

If exercised the contract value would increase to approximately $61 million.

This is a new client for Unisys where we are replacing an existing provider.

We're seeing growing interest by state and local government agencies in pursuing outsourcing as a means of improving efficiency, and reducing costs.

As you may recall, about six months ago we received a more than $250 million contract expense from the state of Pennsylvania to continue and expand our groundbreaking work with the commonwealth.

Pennsylvania was the first state in the U.S. to outsource its IT operations and the commonwealth has realized significant benefits from the work we've done for them.

Now with these wins from Minneapolis and Chicago, Unisys is breaking new ground for major U.S. city governments as well.

And we see growth opportunities in this market.

We also received a couple of other significant multi-year services contracts in the first quarter.

These include a three-year contract from HPOC, PLC, in the U.K. for infrastructure support services and a five-year, $22 million contract from the board of airline representatives in Australia to implement and manage a new baggage reconciliation system at all Australian international airports.

So we're having good success in winning long-term value added outsourcing contracts.

Our pipeline of outsourcing opportunities continues to be robust, particularly for BPO and managed infrastructure services opportunities.

In addition to outsourcing, another area where we continue to see good demand is for our enterprise security services.

This demand is coming not just from government agencies, but also from commercial organizations that want to be sure that their IT infrastructures are safe, and optimized to deal with viruses, hackers, and other potential threats to their information flows.

We continue to expand our client base in this area.

For instance, we eventually received a multi-year -- multimillion contract with Lloyds in the U.K. for managed instruction detection services.

Under this two-year contract Unisys will monitor the bank the information network from our security command center in Amsterdam.

With our resend wins and the work we've done to enhance our capabilities in this area, Unisys is gaining recognition as a leader in the enterprise security market.

In an event report on U.S. securities services market, IDC ranked Unisys in the leadership quadrant in terms of the scope of our security offerings and our potential for growth.

IDC noted, and I quote, in the note worthy move from last year, Unisys has emerged from the unrealized potential execution category to become an outperformer.

The company has made great strides to increase its visibility in the market and develop a more unified strategy for its security services.

As you may know, one of our strategic priorities in 2003 is to enhance our brand awareness and we are pleased that influential industry analysts such as IDC are recognizing our leadership.

Turning now to our technology business, chart ten summarizes trends that we saw in this business in the first quarter.

Overall the global market for server hardware and software remains sluggish in the first quarter.

As is the case in the IT services market, clients generally are limiting their technology spending on optimizing their existing systems and infrastructures.

However, organizations are willing to spend on technology purchases that offer a clear return on investment in terms of lower costs, reduced complexity of operation, and higher performance and efficiency.

This is fueling market interest in areas such as server consolidation, data warehousing and business intelligence.

In our technology business, we continue to weather the IT spending drought by focusing on high end server technology that provides a clear value proposition to clients.

Our ClearPath mainframe business continues to hold up in the current environment as customers upgrade to our new generation of CNP based models to take advantage of the enhanced capabilities and the improved price performance offered by these systems.

Also as I mentioned earlier, we had a good quarter in our Intel based ES7000 program in the first quarter.

ES7000 sales showed strong double digit growth in the first quarter from year ago levels.

This continues the momentum that we saw in the first -- in the fourth quarter of '02.

Our selling proposition in the server market is straightforward.

And we believe compelling.

Unisys, more so than any other high end server provider, has made a firm wide commitment to open standards that is significantly bringing down the costs of mainframe class computing.

Along with Microsoft and our other key partners, we've been aggressively marketing this message over the past two years.

And it appears our message is getting through.

Our ES7000 program continues to set the pace in the high end Intel and windows based server market.

While other vendors are having trouble bringing to market great are than eight-way Intel based systems, we have been providing up to 32 processor Intel systems for more than two years.

And we've now sold about 900 ES7000 servers around the world.

About 40% of these systems have gone to organizations that have never bought technology from Unisys before.

Clients such as Minolta, Jet Blue Airways, Microsoft, CooperVision, the human resources development of Canada, the Philippine port authority and Kaio bank in Japan to name a few.

We're steadily building a sizable installed base of ES7000 users.

We're seeing more repeat orders and more multiunit orders as clients become more comfortable with the performance and benefits of these systems.

We also continue efforts to broaden the market for the ES7000.

Last week we introduced a new line of ES7000 500 servers that are priced to compete not only against Unix based server but also against eight-way window servers.

These new systems take our cellular approach to the next level by allowing ES7000 clients to acquire power performance in increments starting with a four-way cell and expanding all the way up to a fully configured 32 processor system.

By offering our systems this way we allow clients to create highly scalable Intel based systems that can be easily expanded as their requirements grow.

On ES7000 servers also the first systems introduced for use with Microsoft's new window server 2003 operating system.

In recent TPCC benchmark testing of our ES7000 500 system.

Running the window server 2003 operating system our system achieved the best price performance of any eight-way server on the market.

So we continue to push the envelope in our server program and remain focused on maintaining and extending our lead in this market.

Moving now to chart 11, I'd like to close by discussing our financial outlook going forward.

The current business environment remains challenging.

And it's unclear when demand conditions will significantly improve, especially for project based services work.

Our view at this point is for earnings per share in the 14 to 17 cent range for the second quarter of 2003.

In terms of revenue, here again it's difficult to be precise.

For right now we look for our revenue to be up slightly in the second quarter of '03 compared to the prior year.

We expect to see modest growth in services in the second quarter while technology revenue should be down mid single digits from a year ago.

For the full year of '03, we still believe we can achieve our previous earnings per share target of between 77 to 82 cents range.

This is despite the lower levels of pension income that I mentioned at the outset.

In summary, I'm pleased with our solid performance in this environment.

We continue to show good execution and consistency.

And like all of you, we're eager to see demand conditions improve so we can benefit even more from the work we've done to transform our portfolio and strengthen our capabilities.

Now I'd like to turn the call over to our Chief Financial Officer, Janet Haugen who will provide more details on our financial results in the quarter.

Janet.

Thanks, Larry.

Hello, everyone.

I appreciate the opportunity to discuss with you the first quarter results in more detail.

But quickly, on the pension item that Larry discussed, because of the significant change in pension income in 2003 when compared to 2002, and the non-operational nature of this item which is not indicative of normal recurring operating trends, we believe excluding pension income in supplementary schedule is a meaningful nonGAAP measure to fully understand our operating results.

At the end of this presentation on charts 18, 19, and 20 we have provided a reconciliation of our reported results on a U.S.

GAAP basis compared to the results excluding pension income for both quarters.

Please note that you can also find more detailed information on the impact of pension income on our financial results on our investor website.

You can find this information available for downloading under reports and downloads on the investor section of our Unisys website.

Like Larry, I was pleased with our performance in the first quarter of 2003.

We grew our revenue and earnings and met the financial targets we outlined last January.

We continued to execute consistently in a very challenging global business environment.

In my remarks this morning, I'll provide additional details on our financial results in the first quarter and update you on our cash flow outlook for 2003 overall.

To begin, please chart to -- please turn to chart 12 for review of our first quarter revenue by geography.

Our U.S. revenue grew 17% in the first quarter.

This is a very good performance driven by strong growth in our U.S. federal government business.

Our international revenue declined 7% in the quarter.

Within our international business, we saw revenue declines in Europe and Latin America reflecting continued soft conditions in those markets.

Our Asia Pacific revenue was down slightly, however Like Larry, I was pleased with our performance in the first quarter of 2003.

We grew our revenue and earnings and met the financial targets we outlined last January.

We continued to execute consistently in a very challenging global business environment.

In my remarks this morning, I'll provide additional details on our financial results in the first quarter and update you on our cash flow outlook for 2003 overall.

To begin, please chart to -- please turn to chart 12 for review of our first quarter revenue by geography.

Our U.S. revenue grew 17% in the first quarter.

This sa very good performance driven by strong growth in our U.S. federal government business.

Our international revenue declined 7% in the quarter.

Within our international business, we saw revenue declines in Europe and Latin America reflecting continued soft conditions in those markets.

Our Asia Pacific revenue was down slightly, however within as Pacific we saw growth in Japan.

Currency had positive 4 point impact on our first quarter revenue as the U.S. dollar weakened against most global currency.

Based on March month end exchange rate we accept the currency will have a three percentage point positive impact on our second quarter 2003 revenue if rates remain the same.

Chart 13 shows our first quarter revenue by business segment.

Services represented 79% of our total revenue in the first quarter and technology was 21% of revenue.

Our services business grew 6% in the quarter while our technology revenue declined 7% from a year ago.

Further breaking down our business segments, chart 14 breaks out our services revenue in the first quarter.

Our services growth in the quarter was driven by continued double digit growth in our outsourcing business.

Our outsourcing revenue which was 37% of our services revenue grew 20% in the quarter.

This was driven by continued growth in business process outsourcing and our contract with the transportation security administration.

Systems integration and consulting revenue declined slightly by 2% in the first quarter.

Our infrastructure services revenue also declined by 2% in the first quarter as these businesses were impacted by soft industry demand for project based services.

We do not expect a broad based recovery in our project based service businesses until overall business and economic conditions improve.

Moving to our technology business, please advance to chart 15.

Revenue from our high end servers declined 5% in the quarter and specialized equipment business declined 12% in the quarter as the global environment remains challenging for hardware and software sales.

Within enterprise services -- within enterprise servers we saw strong double digit growth in our ES7000 sales.

This growth was offset by single digit revenue declines in our ClearPath business.

Moving on now to our expense trends in the first quarter please advance to chart 16 of the presentation.

We maintained flat SG&A expenses in the first quarter compared to a year ago.

After considering the negative impact of pension income and currency on this line we demonstrated our continued control over expenses.

As a percentage of revenue, SG&A expenses declined to 17.4% of revenue in the first quarter of 2003 compared to 18% of revenue a year ago.

Our R&D expenditures in the first quarter were $67 million compared to $65 million a year ago as we continued to invest in our high end server and industry solution programs.

Also, in the other income expense line, which as you know can vary from period to period, we had $3 million of other expense in the first quarter of 2003 compared to an other expense of $12 million in the year ago quarter.

The primary driver in the lower other expense is lower foreign exchange losses this quarter when compared to the first quarter of 2002.

Moving to cash flow and balance sheet highlights, please advance to chart 17.

We have $65 million of cash for operations in the first quarter of 2003.

This compared to an operational cash flow of $10 million in the year ago quarter.

There were two primary drivers behind the swing in operational cash flow over the two periods.

First, because of our performance in 2002, we paid out incentive compensation in the first quarter of 2003 compared to the year ago period when we paid no bonuses.

Second, cash from operations reflected lower levels of customer prepayments in the quarter.

A few other notes concerning our cash flow and balance sheet in the quarter.

We absorbed $30 million of cash requirements in the quarter for prior restructuring actions and this compared to $35 million in the year ago quarter.

Total capital expenditures in the first quarter were $89 million, up from $76 million a year ago.

About 65% of our Cap Ex in the quarter was spent on direct revenue generating assets compared to about 71% in the first quarter of 2002.

Depreciation and amortization was $80 million in the quarter compared to $70 million a year ago.

We completed a $300 million offering of 6 and 7/8% (ph) notes in the first of 2003 taking advantage of the current favorable interest environment to increase our liquidity during uncertain geopolitical times.

With this issuance, we ended March 31, 2003, with long-term debt of $1.05 billion and we expect our interest expense levels to be about $75 million for the full year.

We ended the quarter with no borrowings against our resolving credit facility and with $433 million of cash on hand.

Looking ahead, we continued to target full year 2003 operational cash flow of between $325 and $350 million.

This is after absorbing cash payments of about $60 million for restructuring actions.

We expect to return to positive operational cash flow in the second quarter of 2003 and we continue to target break even free cash flow after capital expenditures for the full year of 2003.

Our expectation for capital expenditures for the full year is in the $325 to $350 million range.

And our expectation for depreciation and amortization for 2003 is in the $310 to $320 million range.

In closing, Unisys got off to a solid start in 2003 in a very challenging environment.

We continue to show good discipline and cost control and I am pleased with our execution as we work for this uncertain business period.

Now I'd like to turn the call back to Jack.

Thank you very much, Janet and Larry.

Operator, we're now ready to open up the call for questions, please.

The floor is now open for questions.

If you do have a question, you may please one followed by four on your touch-tone phone.

If at any point your question has been answered you Marie move yourself from the queue by pressing the pound key.

We do request that for sound purposes you please pick up your hand set to provide optimum sound quality.

Our first question is coming from John Jones of Soundview Technology group.

Thank you.

Jack, would you expand upon your -- Larry, would you expand upon your comment.

You said that short-term project based business was seeing an impact.

Can you talk about that?

Can you break out what kind of revenue decline you saw in AMIA and can you talk about what the business looked like in the last couple of weeks as a quarter as we went to war?

I'm trying to figure out how much of that impact was driven by war related activities versus business trends.

Yeah, what -- first there's several questions here.

First on the short-term project business, this has been in decline for quite a while at this point, John.

It's not something that has just just begun.

We've seen that in most of the companies and systems integration and consulting showing year to year declines.

We were down about 2% as Janet mentioned in that area.

And we thought that a 2% we felt pretty good.

But it's still a decline and, you know, we're hoping that as the economy turns around whenever it turns around we'll begin to see an uptick there.

As far as looking at Europe goes in the U.K., AMIA in the current quarter our revenue was up about 1%.

And, you know, if you look at all of continental Europe together, we're down about 3%.

So you put this all together.

Europe is not very strong at this point, all though our U.K. business is doing well.

Certainly a number of the large outsourcing deals we got in the U.K. and some of the related work we get with that has helped our systems integration business.

So that's kind of where we see, you know, the picture right now.

As far as the last few weeks of the quarter, we saw things -- particularly on the outsourcing side, slow down a bit in the last two weeks.

You know, about the time when we were going to war.

But when I say slow down, we hadn't anticipated closing anything, but the number of meetings that are usually held to try and close some of the Ts and Cs seemed to take a little longer and, therefore, we think that was just because of some of the uncertainty.

As we go forward now, we still think that the market is soft, outsourcing continues to be very strong.

We have 20% growth in the quarter, but the smaller project based kind of assignments are the ones which if they would turnaround would certainly enhance our revenue growth.

So, mine, what you're really saying is that Europe wasn't nearly as weak -- Europe wasn't as weak as your international was in total?

Is that what you're saying?

John, this is Janet.

Yeah.

Larry's comments were with regard to the services business in particular.

If you were to look on the our European business in total was down 6%.

And so we were -- Larry's comments reflected the services business in response to what I think your earlier inquiry was on project based services.

Okay.

So down 6% meaning it's probably down 12% local currency?

Roughly about that.

Okay.

And just as a follow-up on the outsourcing comment, you basically taking India from 250 to 1,000 on your focused on your application development and SI businesses.

You were saying that outsourcing is also starting to take advantage of offshore.

Is that also in India or is that someplace else that you're taking advantage of outsourcing in offshore.

It's in India, right now, although we are looking at additional locations beings John.

Right now it's India.

We've already got some outsourcing offshore.

That will ramp up.

I haven't given a number because that's in the addition to the thousand because we're still looking at how fast we want to ramp that part of the business up.

But that will be India initially and then probably eastern Europe after that.

Initially in India, yes.

Great, thank you.

Thank you.

Our next question is come being from Ashwin Shirvaiker of Salomon Smith Barney.

Thank you for taking the question.

Could you update us on the progress of several of the contracts signed in the past 12 months?

In particular TSA and Washington Mutual.

I know you said TSA was ramping up nicely.

But any further details?

Well the TSA contract, you know, continues to expand.

We've had expansion quarter over quarter in our revenue.

We think that, you know this, will kind of come to a steady state, probably in the second quarter down a little bit in the second quarter.

As we go forward we'll probably get a steady state, that will be a little lower than we're getting right now.

But we see that going out now for, you know, at least several years.

As you know, the TSA is subject to budget conditions and the continuing resolution, the total definition hasn't been given yet as to how much goes to homeland security and how much goes to TSA from that homeland security.

So it's a little hard to be a little more precise.

But we know from the work orders we presently have that the revenue will kind of meet the conditions I mentioned before.

On the Washington Mutual deal, we have just started that.

The first location we have up in New Jersey, that is operational.

We have a number of locations that we're putting up all around the country for Washington Mutual.

That really doesn't give us good revenue until next year.

This is really in the startup phase and the way we record the startup phase from a P&L standpoint we basically get no benefit very early on in these contracts.

We're conservative in the way we record income.

There's no percentage of completion on these deals and, frfer, you know, it's not really affecting our financial results and will not in 2003 in any major way.

As it relates to, you know, the upcoming check 21 legislation, does the Washington Mutual deal -- has it generated interest amongst other large banking clients?

There are a number of people we're talking to -- when commented to John that, you know things go up and down, they slow down a little because of the war I mean people are looking at this -- people are looking at imaging on site and they are looking at, you know, all of the repercussions of this.

All of this, by the way, we're doing for Washington Mutual so that is really kind of a leadership roll that we've taken in providing resources to them and we think other banks will, you know, sign for the same kind of thing.

But it's going to take them a while to get there.

So we are talking to a number of other institutions.

Okay.

And last question, just on your R&D line, as you look at it, you know, split between hardware and services, my understanding is that the services side, software development, it's primarily moving to India and offshore.

Is there any initiative to move the hardware side to lower cost locations?

Well, on the -- you're right about the services.

The application development is offshore.

We are going to move a little of the hardware R&D offshore and take a look at the -- how well that works and -- but right now there's no plan to move it to the same scale that we're moving the services offshore.

Okay.

Thank you, congratulations on the nice quarter.

Thank you.

Our next question is coming from Julio Quinteros from Goldman Sachs.

I want to talk about the consulting business.

If you could give us some sense on utilization and bill rates on the systems integration consulting side?

Julio, we don't give out the chargeability rates and bill rates.

We think this thing is much more complicated than giving those numbers.

We know some people give the numbers but in my view you have to look at the chargeable time related to the rate realization, related to the leverage you get from the kind of people you have within the consulting arena and then you couple that with the overall leverage as to what percentage of people are billable versus non-billable.

So to throw out numbers and tell you that we're, you know, 70%, 80% chargeable, I don't think that says very much.

We have basically said when you look at our business, you know, look at our business down at the operating margin.

We think that's the most telling thing, the gross margin varies company by company because different people categorize things in different ways.

If you get down the operating margin there's no cheating.

Everybody has got operating margin the same way.

There's nothing left other than other income and expense.

So we run the business on a -- on an operating margin.

That's the way I look at the business.

Obviously we need gross profit but that SG&A becomes very significant.

Lost time becomes significant so for that reason we don't give out those numbers.

We don't think that isolated they really tell a story.

Okay.

I'm laughing because over the last couple of days we've had some interesting just debates even on st street about what those metrics have meant for some of the Indian guys and it's kind of interesting for you to say that.

I've been in the business a long time and I can tell you any isolated number I give you might make you feel good but if you don't have the other pieces you don't feel quite as good until you know all the pieces so I'd be happy --

Or it could be the other way around.

Yeah.

Maybe if Janet could just run through real quickly for the growth rates then that you referred to on the SI repeat solutions and outsources to make sure I have the right general numbers you talked about there.

Sure, Julio.

You're talking about the service portfolio items?

Segments within services, sorry.

Okay.

In the -- on chart 14 in the presentation material --

Your website, I haven't been able to find --

Fine.

Let me repeat where they are.

I said that our outsourcing business represented 37% of our services revenue in the quarter.

And was up 20% year over year.

Our systems integration which represented 32% of our services revenue in the quarter was down 2%.

Our infrastructure services, the short-term project based infrastructure services represented 18% of our services and was down 2%.

Our core maintenance and this is on the chart that was not in my comments represented 13% of our services revenue and was up 1%.

And to just add that 1% benefits from currency, that's a change from a trend writ had been declining in the low to mid single digits.

We expect absolute currency that is still continuing to be the trend but this quarter was where the currency movement is.

It's up 1%.

Services revenue overall at a $1.07 billion was up 6%.

The $75 million in interest expenses was that a net number or was that just a pure interest expense?

Julio, that is the interest expense number anticipated for 2003 right now.

Great, thank you.

Thanks.

Julio, if you weren't able to get the charts, there was one chart where we talked -- I talked in my comments about net income comparisons and it's chart 6.

So if you have an opportunity to look at that, it really shows the impact of our operations with and without pension income.

Right.

Because we do think that the pension income we obviously follow the FASB requirements but pension income last year was much more significant than this year.

And you look at our net income excluding pension income in the first quarter of '02 it was $7 million in the first quarter of '03 it was $34.2 million.

After tax in both numbers.

So that's quite a growth.

It's a pretty nice execution here given all the headwinds.

Thank you.

Thank you.

Our next question is coming from Jim Kissane from Bear Stearns.

What are the long-term objectives from services operating margin if you just exclude pension income or potential expense in the future?

We still think, Jim, we can get our operating margin up over 10% in the 10 to 12%, you know the swings in pension income, if you saw the charts and we try to show on charts four, five, six, what the impact was.

We're not trying to play around with nonGAAP numbers but it is so significant that we thought it was meaningful to see it.

The -- obviously as business gets stronger, and we can get better utilization in some of the short-term projects, you know, those numbers will go up.

So I haven't moved away from a 10% to 12%.

I've been there a long time.

I still think that's the right number.

We've been living in this very tough period in technology and services for the last three years.

But I haven't moved away from that.

The thing that I think is -- was alluded to before, when you look at some of the offshore development, we can continue to get our margins in the offshore development but the absolute dollars do get impacted because have you lower rates.

So, you know, even in spite of that the numbers we gave out were the numbers we see for '03 but I think going forward the industry is going to be looking at some different kinds of trend.

So if you look at the $800 million of services orders in the quarter, just in isolation, are those contracts very close to the double digit level?

Those contracts and operating -- at an operating margin overall would meet our objectives.

Okay.

And maybe a question for Janet.

The technology margins were very strong in the quarter.

You alluded to a positive mix issue.

Is that a sustainable positive or is it more of a one-time?

Well, in the technology business, the margins do have a tendency to fluctuate depending on the mix of the high end.

The high end product.

We do think that this is probably the high point for us for the full year in the gross margins in the technology business.

Coming down a couple of points for overall year average but little bit hire than what we seasonably expect, probably in the couple of point range, for both the second quarter and for the full year.

Okay.

Just one last one.

Janet, can you quantify the compensation payout in the quarter?

It's roughly in the neighborhood of about $50 million.

Excellent, thank you.

Our next question is coming from Julie Santoriello from Morgan Stanley.

I wonder if you could speak about the RSP activity you've seen in the quarter, how it has perhaps changed from the fourth quarter.

And was there -- did you see a noticeable impact from economic uncertainty, geopolitical issues?

If you could, anything there on the composition in general of the RSP activity you're seeing?

Julie, the RSP activity is probably strongest in outsourcing and in the federal government.

The U.S. federal government.

Outsourcing continues to be strong.

We have a number of things we're working on.

It always becomes difficult to determine the exact timing of when you can close these deals.

You close them one at a time.

But the activity there is continuing and it's continuing to be robust.

In the federal government for all types of assignment beings even beyond our TSA we're seeing lots of requests for proposal.

We obviously are pleased that we have such a good reputation down there so we get invited to the dance for a lot of these opportunities that are there.

As far as a slowdown, I mentioned there was some slow down in discussions just before the war on some of these outsourcing deals.

We think that those should be picking up pretty soon back into more, you no, advanced discussions on the RFP -- on the proposals we put in.

We do not announce anything when we're down listed.

We only announce it when we have inked the contract so some of our competitors make announcements as soon as they are down listed.

You still have a lot of work to do in the Ts and Cs so we don't do that.

But by and large for project based infrastructure deals and project based consulting kinds of assignments that's probably the weakest area we have seen.

It's soft, it has been soft and continues to be soft.

Thanks.

If I can get one quick follow-up.

On the BPO opportunities, it seems to be one of the really few areas that's working in the industry.

I'm wondering if you've seen any change in the competitive environment around BPO deals?

The competitive environment -- every deal that we win is in a competitive shoot-out.

There's no deals that are sole source and BPO.

What we see is some people trying to get into BPO by under pricing.

Typically the customers, though, are looking for who has got a solution, where can I see the solution, is it a proven solution.

So although pricing is always important, the solution that you have in BPO, so you can get it up and running, is probably as critical, if not more critical, than just the pure pricing.

If ITO I think it tend to be much more pricing than necessarily the solution they are not looking for a specific application to take on an outsourcing requirement.

So the issue of pricing continues to be across the board but, again, if you've got something which enables you to say I've got a better mousetrap, you have a better leg up in winning these contracts.

So you think then some of your proprietary software and your reference accounts can help you keep pricing fairly stable this year?

Yes, we tend to build some of the software application developments that you know we've taken offshore.

We continue to invest in it.

We tend to invest in not a 100% solution but there's always a proprietary piece of the solution in most of those deals and, you know, that enables us to get the right kind of pricing that we want to meet our financial objectives.

Great, thank you.

Thank you.

Our next question is coming from Joseph Vafi from Jefferies and Company.

Good morning and congratulations on the pension income makeup.

A couple of questions.

Janet, can you give us an idea of where the services business was overall on a constant currency basis?

Terms of growth year over year?

Joe, when you're looking at the overall business, the services and the technology business are generally proportion at from a geographic makeup from -- as our overall business.

But perhaps a little bit more in the U.S. because of the strength in the federal government business this quarter than the past.

We had said overall that -- the currency had a -- had a negative impact year over year.

And -- I'm sorry, had a positive 3 point percentage point impact year over year and the international business was down -- had a 7% trend in the opposite direction.

When you look at the services segment, I would say that was slightly less favorable in the 2 to 3 point range from the services business because the technology sector -- I'm sorry, because of the U.S. federal government business was so strong proportionately with the rest of the business.

So once again, typically our services and our technology business have the same geographic makeup.

A little bit more skewed to the U.S. and our services business this quarter because of the U.S. federal government and in particular transportation security administration and overall we think that impact was about a 2 to 3 points on the services business.

Okay.

Great, that's helpful.

So then is it fair to say then that if you looked at the business on the services business and maybe on a constant currency basis where you had -- you definitely had some growth coming out of the services side, was -- can you maybe provide some more color on how much TSA provided that overall growth rate?

Sure.

Let me first comment by saying, you know, we did have a nice quarter in the services business.

And it's up 6 points.

Double digit growth in outsourcing, you know, that's significant and that's a major driver of that growth.

The transportation security administration is a significant portion of that growth year over year.

But we don't want to get into the specific amount of the revenue for the quarter but a significant driver of that growth.

That's fine.

Then if we kind of looked at the pension income that the company made up here in the first quarter.

I know you've been working hard on making the business efficient over the last year or two years.

Is there anything specifically you point out on the makeup here that got -- that we're able to post some good operating margins?

Joe, this is Larry.

We have been looking very hard at all the factors that Julio asked about when he was on the call.

And it's really -- how do you utilize your people?

Do you have the right mix?

Are we getting the right kind of leverage?

We've been work ongoing this for a year and a half.

We continue to hire people at the partner level from competitors, at the same time we continue to leverage them.

So it's really changing the mix and as we look out in this first quarter, and having the makeup that big GAAP in pension income, a lot of that and you can see in the operating margins, came through the execution and it's really getting to a better model.

Okay.

Fair enough.

And then on the India strategy, clearly ramping or -- are going to ramp the business there in terms of head count.

Do you see any issues in moving business over there in terms of potentially cannibalizing some of your own revenue because it's moving to a bit lower bill rate geography?

Do you have any strategies on how you might be able to minimize that impact?

Well, there's no question that a cannibalizes revenue and is no question that I mentioned before the margins stay up but the absolute dollars stay down of earnings so we're looking at this and believe that by utilizing the offshore we can become even more competitive and some of the deals that we do not go after at this point by going offshore would enable us to compete.

So we are looking at that as an enabler to enhance revenue by reducing our cost structure and making us more competitive.

But there's no question not only for us, but for everybody in the industry, offshore does cannibalize revenue.

So really the India strategy is it's not really so much on a moving forward basis with now business it's going to be kind of interlayered into existing piece of business that you have now?

It's across the board.

It's existing business.

It's new business.

It's the whole pricing model is changing.

In systems integration we're using the people offshore.

Which is helping us with the model that we're building.

So we would be using it in outsourcing systems integration application, maintenance application development.

Okay.

Then one quick final question for Janet on the cash flow.

I know you stated that you're looking at a kind of free cash flow neutral year for the year.

And I know your Cap Ex buckets consist of the two which is really capital additions to property as well as investment in marketable software.

Any idea where those two line items are going to end up for the year?

Generally?

Joe, one of the statistics that we have quoted is the percentage of revenue generating Cap Ex compared to the total.

And that includes both the investment and marketable software but as well the investments in outsourcing type of assets.

In 2002, $253 million of our $340 million of Cap Ex was in revenue generating or 74%.

We're -- I'd given a range in the $325 to $350 for Cap Ex for the full year anticipating that's going to be in about the 72%, 73% of that total Cap Ex being spent towards what we call our revenue generating category, which is the combination of the software and the outsourcing type assets that are put directly in play for a customer engagement.

Very good.

That's helpful.

Thanks a lot.

Operator we can take one more question.

We're running over a little bit.

Our last question today will be coming from Stephen Weber from S.G. Cowen.

A couple of questions.

Last year, Larry or Janet, you had a significant charge that you absorbed from NUL in the second quarter and I'm not quite clear, you said your business in Japan was pretty good.

Can you give us a feel for what NUL is big in the second quarter and pick up?

What that will look like year on year in the second quarter and for the full year 2003.

And then my second question is if I look at your services on a pre-pension income basis, you are up about .3 on the margin for the first quarter.

Larry and Janet, what do you think that ought to be on a full-year basis as you look at it?

Okay.

Steve, as you are right, we did have in the first quarter -- the second quarter of last year a charge for our share of the early retirement charge for NUL.

Obviously that doesn't impact us again this year.

I just want to make a distinction there.

When I talked about the revenue for Japan, that is the primarily product revenue going to NUL.

Right.

Then we obviously account for NUL on an equity basis which is a separate item and that charge of the equity income or expense pick-up goes lieu the other income and expense line.

So a year ago in the second quarter we did have the roughly $20 million, $16 to $20 million charge for the early retirement last year.

We don't obviously expect that to continue in -- that has not continued.

That was a one-time charge.

It won't be happening in the second quarter.

With regard to the comment on pension income.

For the full year in Larry's comments he did mention the pension income expectation for the full year is about $30 million in income.

No, no, my question was.

Services margins were up about 30 basis points in the first quarter year on year in services alone.

What would you -- what do you think that ought to look like for the full year at this point in time assuming your revenue plans materialize?

Steve, this is Larry.

We would expect to see sequential growth in the excluding pension income in the operating margin for our service business.

So as we go quarter to quarter, we would expect to see that increasing.

Okay.

Do you expect it -- would you expect it to be up more than the 30 basis points for the full year on that same basis?

Yes.

Okay.

And then just lastly -- come being back to the NUL.

How is it doing on an operating basis?

Because you catch it on a three-month lag.

Is that going to be positive compared year on year in the second quarter?

Negative?

Can you give us a feel?

Well, March 31 is the end of their year.

They are closing their books now.

They are going to be profitable for the year.

But it isn't going to be very significant profitability.

I don't want to give you -- I don't want to give you the number because they -- they're still closing their books.

We have their preliminary number but it will be profitable as you mentioned we're not going to have to take the pension in as we did last year in the second quarter.

But usually our second quarter this year will not have anything that would be really substantial coming through from NUL.

Our portion of this will be modest, let me say.

Okay.

I'm not trying --

No, no, I understand.

They haven't released yet, Steve --

I know that.

I appreciate that.

Thank you.

Thank you all.

Again, I appreciate everyone tuning in.

We obviously changed the timing for this call given the fact of lots of people want to come out today and tomorrow and Wednesday but we think overall that we had a very good quarter, particularly given the environment and given the fact that we had to overcome the $32 million of pension income.

Despite that everybody worked very hard.

People all around the world pitched in and I think and I hope you believe that we had a good showing.

So, again, thank you, thank you for your interest and in Unisys and we look forward to talking to you soon.

Bye-bye.

Thank you.

This does conclude today's teleconference you may disconnect your lines at this time and have a wonderful day.--- 0