Unisys Corp (UIS) 2003 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Unisys Corporation second quarter results conference call.

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

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

Sir, the floor is yours.

Thank you, operator.

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

Earlier this morning Unisys reported its second quarter 2003 financial results.

In a challenging business environment, we reported continuing growth in our earnings per share and achieved our targeted EPS range for the quarter.

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 Lawrence Weinbach and our Chief Financial Officer Janet Haugen.

Before we begin, just some housekeeping details.

First, as is our usual practice, we will be using some presentation cells this morning to guide our discussion.

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

Today's presentation, which is complementary to the earnings press release will include non-GAAP financial measurements and a reconciliation of these to GAAP can be found at the end of today’s presentation and on our investor website.

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 days.

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 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.

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

Now let me turn today’s call over to Larry.

Good morning, everyone and thank you for joining us today to discuss our second quarter 2003 financial results.

To begin our discussion today, please turn to chart one of the presentation materials for an overview of the quarter.

Unisys continued its consistent performance and we reported another solid profitable quarter today.

We met our financial targets for the quarter.

We grew our earnings per share by 23% over the year ago quarter.

This was despite significantly lower pension income, which I'll talk more about in a few moments.

We grew our services revenue by 12%.

We reported double digit growth in our service orders over a year ago quarter.

In addition, we generated $113 million of cash flow from operations in the quarter, and $14 million of free cash flow, a substantial improvement over the year ago period as well as the first quarter of 2003.

We delivered this performance in what continues to be a challenging environment for the IT industry overall.

Please turn to chart two for a summary of demand trends in the second quarter.

Overall, we continue to see a mixed environment for IT spending.

Clients continue to be highly deliberate and also cautious in proceeding with new capital spending projects especially for high-end technology purchases.

While our services business showed double digit growth in the quarter, our technology business declined more than expected, and this was driven by lower sales of ClearPath servers.

From a geographic perspective, the United States market remains stable and is perhaps even picking up a bit.

We saw double digit growth in our U.S. revenue in the quarter.

This was driven by continued strong growth in our U.S. federal government business.

On the other hand, international markets remain weak particularly in continental Europe and in Latin America.

International business conditions are impacting us most in our technology business.

While our ClearPath sales were relatively flat year-over-year in the United States in the second quarter, a good performance, sales of ClearPath declined substantially in Europe and Latin America, reflecting the weak demand environment in those regions.

From a portfolio perspective, business process outsourcing and security remains areas of client interest and good demand, and we continue to build our client base and our reputation in these markets.

In our technology business, while our ClearPath business declined in the quarter, we continued to build momentum with high-end, Intel-based ES7000 server program, where we have another strong performance in the second quarter.

Clearly, any business obtained in this environment is hard won - competition continues to be strong.

Clients are looking for solutions that provide a clear, tangible return on their investment, and for partners that have a proven track record of delivering this kind of ROI in past projects.

This tough ROI driven environment actually plays to our strength at Unisys.

Throughout this tough IT spending period, we stayed focused on our strategy of building long-term client relationships where we can deliver value for the client and we can achieve attractive margins in the process.

It's a strategy that's working.

A strategy that's enabled us to grow our earnings throughout this period.

Chart 3 summarizes our financial results in the second quarter of 2003.

We reported revenue of $1.43 billion in the quarter, which was up 5% from our revenue in the year ago quarter.

Currency translation had a 4 percentage point benefit on revenue in quarter, reflecting continued weakness of the U.S. dollar against global currencies.

Our services revenue grew 12% in the quarter.

We saw continued strong double digit growth in our outsourcing business.

We also saw double digit growth in systems integration and consulting.

Our contract with the U.S.

Transportation Security Administration was a strong contributor in the quarter as we continued the initial ramp-up work for this project.

We expect somewhat lower revenue from TSA in the third quarter of 2003 as we move into a more normalized revenue flow.

Customer revenue in our technology business declined 18% in the quarter, as the market for our proprietary servers remains challenging.

However, as I mentioned, we did have a very strong quarter for ES7000 server sales.

Later in my remarks, I'll provide more highlights on our services and technology businesses including our major wins and growth initiatives.

Let's turn now briefly to margins.

Our reported margins in the quarter went down from year ago levels.

However, as we discussed last quarter, our margins reflect significantly lower pension income from a year ago.

Pretax pension income from this quarter was $8 million compared to $34 million in the second quarter of 2002, a decline of $26 million.

On a comparable basis, excluding pension income, our operating margins increased in the quarter.

Chart four shows our overall operating margin in the second quarter compared to a year ago.

Excluding pension income in both periods, our operating margin increased to 5.5% in the second quarter of '03, compared to 4.7% a year ago.

This margin improvement was driven primarily by improvement in our services business, which represented 82% of our revenue in the second quarter.

Chart five shows a comparison of operating margins in our services business in the second quarter of '03, compared to the year ago period.

Excluding pension income, our services operating margins improved 150 basis points to 5.2% from 3.7% a year ago.

Our operating margin improvement in services is being driven by a number of factors.

First, we continue to streamline our services operations and eliminate non-revenue generating activities and expenses.

This is ongoing effort at Unisys.

Second, we're changing the way we engage with clients and sell new services engagements.

As we continue to bring on experienced, high-level managers and consultants from outside firms, these individuals are responsible for both selling and doing.

That is, they work with a client up front to understand requirements and capture the opportunity and then they lead the Unisys team that delivers the solution.

This enables us to control our selling expenses.

The third key factor in our services operating margin improvement is better leverage.

So far in 2003 we've grown our services revenue by 9%.

By increasing our volume of services work while keeping expenses relatively flat on a dollar basis, we're able to better leverage our cost structure and bring more of our revenue down to the bottom line.

While we continue to enhance margins in our services operations, our technology business continues to be an important profit generator for Unisys, although we're seeing margin pressure right now in this business due to lower volume.

As you can see in chart 6, excluding pension income, our technology business generated a 6.4% operating margin in the second quarter of '03 compared to 9.2% in the year ago period.

This decline in technology operating margins reflects the impact of lower revenue given the nature of fixed costs in the technology business.

We expect our technology operating margins to improve with higher revenue in the fourth quarter.

In the meantime, we continue to control SG&A costs in our technology business and to improve the efficiency of our R&D operations.

Moving on to chart 7, at the bottom line, excluding pension income, our net income increased sharply in the second quarter to $47 million from $20 million in the year ago period.

We reported earnings per share including pension income of 16 cents in the quarter, which was up 23% from earnings per share of 13 cents in the second quarter of 2002.

So our value added end-to–end strategy is delivering results in terms of improved profitability in a tough environment and despite the pension income decline.

Our Chief Financial Officer, Janet Haugen, will provide more details on our second quarter financial results.

But now, I would like to step back and I’d like to update you on our strategic priorities for 2003 and review where we stand in terms of achieving these objectives six months into the year.

For this, please turn the chart 8 of the presentation.

Back last December, I laid out 6 key priorities for 2003.

Many of these objectives were also priorities in prior years and this show it is consistency of our strategy.

Our priorities going into 2003 were to continue double digit growth in our outsourcing business, to drive growth and enterprise security in IT infrastructure, to continue margin improvement in systems integration and consulting by enhancing our value added service offerings and upgrading our skills, to expand market and sales for ES7000 servers, and to build greater awareness of Unisys in the marketplace.

A sixth ongoing priority was to maintain tight cost control and reduce selling, general and administrative expenses as a percentage of revenue.

Six months into the year, I'm pleased to say that we're on track with these objectives.

And that, in fact, we've made good progress.

Chart 9 shows our key achievements so far in 2003 in our outsourcing business.

Our outsourcing business grew 22% in the second quarter, and it's grown 21% in the first half of the year.

And this has been driven by very strong double digit growth in our BPO business, as well as by double digit growth in infrastructure managed services.

Throughout the first six months of '03 we closed approximately $1.1 billion dollars of long term service contracts.

In the U.S., we won a contract from Eli Lilli for an expanded suite of outsourcing services for this pharmaceutical leader.

We've been providing Eli Lilli with outsourcing services for a number of years and this contract expands our work.

Also in the U.S., the Federal Deposit Insurance Corporation, the FDIC, selected Unisys to help its agencies modernize their IT infrastructure and transition toward a paperless electronic environment.

The contract is valued at $28 million over the initial 7 year base period, and the contract includes 3 one-year extensions that can bring the value to about $39 million.

We also added significant new business for our insurance processing operation in the U.K.

As you may know, we established this operation in early 2001, when we took over all the customer contact, IT management, and premiums collections and claims processing for Abbey Life.

Earlier this year, we added Royal & Sun Alliance to the operation, more than doubling our work flow and making Unisys the leader in this U.K. market.

This work, along with some 1700 Royal & Sun Alliance employees, came online during the second quarter.

In the second quarter, we added a third major client to our insurance operation, further expanding our processing volume.

This contract was in excess of $60 million over ten years.

So we're winning new long-term service clients and we're adding new business volume with existing clients.

We continue to work on other potentially sizable outsourcing opportunities, especially in the BPO arena.

Our pipeline remains strong, including more than 12 opportunities, each potentially worth $100 million or more, and we continue to be patient in trying to close deals to ensure we can meet our financial metrics for that business.

Moving now to chart 10.

Our second priority coming into 2003 was to drive growth in enterprise security within our infrastructure services business.

Here, too, we’ve made significant progress.

Following the groundbreaking contract we received almost a year ago from the TSA, we’ve dramatically expanded our roster of security clients.

New security clients in '03 include Starwood Hotels, the U.S.

Department of Defense, the Austrailian Board of Airline Representatives, ING, Chiao Tung Bank in Taiwan, and the French Ministry of Education, where we're working with telecommunications provider Cegetel.

In the second quarter we were selected to lead one of the key pilot projects that are part of the TSA’s new Operation Safe Commerce project.

This is a potentially very significant effort.

An effort to improve the security of containerized shipments entering ports in the United States and overseas, this pilot project is with the Port Authority of New York and New Jersey.

Our reputation as leader in enterprise security continues to grow, and we are increasingly being invited to bid on major new security proposals around the world.

Our pipeline of potential contracts has grown significantly over the past six months.

We also continue to enhance our capabilities and security.

In the second quarter, we announced the suite of identity management framework services for Microsoft-based environments.

These services help Microsoft clients manage their distributed environment and provide secure access to sensitive data.

We're also pleased that Microsoft has awarded us a gold certification partner for security solutions, and that Microsoft has selected Unisys as one of only five global integrators for providing security services to major Microsoft customers.

Turning to chart 11, our third strategic priority entering 2003 was to continue the margin improvement we've made in our systems integration and consulting business.

Our systems integration and consulting revenue grew 13% in the second quarter, and 5% so far in 2003.

And our margins in this business, excluding pension income, were flat in the second quarter on a year-over-year basis and up versus the first quarter of '03.

One of our important initiatives is to continue enhancing our services, our skills and our portfolio to move up the value chain in terms of the capabilities we provide to customers.

In the second quarter, we announced business blueprinting, our most significant services launch since we introduced our zero gap planning security methodology last year.

Our business blueprinting strategy leverages the high-level consulting talent that we brought into the company in recent years.

It combines this talent with our industry expertise, our vertical market solutions and our understanding of mission critical technology.

And it brings these capabilities together into solutions that help our clients save money and respond more quickly to changing business conditions.

Many organizations today are operating with complex IT environments which are often created through mergers, acquisitions and decentralized purchasing decisions.

Integration is a process that typically occurs after the pieces are in place, rather than before.

New investments in systems and applications are made without a clear linkage to the organization strategy and these systems quickly become obsolete as business conditions change.

All of this results in redundancy.

Redundant processes, redundant systems and software code, and redundant layers of overhead, that create added costs and slow down the organization’s responsiveness.

With our blueprinting services, we work with executives to create high-level road maps for their organizations.

And these road maps thread together their strategic vision, their business processes and applications, and their underlying technology infrastructure.

Since these road maps are based on standards the blueprints are extremely flexible.

Applications can be changed as a business changes and these changes are traceable across the organization, so executives know how a change in one area of the business will impact another.

We have a number of business blueprints in development, including a few of them that have been completed already for our focused industries.

We've received positive feedback on our business blueprinting strategy.

And we're excited about growth prospects.

It's a clear example of differentiated value added services with higher margin potential.

And we believe these services whether enhance or revenue and profits as demand grows.

Turning now to chart 12, our fourth strategic objective in 2003 was to accelerate sales growth and market awareness of high–end, Intel-based ES7000 servers.

We've been working very hard with our partners, primarily Microsoft, over the past couple of years to develop and build the market for high-end Windows–based servers and we're pleased with the traction we're starting to make.

Sales of ES7000 line were up more than 50% in the second quarter of '03 over a year ago.

This performance was partially driven by strong activity in our new modular ES7000 500 models that we introduced late in the fourth quarter.

We've now seen four straight quarters of year-over-year double digit revenue growth for the ES7000 server line, and we're achieving this growth despite the difficult market for new technology sales.

So, market acceptance of the system is growing.

Market acceptance of high-end, Intel-based and Windows-based computing is growing.

And perception is growing of Unisys as the leader in this emerging market segment.

New clients continue to represent more than 40% of our ES7000 sales.

Some of our new client wins in the second quarter include Gateway, Thompson Financial, Mariner Healthcare, KZVK Catholic Services in Germany, and Swedish engineering firm Sandvik.

We're also seeing a growing number of multiunit orders.

For example, ateway ordered four systems.

Thompson financial, three systems.

Mariner Health, two systems, and Sandvik ordered two ES7000 systems and related services for server consolidation.

We also received an order for 12 ES7000 from the U.S.

General Services Administration to support their SAP implementation.

We continue to extends and enhance our line of ES7000 systems.

In the second quarter we launched a new line of servers, the ES7000 400 series based on Intel's new 64-bit Itanium II technology.

We offer three models of the ES7000 400, starting with an entry level four and eight processor model and going up to fully-configured 32 processor model.

Customer response to the new Itanium II-based ES7000 400 systems has been positive.

For example, Sage Telecom, one of the fastest growing telephone service providers in the United States, ordered the new ES7000 410 system to standardize its IT environment on Intel and Microsoft technologies.

This new line of 64-bit ES7000 400 systems, along with our existing ES7000 500 line of Xeon–based 32-bit servers gives up a very powerful complement of products to address the dynamic high-end Intel server market.

Moving to chart 13, our fifth key priority for 2003 was to expand awareness of Unisys, what we offer, what we stand for in the marketplace.

This is no easy assignment.

Especially given the intense competition in the IT services market.

And it's important that we focus our efforts on our marketing dollars.

In addition to our new global advertising program, which has been well-received, we're working to broaden awareness of Unisys through focused thought leadership, expanded research coverage on Wall Street, and outreach to major media outlets.

You may have seen, for example, some of the recent news articles about Unisys in Barron's, Business Week, and Information Week.

In these efforts, our focus is on expanding awareness of Unisys as a thought leader in our targeted growth markets, such as BPO, enterprizes security, high-end consulting and systems integration, and the ES7000.

One new effort, for example, involves the creation of a security advisory board made up of outside experts in the security area.

This board will include security leaders and law enforcement, government, and the private sector.

The board will partner with Unisys to advise us of key trends in the security market, changing client needs, and approaches to addressing complex security issues that will enhance our capabilities and our reputation in this market.

We expect to formally launch the security advisory board in the fall, so look for more details as we go forward.

Our sixth ongoing priority entered 2003 was to continue our tight cost controls.

I'm pleased with the continued progress we have made in this area in 2003.

While our revenue is growing, we're managing to keep our expenses relatively flat allowing us to bring more of our topline growth to the bottom line.

Of course, the goal of all these strategic objectives is to deliberately enhance value for our stockholders, to grow our revenue, our earnings and our cash flow.

And here, too, we're on track with our goals for the year.

Chart 14 provides an outlook going forward for the rest of '03.

While our overall business conditions remain challenging, especially in the technology market, we're maintaining our financial outlook for the full year of 2003.

At the top line, we continue to look for mid-single digit revenue grow for full year of 2003, driven by our services business.

At the bottom line, we reaffirm our targeted earnings per share range of between 77 to 82 cents for the full year of 2003.

This is despite the significant year-over-year decline in pension income.

The third quarter is difficult to forecast.

It’s difficult every year due to the usual seasonal patterns we experience with summer vacations, particularly in Europe, that can impact high-end technology sales.

As I mentioned earlier, we anticipate less revenue from our TSA contract that we received in the first half of the year.

We anticipate modest revenue growth in the third quarter of '03 with EPS in the 15 to 20 cents per share range.

Based on our conversations with clients, we're optimistic that we'll see update an uptick in technology spending in the fourth quarter, as clients feel comfortable enough with their business levels to proceed with planned IT spending.

Hopefully this strength will carry over into 2004.

That wraps up my remarks this morning.

Now, I would 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.

Thanks, Larry and hello everyone.

This was a good quarter for Unisys.

We continue to execute consistently in a challenging global business environment as demonstrated by results in our quarter.

We grew revenue, generated free cash flow and met the earnings targets we outlined last April.

In my remarks this morning, I will cover additional details on our second quarter results and also update our 2003 outlook for cash flow performance.

Before I begin, I a quick note on the pension income that Larry mentioned in his comments.

As I discussed last quarter, we are providing information on our results excluding pension income.

We believe that providing this information is a meaningful non-GAAP measure to fully our understand our operating performance.

There is a significant change in income in 2003 compared to 2002.

It is non-operational in nature, and the significant change is not indicative of normal, recurring operating trends.

As Jack mentioned, at the end of this presentation, on charts 21 and 22, we have provided a reconciliation of our reported results on a U.S.

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

You can also find more detailed information on the impact of pension income on our financial results at the investor section of our website.

Moving on to operating results in the second quarter, please turn to chart 15 for a view of our revenue by geography.

Our U.S. revenue grew 12% in the second quarter, driven by substantial growth in our U.S. federal government business.

Our international revenue declined slightly in the quarter.

On a constant currency basis, we continue to see revenue declines in all international markets, reflecting continued weakness, particularly in continental Europe and Latin America.

Currency had a positive 4 percentage point impact on our second quarter revenue.

This was primarily driven by the weakening of the U.S. dollar against the euro, the British pound, and the Australian dollar, offset by some strengthening of the dollar against the Brazilian real and other Latin currencies.

We anticipate the currency will have a 3-4 percentage point positive impact on our third quarter revenue if the rates remain the same.

Chart 16 shows our second quarter revenue by business segment.

Services represented 82% of our total revenue in the second quarter, with technology representing 18% of our revenue.

Our services revenue grew 12% in the quarter while our technology revenue declined 18% from a year ago.

Further breaking down our business segment, chart 17 breaks out our services revenue in the second quarter.

Our outsourcing business grew 22% in the second quarter, and represented 36% of services revenue in the quarter.

This was driven by continued growth in business profits outsourcing and our work with the Transportation Security Administration.

Systems integration and consulting revenue grew 13% in the second quarter.

Our infrastructure services revenue declined slightly by 1% in the second quarter.

Moving to our technology business, please advance to chart 18.

Revenue from high-end enterprise servers declined 19% in the quarter.

Within enterprise servers, sales of our ES7000 servers showed substantial growth over a year ago levels, while ClearPath revenues declined in double digits.

Moving on now to our expanse trends in second quarter, please advance to chart 19.

SG&A expenses were down slightly in comparison to year ago levels.

We continue to demonstrate our control over expenses as we absorb the negative impact on currency on expenses and lower pension income.

As a percentage of revenue, SG&A expenses declined to 17% of revenue in the second quarter of 2003, compared to 18.1% of revenue a year ago.

Our R&D expenditures in the second quarter were $64 million, compared to $62 million a year ago, as we continue to invest in our high-end servers and industry solution program.

Also, in the other income expense line, which you know can vary from quarter to quarter, we had $11 million of other income in the second quarter of 2003, compared to other expense of $16 million in the year ago quarter.

The primary driver in this change is that last year's results included a $22 million charge for our share of the early retirement program of our Japanese equity investment, NUL.

Now moving to cash flow and balance sheet highlights, please advance to chart 20.

We generated $113 million of cash from operations in the second quarter of 2003.

This compared to operational cash flow of $3 million in the year ago quarter.

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

First, higher income, and second, continued working capital improvement, particularly in the area of customer pre-payment.

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

We absorbed $14 million of cash requirements in the quarter for prior restructuring actions, which compares to $28 million in the year ago quarter.

Total capital expenditures in the second quarter were $100 million, slightly down from the $102 million in a year ago.

About 77% of our capex in the second quarter of 2003 was spent on revenue generating assets compared to about 78% in the second quarter of 2002.

Depreciation in amortization was $86 million in the second quarter of 2003 compared to $75 million in the year ago quarter.

We generated $14 million of free cash flow in the quarter.

We ended the quarter with no borrowings against our resolving credit facility and with $382 million of cash on hand.

On July 1st, we completed an early renewal of our revolving credit facility with similar terms and conditions as our previous facility.

We have expanded our revolver to $500 million from $450 million, and we are pleased with the support of the 15 banks in our revolver bank group, up from 14 that participated in our prior facility.

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

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

Our expectations for capital expenditures for the full year of 2003 is in the $325-350 million range.

And our expectations for depreciation and amortization for 2003 is in the $310-330 million range.

We continue to target breakeven free cash flow after capex for the full year of 2003.

In closing, we continue to show good discipline and cost control.

And I am pleased with our execution as we work through what continues to be a challenging IT spending environment.

I would like to turn the call back to Jack.

Thank you, Janet and Larry.

Operator, we're now ready to open for the question and answer period.

Yes, sir.

Ladies and gentlemen, the floor is now open to questions.

If you do have a question or comment, you may press one followed by 4 on your touch-tone phones.

If you're on a speakerphone, we do ask that you please pick up your hand set to minimize any background noise.

And if at any point your question has been answered, you may remove yourself from the queue by pound key.

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

Good morning.

Jack, would you comment again on your pipeline?

There's a little confusion in the marketplace.

PPI had a call last week and basically said that their pipeline of business that they're working in the second half has dropped pretty significantly.

You and other companies are seeing something different.

Can you just review that, your pipeline statement again?

And could you talk about a separate topic, how your systems integration consulting margins might trend over the next 12 months and where they might be at the current period?

John, this is Larry.

I'll try and answers your questions.

On the first question on TPI, I don't know, I've read some of the material they put out.

I don't know where they got their information.

We said in my remarks that we have more than a dozen deals that we're working on in excess of $100 million each.

These tend to be in the BPO area, and I'm not sure if TPI was talking about BPO or ITO.

I think they tend to spends more time in the ITO, although I'm not positive about that.

I can only tell you from our standpoint that we have more than a dozen deals and we think right now it's the pretty strong pipeline that we're seeing in the BPO.

Now, the problem with the pipeline is that you don't know when it's going to close, because these things take a fairly long time to close.

But our hit rate has been very good and typically when we have more than the dozen deals, we would say it’s a good pipeline.

If they're seeing otherwise, we're seeing something different.

As far as systems integration goes, we do anticipate the margins to continue to improve.

As you can see, we had pretty good improvement for overall services.

System integration margins were up from the first quarter, but relatively flat.

And one of the reasons for the systems integration is on the short-term projects, there is some pricing pressure out there in the marketplace.

On the other hand, with the growth that we had, 13% in our systems integration business, we're beginning to get some better leverage, and that leverage will enable us to increase margins.

So, we do expect to see margins continue to increase

When – any feel for when the pricing environment might abate, the tough competitive pricing environment might – seeing any --

The tough competitive pricing environment tends to be more on the short-term projects right now.

What we've done, John, is we brought out our business blueprinting is more of a value-added service.

Some of the things we’re doing, we're trying to get away from something where it’s just whether we can install an ERP or someone else can install an ERP, what's your value add?

On the other hand, it's very hard to tell right now in this business.

A lot of the smaller players are under pressure.

And because they're under pressure, we see pricing come under pressure.

I'm hoping that the trend that we anticipate in the fourth quarter, some of it is budget flush as we talked about before, we're hoping that that trend will actually continue in to '04 as business hopefully improves.

The U.S., as we mentioned, is stabilized and is up a bit, but I think the real challenge right now is probably continental Europe also a little bit in Latin America.

Thank you

Thank you.

Our next question comes from Ashwin Shirvaikar of Smith Barney.

Hi, thank you for taking the question.

The question is on pensions for Janet.

Janet, if you look at equity markets, they’re up for the year, bonds hanging onto small gain, but interest rates are lower.

Assuming everything stays the same level through the end of year measurement date, can you provide an update on financial statements?

I mean income statements, balance sheet, cash flow for 2004?

I know it's kind of early, but moving into the second half of the year 2004 estimates start becoming more important.

Ashwin, as you said, it is difficult to predict the impact in 2004.

What I can tell you is that our U.S. domestic pension assets have performed consistent with the equity market through six months, through the year.

They're probably up about 9%.

And so that would go for a significant improvement against the prior year returns.

However, the same time, we understand that given the current interest rate environment, the discount rate that we have at 6.75% is probably going to be under pressure right now in the current environment in the 6-6.25% range.

We have previously talked about the impact that a 25 basis point change in the discount rate can have on our obligations, around the general range of $100 million.

That's the best insight I can give you with regard to 2004.

There's a lot of variables that have to happen that derive on how the market performs in the second half of the year, and it’s really too early for me to give you an estimate of what 2004 is going to look like.

But generally as you probably mentioned before, there isn't expected to be a cash flow impact anyway?

As we said previously, Ashwin, there is about $60 million in pension funding that we do in the course of 2003.

We had previously stated that we do not have any pension funding requirements for 2004 – for 2003 for the U.S. pension plan.

Based upon simulations we do right now, we're not anticipating that there will be a 2004 funding requirement for us, but obviously, it depends upon what happens in Congress with regard to determination of how you calculate the funding requirements for the U.S. pension plan, and how the equity markets perform in the value of our pension assets at the end of the year.

It is a multiple step calculation to determine funding requirements, but as of right now, our estimate with regard to funding for 2003 is still the same.

And our preliminary indications look like we do not have a funding requirement, based on today's scenario for 2004 for the U.S. pension plan.

But obviously that would need to be continued to be updated as we go throughout the year.

And it really depends upon year end asset values at December 31st and interest rates in the market.

If I could ask the mandatory question on offshore.

As you move some of your R&D and support jobs overseas, is there likely to be a severance charge associated with getting rids of jobs in the U.S?

Is that likely to happen?

And what is the status of offshore generally speaking?

Well Ashwin, this is Larry.

There is some costs when you move offshore.

We are treating those costs as period costs where moving as we move more and more people offshore.

You're not going to see a benefit in our R&D line from going offshore in '03 because we're offsetting whatever benefit we have because of the restructuring costs.

We will begin to see some benefits in '04 because we will not have the same level of restructuring.

Understood.

Thank you.

Thank you.

Thank you.

Next question is coming from Julie Santoriello of Morgan Stanley.

Thank you, good morning.

I wanted to ask a bit more on margins.

The decline in technology margins was pretty dramatic year-over-year.

And I understand that a big part of that was the big shift away from ClearPath and towards ES7000.

I wanted to get your thoughts on whether this change in the technology margin is more of a temporary phenomenon, or do you think that as ES7000 grows that technology margins will be a little bit lower and possibly below that double digit range?

Well, Julie, first off there's no question that because the ES7000 is Intel-Microsoft, you know, open, it would have a lower margin than you're going to have in the proprietary ClearPath.

And there's also no question, as we’ve said, that the ES7000 will be more of a growth area more us than the ClearPath will be.

Nevertheless, you know, we're not ready to write off ClearPath.

We think ClearPath still has a long life and has very good margins.

We would expect by the fourth quarter to see nice pick up in technology and in ClearPath from where we were in, let's say last year in the fourth quarter, we had a very strong quarter.

So we just think that in the second and third quarter, we've seen some pressure on ClearPath because of market condition conditions but do believe that this budget flush in the fourth quarter will bring us back.

Long term, what we see is ClearPath being flat to down a small amount where ES7000 will pick up.

And therefore, you will begin to see the margins coming down.

We would still believe we can get our operating margin in the technology business in double digit, you know, in the 10%, 11% range.

Thanks, and I can get one more.

Just wanted to get a little bit more color behind the growth and consulting in systems integration.

The double digit growth was much more than I’d expected, and I just wanted to see what was driving that.

Was it more stand alone deals in consulting integration?

Was it tied to other outsourcing?

And also, how important was the government in that growth?

The systems integration at 13% was very strong.

Obviously outsourcing we’ve reported a lot of the deals, so the 22% in outsourcing in the quarter, I think people expected the 13% in systems integration.

A lot of that came from the public sector.

A portion of that was in the federal business.

But it was a number of different deals.

It wasn't something where it was one thing that came in and made it all happen.

It was more broad-based.

And we felt very good about that kind of growth in this kind of environment.

Yeah, that was great.

Thanks

Thank Julie.

Thank you, our next question comes from Julio Quinteros of Goldman Sachs.

Good morning, guys.

Quick question for Janet.

I saw that the foreign currency contribution was about 4% for the total business, can you give us the foreign currency impacts by services and technology please?

Julio, is it 4% that we see from an overall company perspective generally translated the same way into the services and tech business.

The geographic mix of our businesses is relatively consistent between the two.

Perhaps just a slight bit more in services than in technology.

Okay, thank you.

Real quickly on cash flow, Janet, can you.

Can you just help me reconcile the DSO days – that sixty days which was up a little bit from the first quarter against the accounts payable improvements for your cash?

I'm just trying to get a sense what's happening in the AP line relative to your AR line, if you will.

As you mentioned, our DSO for the quarter was 60 days, which was improvements for us of 3 days compared to the second quarter of last year at 63 days.

So we're continuing our focus on the receivables line with regard to trying to get that on a consolidated basis in the high 50’s to 60 range.

When with it comes to accounts payable, we have a little bit of a seasonality that skews back and forth.

Also, some of the projects that we did in the transportation security area led us to have a little bit higher than usual payables right now.

If we look at an accounts payable term, depending upon how you calculated, the accounts payable based upon the volume of business is roughly the same profile as what we had in the second quarter of last year, based on the seasonality of how the business happened within the quarter.

We expected to be kind of at that same level as we go through the third and perhaps a little bit improved in the fourth quarter.

Okay, great.

Thank you.

And I guess, you know, I'll leave that one for the next – for offline.

Thank you.

Julio, I just want to comment on the accounts payable again.

I just wanted to -- if you're looking at the pure accounts payable line, the comment with regard to that as opposed to all the accrued liabilities --

Definitely.

Thank you.

And Julio, if you look at it from December 31, it went down about $50 million in accounts payable from December 31 to June 30.

Great.

Thanks a lot, guys.

Thank you, our next question coming from Michael Myesthes of Merrill Lynch.

Thank for taking the question.

Actually, this is for Janet.

I get a benefit of about $10 million in other income.

As I understand it, that’s largely foreign exchange gains and losses.

You know, just firstly can you tell me if there's anything else in this line besides foreign exchange?

And also, can you talk about your hedging policy generally?

No, we have two items in that other income line, Michael.

It's a combination of the FX as well as some equity income from our Japanese equity investment NUL.

When you’re looking at the other income expense line year-over-year the biggest swing is in the second quarter of last year, we did have the charge for the pension plan.

This time we did have equity income the neighborhood of about $6-7 million, and then the foreign exchange made up the difference.

With regard to hedging policy, we do – we have a – what I will call a straight forward hedging policy.

We do not view the treasury area of a profit center.

We are hedging what we anticipate to be our exposure going forward.

We do that through a combination of instruments and natural hedges within the business and within the balance sheet.

Okay, great.

And then just generally, can you talk a little bit about the denomination of your expenses in both services and hardware?

Are they generally local currency?

Do they tend to be U.S. – basically expenses in U.S. dollars?

With regard to the expenses in the services and the technology business, the technology business has more U.S. dollar denominated expenses because the most of the R&D activities happen in this state.

However, when it comes to the services business, that's more broadly split, we do have operations in multiple countries, most of the support for the services business is done there.

And we operate in the global fashion.

We're not U.S.-centric with regard to the way those operating expenses happen.

Okay.

Fantastic, thank you.

Operator, we have time for one more call.

Certainly, sir.

Our final question will coming from Joseph Vafi of Jeffries.

Mr. Vafi, your line is live at this time, do you have a question?

Yes.

Thanks for taking my question.

Question was on ClearPath and some of the trends that you're seeing there.

I know, Larry, you mentioned that ClearPath sales in Europe were down.

I think we all know that the spending environment in Europe is pretty tough right now.

Are there any other trends that you're seeing that might be responsible for some of the tough ClearPath sales in Europe, maybe some migration to newer platforms and away from ClearPath or anything else going on there?

Joe, we're seeing the downturn in Europe because of the downturned economy in Europe.

These are typically large deals.

As you know, ClearPath is multimillion dollar deals typically.

And therefore, people are hesitating right now in making that kind of expenditure.

On the other hand, least from the conversations that I and our people have had with our clients, we do expect that by the end of the year, those who have capacity needs will continue to come and buy because of the capacity need.

Again, the fourth quarter tends to be when people look at their budgets if they have some room will spend.

I don't think this is something that is a permanent situation in Europe.

I do think though, we're feeling the effects of some of the malaise, particularly in continental Europe right now.

Okay, so maybe we should look at some the ClearPath activity or maybe less ClearPath activity this quarter as kind of building to some degree of backlog for later on in terms of some upgrades for ClearPath opportunities?

Yeah, I mean, the way that look at it, Joe, we said, look, we're still reaffirming our feelings for the whole year, our earnings for the year of the 77 to 82 cents.

We have never given an estimate for the third quarter.

We think we'll be in the 15 to 20 cents.

But at the same time, we look at the whole year and say we are still comfortable.

Part of that has to do with the fact that when you get into these multimillion dollar deals, it's a little bit like BPO, it’s hard for us sometimes to say it will close at this date or that date.

We know that we're working on something.

We know that it will close.

The client needs it, so if I look at the second half of the year and didn't have to make a judgment on the third quarter versus the first quarter, but looking at the full 6 months, we're very comfortable.

If I look at it quarter by quarter, because of the size of these deals in Europe, we're being conservative here.

And, therefore, it's not that we don't believe what we have for the year, we're finding it difficult in this environment to try and call in the three month versus the six month of multi-million dollar deals.

Sure, fair enough.

If I could slip one in for Janet.

Looks like revenue generating capex kind of flat year-over-year.

I would guess that you had some better contract activity over the last year, which would kind of, potentially, kind of translate into maybe a little bit less capex given the bookings cycle that you seen over the last year.

Am I right in -- in interpreting that or is there some other things going on there with I guess equates a kind of flat capital intensity on new bookings and revenue generating contracts.

Joe, you can't always draw a direct correlation between when we have the order and capex requirements.

They have a tendency to spread out over time.

So for example, our large win with Washington Mutual is in a ramp up phase.

So even though that order was announced previously, we're still in a ramp up phrase and we'll continue to have that happen over the next 12 months, roughly.

So the capex call that we made, the 325 to 350 is consistent with what we envisioned coming into the course of the year.

But unlike in ITO, where you have all the up front capital come in at one time, in the business processing outsourcing there is a longer ramp.

So there is nothing – we're not calling any different type of change in our capexs.

We would have calls coming into the beginning of the year.

Okay, fair enough.

And then just finally, Janet, are we still looking to kind of end the use of cash for restructuring activities by the end of the year?

Yes.

It's going to be down to a de minimus amount when we come out of 2003.

Great.

Thank you very much.

Thanks, Joe.

Thank you, everyone.

I know the market opens in about 10 minutes.

And we have some other interviews to do, but we thank you for listening to our second quarter results.

We feel very good about these results.

We feel very good about the rest of the year.

We just hope that the economy picks up as people are forecasting, particularly in Europe and Latin America, where we saw the most softness.

Thanks again for your interest in Unisys and have a good day.

Bye-bye.

Thank you, ladies and gentlemen for your participation.

This concludes today's conference.

You may disconnect your line and have a wonderful day.