Unisys Corp (UIS) 2003 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Unisys Corporation third quarter 2003 results conference call.

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

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

Sir, you may begin.

Thank you very much, operator.

Good morning everyone and thank you for joining us.

About an hour ago Unisys released its third quarter 2003 financial results.

You can find today's earnings release on First Call, and on Unisys investor Website.

We were very pleased with our revenue growth, our earnings, and the cash flow we generated in the quarter.

With us today to talk about these results are Unisys chairman and CEO, Larry Weinbach, and our Chief Financial Officer, Janet Haugen.

Before we begin, just a few housekeeping details.

First, as is our usual practice, we will be using some presentation cells this morning to guide the 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 some non-GAAP financial measurements and a reconciliation of these measures to GAAP results.

You can find this reconciliation at the end of the presentation and on our investor Website under the link labeled reports, released and downloads.

Let me now turn the call over to Larry.

Thanks, Jack and hello everyone.

Thank you for joining us this morning to discuss our third quarter 2003 financial results.

To begin our discussion, please turn to chart 1 of the presentation materials for an overview of the quarter.

This was a very strong quarter for Unisys.

We grew revenue 9%.

Our net income was up 47% from the prior year when you eliminate pension income in both years.

Our cash flow from operations doubled compared to the third quarter of 2002, and we generated positive free cash flow for the second quarter in a row.

Unisys continues to focus and execute in this market.

And we achieved these results in what is typically a seasonally weak quarter for the technology industry.

I want to share with you in more detail five key financial highlights of the quarter.

First, we continued to grow our top line in a challenging environment.

Our third quarter revenue grew organically 9% from a year ago.

Even backing out the positive impact from currency translation, our revenue showed mid single digit growth in the quarter.

Second, we continued to deliver double-digit growth in services.

Our services business grew 11% in the quarter driven by growth in all of our service lines.

This is the second consecutive quarter of double-digit growth in our services business.

Third, our enterprise server technology business turned in a strong performance in the quarter.

While our technology revenue grew 3% over the prior year, our ClearPath business grew double digits, and momentum continued in our ES7000 program, where year-over-year sales grew more then 50% for the second consecutive quarter.

Fourth, our cash flow performance continued to improve.

We achieved $114 million of operating cash flow in the third quarter, up from $57 million in the year-ago quarter.

After capital expenditures which are predominantly for revenue-generating projects, we had free cash flow of $16 million in the quarter.

Our second consecutive quarter of positive free cash flow.

Free cash flow is a major focus area for our management team and we're encouraged by the progress we're making.

Finally, at the bottom line, we showed continued consistencies in meeting our earnings targets.

We reported third quarter 2003 earnings per share of 17 cents on a GAAP basis.

Which was within the 15 to 20 cent range that we targeted at our last earnings call in July.

However, to truly understand what we have accomplished this quarter on the bottom line, you need to exclude the impact of pension income, which is non-operational.

Excluding pension income, our year-over-year profit improvement was very impressive.

Pretax pension income declined from $37 million a year ago to $9 million in the third quarter of 2003.

A $28 million decline.

And as you can see in chart 2 of the presentation, excluding pension income, our net income increased sharply in the third quarter, to $50.5 million, up from $34.4 million in the year-ago period.

An increase of over 47%.

Our Chief Financial Officer, Janet Haugen, will provide more details on our third quarter financial results, including our margins and cash flow performance.

We've now met or exceeded our quarterly earnings targets for 13 consecutive quarters.

And we've done so in a highly volatile period for the IT industry.

We're proud of this track record of consistency which speaks to the focus Unisys people have demonstrated and continue to demonstrate in executing our value-added strategy.

Clearly, there continue to be many challenges in the global marketplace.

We continue to see constrained spending on IT projects, and lengthened decision-making cycles especially for large multi year contracts.

Competition is intense and certain regions of the global economy continue to present challenges.

Nevertheless, we are pleased by how we're executing in this environment.

Because of the investments that we've made over the past few years, in hiring more than 250 consultants and partners to enhance our skills and solutions, as well as our investments in enterprise server technologies, Unisys today is more competitive than at any time since I joined the company six years ago.

We're engaged now at the highest management levels of large national and global organizations.

We're working with these clients, and potential clients, in dealing with very significant mission-critical competitive issues and opportunities.

And we're bringing these clients value-added solutions that are unique and differentiated in the marketplace.

In fact, if you look at the major shifts that are occurring in the IT services and technology market, Unisys is at the center of these changes.

In our focused industries we're helping clients fundamentally reshape their businesses and their business models by applying cutting-edge ideas and technology.

And I'd like to highlight the key initiatives and growth drivers that are fueling our success.

While there are many factors, five are particularly key.

And you can see these summarized in Chart 3.

First, we're succeeding because we have the right model.

The market is shifting to end-to-end, industry-focused solution providers.

And that's precisely the model we've been building over the past six years at Unisys.

Second, we're succeeding because of our capabilities in business process outsourcing.

Expertise in BPO is emerging as a key competitive requirement in the IT services industry.

And Unisys has strong capabilities in industry-focused BPO.

Third, we're succeeding because we have the capability, not just to run business processes, but also to reengineer and to transform them with our industry expertise, consulting capabilities, and business blueprints, we're changing the way BPO services are structured and delivered to clients.

Fourth, we're succeeding because of our capabilities in enterprise security, a key requirement for success in today's market.

And the final growth driver in our technology business is our focus on high-end Windows-based solutions.

Clients today want to simplify and standardize their IT environments and this is driving growing acceptance of our Intel-based server solutions.

Now, I'll dig a little deeper into each of these five growth drivers and the industry trends behind them.

Turning to Chart 4, the first key success factor for Unisys is our end-to-end industry focus business model.

Organizations today increasingly want to purchase a full range of services from a single end-to-end partner, rather than contracting for discreet services on a piecemeal basis.

And clients want the end to end solutions tailored to the specific challenges they face in their industries.

There is a simple reason for this shift to an end-to-end industry focus model.

Business issues are becoming increasingly complex and solving them requires service capabilities that are both deem and broad.

This trend plays to our strength at Unisys.

We're one of the few IT service firms with a truly end-to-end vertically oriented services portfolio.

And we continue to focus on building long-term partnerships with clients that add value and are win-wins for both the client and Unisys.

Over the past several years, we've been investing heavily in enhancing our capabilities as a value-added business partner in our focused industries.

We've deepened our industry skills by bringing on hundreds of industry experts and consulting partners.

We've expanded our business process outsourcing, service capabilities, and operations around the world.

And we've significantly enhanced our capabilities in security, and IT infrastructure.

Because of these investments, we're able today to help our clients address some very fundamental and far-reaching challenges that they're facing in their industries.

In the U.S. financial services industry, for example, legislation is currently working through Congress that could greatly impact banks and other processors of payments.

Under this legislation, which is known as the check clearing for the 21st century act or Check 21, financial institutions will be able to exchange electronic images of checks as the legal equivalent of paper checks.

By truncating the paper check process banking customer will benefit from a faster simpler and more secure payment process.

Given that there is some 40 billion checks processed annually in the United States, this legislation will likely lead to major changes in the way banks and other institutions process payments.

As a leader in payments and imaging technology, Unisys is in a strong position to help financial institutions deal with these changes.

We're already engaged with a number of top U.S. financial services institutions, such as Washington Mutual and Huntington bank to help them move to a digital payment environment.

The Check 21 act was passed in the house last week and is currently being reviewed by the senate before going on to the president for final signature.

There are similarly major changes happening in our other focused industries.

For example, U.S. government agencies and commercial organizations are struggling with how to enhance the security of goods coming into U.S. sea ports.

And to protect against disruptions in the nation's supply chain from potential acts of terrorism or other threats.

This is the focus of the new federal operation safe commerce program that is being funded by the U.S.

Transportation Security Administration.

Unisys is deeply involved in this initiative, and I'll talk more about it in a few moments.

Both of these initiatives, operation safe commerce and Check 21 are potentially significant industry-changing initiatives.

Both areas offer significant growth opportunities for Unisys, and we are well positioned because of our end-to-end industry focused portfolio.

Moving now to Chart 5, the second key growth driver for Unisys is our focus and capabilities in business process outsourcing.

Deep capabilities in BPO are becoming a competitive necessity and differentiator in the IT services industry.

In fact, BPO is emerging as key to selling services of all types, including shorter term systems integration and consulting projects.

Gardner Dataquest noted this trend in a recent report on the outsourcing market.

As the firm noted and I quote, "outsourcing is becoming the primary channel for selling other IT services as opposed to secret market services."

Market trends support this view.

Chart 6 shows Gardner Dataquest forecast for the IT services market through 2007.

As you can see, business process outsourcing is the fastest growing services market.

And by 2007, outsourcing services are expected to account for 57% of all IT services spending.

Of course, business process outsourcing isn't easy.

Because of the business and industry knowledge required, BPO is much harder to do effectively than taking over a client's data center.

In fact, in its report on the outsourcing market, Gartner Dataquest went on to say and I quote again, "not all IT service providers are positioned to sell BPO services.

The combination of people, process and technology expertise as well as the ability to sell to business buyers will be key in determining a provider's success."

Over the past few years we've done a lot of work at Unisys to build our capabilities in BPO.

We had a good base to build on with our industry knowledge and our global computing centers.

And we've deepened these capabilities by expanding our BPO practices, solutions, centers, and skill sets.

And as a result of these efforts, we're steadily enhancing our reputation in the BPO market.

Unisys has carved out leadership positions in industry segments such as payment processing, and insurance processing.

We're being invited to bid on significant BPO opportunities, and our pipe line of multi-year opportunities continues to be robust with more than a dozen proposals in our pipeline of $100 million or more.

Last week, we announced a ten-year contract with Halifax Bank of Scotland [HBOS] of U.K. that will add about $140 million of revenue to our payment processing operation in the United Kingdom.

This was an October order and it gets us off to a good start for the fourth quarter.

Turning to Chart 7, a third key growth factor for Unisys is the capability we offer, not just to run a BPO operation, but to reengineer, to transform business processes through our consulting capabilities and our business blueprinting services.

Here we're benefiting from the high level consulting partners that we've brought into the country.

These individuals are bringing innovative new ideas into Unisys, and they're helping us win new business, not just in systems integration and consulting, but also in higher level BPO advantage service contracts.

We continue to strengthen our high-end services capabilities through focused hiring and selective acquisitions.

In the third quarter, we aimroad to acquire KPMG's IT consulting business in Belgium adding about 150 people with deep capabilities in consulting systems integration and application integration.

This acquisition, the closing of which the subject to antitrust review in Europe, will enhance our end to end service capabilities in Belgium and cross border in Europe overall.

Deep consulting capability is critical.

Because clients today are seeking more sophisticated models for packaging and delivering business process services.

The traditional model for BPO is transactional in nature.

Clients want a more cost-effective way of handling their back office processes without fundamentally changing those processes.

Increasingly, however, clients want not only to outsource their back office processes, but also to reengineer and transform them to gain greater cost efficiencies.

These services go beyond transactional BPO to business process transformation services.

Accomplishing this kind of transformation requires deeper consulting and industry skills.

Skills that Unisys can bring because of our vertical focus and our expanding network of industry consultants.

We're doing this kind of process transformation for Washington Mutual, for example.

As we help this client move from a paper-based central payment environment to an electronic environment where payments are captured at the branch level.

Gut there's a third model of BPO emerging and that is the business process utility approach.

In this approach, multiple clients within a specific industry contract for business processing services from a single outsourced utility.

Competitors join together and they form industry utilities to handle back-office functions at a lower cost than doing the processing alone.

Please note that I'm speaking here about business process utilities, not computing utilities.

There's been much talk in the industry about IT utility computing.

Where clients can plug into huge data centers to access computing power and applications on demand in the same way they get electricity.

But these computing utilities are horizontal.

The service is typically the same whether you're a bank, an airline or a government agency.

By contrast, business process utilities are vertical in nature.

They handle critical business functions that are specific to certain industries, such as payment processing for banks, life and pensions processing for insurance companies, and cargo processing for airlines, to name a few.

We believe that these business process utilities offer attractive growth opportunities for Unisys, because these services are more differentiated and less capital-intensive than IT hardware computing utilities.

At Unisys, we've been following a business utility approach with the operations that we've set up in various geographies for processing payments, remittances and other similar services.

With the addition of our new contract with HBOS, our payment processing center in the U.K., for instance, will now process more than 1 billion checks each year, representing more than 70% of the checks cleared in the U.K.

Our new business blueprinting services, which we announced last quarter, are helping us capitalize on this trend toward end-to-end industry-based business utilities.

In each of our selected industries, our consultants are building highly focused blueprints for specific functions such as enterprise payments, life and pensions administration, airline reservations, cargo security, and justice and public safety.

These blueprints are being built working directly on client assignments, not in the back room.

Clients can use these blueprints to run their own business functions more cost effectively.

Equally important, because the blueprints are based on standards.

Clients can make the decision to outsource functions within the blueprint that are outside of the core strategic focus.

We continue to see good client interest in our new business blueprinting strategy, services and tool sets.

As this approach continues to evolve, we believe it will be a key competitive differentiator and enabler of our end-to-end approach at Unisys.

Moving to Chart 8, security is another key success factor and growth driver for Unisys in the market.

We all know the importance of security to organizations around the world.

Security has become a critical component to nearly all IT projects and proposals, and IT services firms without a strong understanding of security are at a competitive disadvantage.

Because of our focus on security, and the capabilities we bring in this area, Unisys has been able to build a strong reputation in the enterprise security market, and this capability is helping us win business and differentiate ourselves in the market.

Our track record and our proven partnership with TSA and Home land Security are helping us win additional business opportunities such as the Operation Safe Commerce initiative.

TSA is funding Operation Safe Commerce in conjunction with key U.S. seaports.

The goal of the program is to identify and to test new technologies such as biometrics and radio frequency ID technology that can be used to track and monitor containerized shipments entering the U.S. from abroad.

These projects build on our supply chain and transportation expertise as well as our security credentials.

To date, Unisys has been selected to implement four of these pilots, more than any other solution provider.

As part of this program, we're working with commercial companies, including Sara Lee and Motorola to evaluate and enhance the security of activities throughout their supply chain.

Given the magnitude of this challenge, we're excited to be a part of this program.

We see significant growth opportunities not just in Operation Safe Commerce but in enterprise security and secure supply chain requirements overall.

We will continue to deepen our expertise in these areas.

Finally, turning now to Chart 9, the final growth driver for Unisys in our technology business is our continued focus on the high-end, Intel and Windows market.

Unisys has been focused on building a leadership position in the high-end Windows market since we launched or ES7000 program several years ago.

When we first moved into this market, there was still questions about the ability of Intel and Windows systems to handle enterprise-level applications.

But because of the work we've been doing with Microsoft and our other partners, that perception is changing.

And clients are increasingly adopting high-end Windows systems for enterprise level applications.

Economic pressures and the need to standardize are fueling this shift.

Clients want to simplify their IT infrastructures and reduce their cost of ownership.

They want to reduce hiring and training costs, and this is leading organizations to standardize on open environments such as Intel and Windows and move away from proprietary environments such as Unix.

Chart 10 shows IDC's view of the market for mid range servers costing from $25,000 to $500,000.

As you can see sales of Windows based servers continue to grow as a percentage of the total while sales of Unix based systems are in a long term decline.

Our focus within the Windows based market are on large enterprise systems.

Windows based servers selling for more than $50,000, we call this the big Windows market.

While this market is just emerging, it's growing quickly.

And Unisys has the leading share of the market.

As can you see in Chart 11 the big Windows market is currently about $400 million in size and Unisys holds about a 50% share of this market.

As clients transition to standard Intel-based systems, IDC expects the market for these Windows based servers to quadruple in the next four years to more than $1.6 billion in 2007.

So there is significant growth potential in this market and we plan to capitalize on this growth by staying focused and continuing to maintain and build our leadership position.

As I mentioned earlier, we had another very strong quarter for the ES7000 in the third quarter, with sales again up by more than 50% over the prior year.

The ES7000 also continues to bring new clients to Unisys.

More than 40% of these orders this year have come from such clients.

Some new clients' accounts in the third quarter included Cornell University, the U.S.

Army Reserve, Konica Europe, Minolta Europe, and Banco Pactual of Brazil to name a few.

Another use for the ES7000 is for powering high volume enterprise applications including business intelligence applications.

Unisys has been working closely with independent software providers such as Siebel, SAP PeopleSoft and J. D. Edwards.

We have released increasingly more impressive benchmark results that demonstrate the price performance of these applications on a Windows based ES7000.

A major financial institution just purchased eight ES7000s to power the database for a new Siebel steal.

When completed this will be the largest Windows based Siebel implementation in the world.

The General Services Administration ordered additional system in the third quarter, now has 21 ES7000 servers which is used to run SAP implementation.

Because of the scalability and flexibility of the architecture the ES7000 is an ideal solution for server consolidation.

A growing number of clients are consolidating their small Intel-based servers and applications on to the ES7000.

In the third quarter, for example, the U.S.

Army Reserve, a new Unisys client ordered four ES7000 systems for server consolidation.

The Commonwealth of Pennsylvania purchased three ES7000 in the quarter as a consolidation platform.

So we're excited by momentum we are building with the ES7000 and we're focused on continuing to strengthen our leadership position in this marketplace.

Now, please turn to Chart 12 for our financial outlook going forward.

Heading into the final quarter of 2003, we remain on track to achieve our financial and strategic goals for the year.

While there continue to be pressures in the market, and we have not yet seen a broad-based recovery in IT spending, we are encouraged by the trends in our business, and we look to close out 2003 with a solid fourth quarter.

We continue to target earnings per share of 77 cents for full year 2003 on the full year revenue increase of mid single digits.

This would allow us to meet our earnings target for 2003 of an increase of over 50% in net income excluding pension income in the current and prior year.

So that wraps up my remarks this morning, and 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.

And hello everyone.

This quarter, the consistent focus and execution of the more than 37,000 Unisys employees resulted in our growing our top-line revenue, improving our operating profitability, and generating free cash flow.

This morning I will provide additional details on our third quarter results, including a comparison of our operating margins by segment with and without pension income, and a review of our cash flow performance as well as our cash flow outlook for the remainder of 2003.

Let me begin by making a quick point on pension income.

As we've done throughout 2003, we are providing information on our third quarter results with and without pension income.

We believe that this non-GAAP information is meaningful to fully understand our operating performance because of the significant change in pension income in 2003 compared to 2002.

Pension income is non-operational, and the significant change year over year is not indicative of normal recurring operating trends.

At the end of this presentation on Charts 22 and 23, we have provided a reconciliation of our reported results on a U.S.

GAAP basis compared to our results excluding pension income for both the third quarter of 2003 and the third quarter of 2002.

You can also check the Unisys investor Website for more detailed information on the impact of pension income on our financial results.

Let me start with a review of our orders in the third quarter.

Our worldwide orders showed a double-digit decline over a strong year-ago period which included the more than $250 million expansion of our outsourcing relationship with the Commonwealth of Pennsylvania.

Because of the size of our, quarter to quarter, depending on the timing of concluding the final terms and conditions.

Our goal is to achieve a win-win with our client in negotiating final terms and conditions, ensuring a positive start to a long term strategic relationship.

As Larry mentioned, we closed a large contract early in the fourth quarter, the ten-year contract with HBOS which added about $140 million of revenue to our U.K. payment process operation over the ten-year contract term.

We would have liked to have closed this contract in the third quarter, but it was more important for both parties to get the right terms.

Regarding orders, relative to the industry Unisys continues to be conservative in how we book orders.

And I'd like to take a moment to refresh your understanding on our order booking practices.

We book orders when a contract is signed, not at the time of the award.

We also book only the initial term of the contract and not the value of potential options or extensions.

The value of contract extensions is booked as an order when the contract extension is signed.

In our federal government business, we only book task orders that have been signed and funded, not master agreements as much as an IDIQ contract.

So our orders in any given quarter represent the value of signed base-period contracts and in our Federal Government business the value of signed and funded orders.

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

Moving on to the operating results in the quarter, please turn to Chart 13 for review of our third quarter revenue by geography.

We sold growth in both our U.S. and international markets in the quarter.

Our U.S. revenue grew 11% in the third quarter.

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

Our international revenue grew 7% in the quarter.

On a constant currency basis, our international revenue was flat, although we saw good growth in Europe.

Overall, currency had a positive four percentage point impact on our third quarter revenue as the U.S. dollar remained weak against other global currencies.

Given that economic conditions remain challenging in continental Europe we were encouraged by our double-digit growth in our European revenue in the quarter which was driven by the rollout of some new service contracts and by better ClearPath sales.

Growth in Europe offset revenue declines in Latin America and Asia Pacific.

We anticipate that currency will have about a five, maybe six percentage point positive impact on our fourth quarter 2003 revenue if rates remain the same as today.

Chart 14 shows our third quarter revenue by business segment.

Services represented 78% of our revenue in the third quarter with technology representing 22% of revenue.

Both our services and technology businesses grew in the quarter.

Services revenue grew 11% and our technology revenue grew 3% from a year ago.

Chart 15 breaks down our services revenue in the third quarter.

Services growth was driven by double-digit growth in federal, financial services, and the transportation industries.

Every services area grew in the quarter.

BPO and managed services grew double digits.

ITO, which as you know is not a focused growth area for our company, declined low double-digits.

Overall, our outsourcing revenue grew 7% in the quarter.

Systems integration and consulting revenue grew 23% in the third quarter, as we continued to see improved demand particularly in the U.S. government.

In terms of our other service lines, infrastructure services revenue grew 4% in the quarter, and core maintenance revenue was up 2%.

Turning to technology, please advance to Chart 16.

Our technology business delivered a strong performance in the third quarter.

We saw higher sales volume in our enterprise server sales which provided good leverage in our technology margins and profit.

Revenue from high-end enterprise servers grew 21% in the quarter.

Our ClearPath sales were up double digits as we closed some key second half deals in the second quarter.

Also, within enterprise servers, we saw continued substantial growth in the ES7000 servers, where sales were up more than 50% for the second consecutive quarter.

Growth in our enterprise server business offset a 31% decline in specialized equipment revenue.

And the decline primarily reflects our continued de-emphasis of low-margin product sales.

Moving to expenses and margins in the third quarter, please advance to Chart 17.

SG&A expenses increased slightly in the third quarter due to currency and lower pension income.

As a percentage of revenue, SG&A expenses declined to 17.3% of revenue in the third quarter of 2003, compared to 18.1% of revenue a year ago.

Our R&D expenditures in the third quarter were up slightly to $68 million, compared to $66 million a year ago.

As we continued to invest in our high-end server and industry solution program.

Higher revenue, a strong technology performance, and continued expense control, allowed us to achieve an operating margin of 7.3% in the third quarter, up slightly from 7.2% in the third quarter of 2002.

As Larry mentioned, pretax pension income declined to $9 million in the third quarter of 2003, from $37 million in the year-ago quarter.

Chart 18 shows our overall operating margins in the third quarter compared too a year ago.

Excluding pension income in both periods, our operating margin increased over 2 percentage points to 6.7% from 4.5% in the year-ago quarter.

Chart 19 compares the operating margin in our service business in the third quarter of 2003 compared to the year-ago period.

Excluding pension income, our services operating margin improved to 3.5% from 3.3 a year ago.

Chart 20 shows our operating margins in our technology business, excluding pension income, our technology business generated a 15.3% operating margin in the third quarter of 2003, up sharply from the 6.8% in the third quarter of 2002.

So we continued to improve the profitability of our operating model.

One more note on the income statement.

In the other income and expense line, which can obviously vary from quarter to quarter, we had $5 million of other expense in the third quarter of 2003, compared to other income of about $10 million in the year-ago quarter.

The primary driver of this change is foreign exchange losses in the third quarter of 2003, compared to foreign exchange gains in the year-ago quarter.

Moving to cash flow and balance sheet highlights, please advance to Chart 21.

We generated $114 million of cash from operations in the third quarter of 2003.

This compares to operational cash flow of $57 million in the year-ago quarter.

This higher level of operational cash flow reflected improved working capital management.

We spent $6 million are cash in the quarter for prior restructuring action which compares to $24 million in the year-ago quarter.

Total capital expenditures in the third quarter were $98 million, up from $80 million a year ago.

About 73% of our capex in the third quarter of 2003 was spent on revenue generating assets, compared to 74% in the third quarter of 2002.

Depreciation and amortization was $82 million in the third quarter of '03, compared to $71 million in the year-ago quarter.

After capital expenditures, we generated $16 million of free cash flow in the quarter.

This was our second consecutive quarter of free cash flow, as we continue to place strong emphasis on evolving our business model to be a generator of free cash flow.

A reconciliation of cash from operations with free cash flow can be seen on Chart 24.

We entered the quarter with no borrowings on our revolving credit facility and with $403 million of cash on hand.

Looking ahead, we target full year 2003 operational cash flow of between $340 to $375 million.

This is after an be associating cash payments of about 60 million for restructuring actions.

Our expectation for capital expenditures for the full year of 2003 is $340 to $370 million.

And our expectation for depreciation and amortization for 2003 is in the $325 to $335 million range.

Finally, we continue to target break-even free cash flow, or maybe a little better for the full year of 2003.

In closing, we are very pleased with our third quarter financial results.

Moving into the final quarter of the year, we are on track to achieve our financial call -- we're on track to achieve our financial goals for 2003.

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

Thank you Janet and Larry.

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 expectation.

These factors are discussed more fully in companies periodic report filed with the S.E.C and copies of S.E.C reports are available from S.E.C. and from Unisys investor Website.

Operator we would now like to open the call for questions.

Thank you.

The call is open for questions.

If you do have a question press the No. 1 followed by 4 on your touch tone phone at any time.

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

We do can ask that while you pose your question that you pick up your hand set to provide optimum sound quality.

Once again that is 1 followed by 4 on your touch tone phone at this time.

Your first question is coming from Julie Santorielo from Morgan Stanley.

Good morning, Larry I wonder if you could comment more on the outlook for this year, you had guidance of 77 cents which is at the low end of the range you had been giving.

So I'm wondering if you could share with us, holding you back from reaching the upper end of the guidance.

Julie, if we accomplish, which we expect to, the 77 cents, you have to look at the earnings both with and without our pension income.

And we look at that as being quite an improvement for the year, if we get to the 77 cents.

When you look at our third quarter, and you take out our pension income, you can see that in the services business, we increased our margin, our operating margin from 3.3 to 3.5.

We expect in the fourth quarter to see that 3.5 increase by several hundred basis points at least.

At the same time, we look at the technology part of the business, which was very strong in the third quarter, not to be as strong in the fourth quarter.

So balancing it ought out, it out, we think the 77 cents is realistic.

We think mid single digit revenue growth is realistic and it's going to put us in a very strong position as we move into 2004.

Okay, thanks.

Just a quick follow-up.

In talking about the services margin improving by several hundred basis points in the fourth quarter, can you discuss the drivers behind that?

Are there certain BPO contracts that are ramping up to better profitability?

Well, it's really in the third quarter, the 3.5 without pensions is low because we had some startup cost in some of our outsourcing contracts, and as you know, we expense those as we go along.

So we basically took some of those costs, but as we go into the fourth quarter we see -- we see some of the contracts that we have coming on board in full force, and therefore we'll get some improvement.

Also, in the third quarter core maintenance, the margin in core maintenance was down a bit, which also hurt our services margin.

We think that should stabilize as we look at it third to fourth quarter.

Okay, thank you.

Thanks Julie.

Thank you.

Your next question is coming from Ashwin Shirvaikar of Smith Barney.

Please go ahead with your question.

Thanks for taking the question.

It's on cash flow performance which has been much stronger this year than in prior years, so first of all congratulations on the good work there.

Question is can you sustain and improve on the performance and to what extent will capex and working capital associated with new contracts take away from it?

Not just the rest of this year, obviously, which Janet commented on but next year as well.

Ashwin, as we look at our cash flow, I mentioned and Janet mentioned, this has become a real focus for us.

We believe, as a number of these new outsourcing contracts came on board at the same time, we had a lot of cash requirements for capital expenditures.

We also this year faced about a $60 million payment for restructuring charges that relate back to 2001.

As we go into 2004, those restructuring charges will be more in the $10 to $15 million range, which is the last piece of the '01.

This isn't a new restructuring, it is the last piece of the '01 restructuring.

So we basically start out with about $50 million of free cash flow if you compare '04 to '03, couple that with what we would anticipate in the environment, and our goal is to try and get up to a cash flow of -- a free cash flow that would be, you know, $100 million or more.

But we have not put together a forecast for '04 yet.

Thanks.

And just talking about the pipeline a little bit more in detail.

I understand there are two large U.S. banks that are similar in scope to last year's Washington Mutual contract.

And a related question to that would you consider a IPSL contract in the U.S.

We are considering an IPSL type of utility.

We think that business process utility is really the next major phase with our capability in check processing and imaging and work flow.

The work we're doing with Washington Mutual in Truncation, we are well positioned to take a number of banks and help them move forward not only from check processing but the whole Check 21 environment.

When you think about Check 21, many of the financial institutions if they have to do it themselves will have to put up very significant capital expenditures in order to make it work.

We think the business opportunity, Ashwin solves that problem.

So the answer is yes.

Thanks.

Thank you.

Next question is coming from Michael Maestas of Merrill Lynch.

Thanks for taking the question.

Can you just tell us little bit more about HBOS deal maybe give us some project time lines and maybe when its going to be Fully operational and when it's going to be generating revenues and then also can you give us an idea of sort of the implementation cost for this type of business utility as opposed to a full-on business process outsourcing contract?

Well, Michael first on HBOS, the contract got signed last week or the end of actually the prior week.

But basically last week.

We should see the full impact beginning in the first quarter of '04.

It will take us a little while to get this up and running.

But given the fact that we've created the utility, it isn't the same kind of startup.

In other words, if we started a utility today, you'd probably take at least 12 to 18 months for a full-fledged utility the size of IPSL to get up and running.

We are gearing up because we do think the utility concept is going to be a very significant concept in the United States.

But at the same time, we have the experience dealing with tier 1 kinds of banks, the really large financial institutions.

We don't think anybody else has a experience in a business process utility dealing at that very high end with the very large banks.

We are excited about the opportunity, hopefully the legislation will pass the senate and the president will sign it in the next week or two.

Fantastic.

Could you give us an update on the Washington Mutual deal, where we're in project implementation, where revenues are and in terms of being in full run rate and sort of how implementation costs have sort of, you know, how much more we expect to see there for Washington Mutual as well as any other significant contracts?

Well, in the Washington Mutual, as you know Washington Mutual turned the contract over to us on a piecemeal basis.

The incumbent is still doing pieces, we are doing pieces.

We got New Jersey up and running, Florida will be up and running very soon.

The total revenue is minimal, maybe it's $10, $15, $20 million, not much.

Next year maybe twice that and then after that in '05 we are up and running in full force.

And that's because of the nature of our building up these regional centers and taking over the contract.

So we don't expect profitability of this, really to hit us until '05.

But again, we're going forward with the accounting policies that we have followed which are very conservative to make sure that we get this thing built up right and therefore, you know, we continue to be very excited about the Washington Mutual, not only that contract, but there's lots of other opportunities at Washington Mutual.

Okay, great.

Thank you.

Thank you Michael.

Next question is coming from Joseph Vosse Jeffri seferks.

Hi good morning and sold results everyone congratulations.

Two questions I was wondering if we could dig more into the ClearPath business.

It sounds like you had a pretty good quarter of double digits, if you could point to any kind of information there as to where that growth might have come from if this is something we could expect to see moving forward, sounded like maybe a Q4 sales there might be little bit off versus Q3.

That might be a good place to start.

Well, Joe, thank you.

First off in ClearPath, we really had an extraordinary third quarter in ClearPath.

As Janet mentioned, we looked at ClearPath for the second half of the year, and knew that there was a certain number of transactions that we were hopeful that we could count on.

Most of those transactions actually came in in Q3, which is good because it means, you know, clients are gearing up and hopefully, the economy will be expanding because they are gearing up in the third quarter rather than the fourth quarter.

The growth that we saw which was really strong double digit growth for ClearPath in the third quarter we do not expect to be repeated in the fourth quarter.

We think ClearPath will be down in the fourth quarter year-over-year but we are not looking for this thing to continue at the third quarter level.

Nevertheless, you know, ClearPath continues to be strong.

And people were concerned the second quarter was down, the third quarter was a blow-out, we think we'll be on target for the year.

Okay.

Was there any kind of specific, you know, big sales in ClearPath in Q3 that buoyed the growth there?

There was no one deal that, you know, created all the revenue.

This was many, many, many deals that closed over the course of the last six weeks, and I would say there was nothing that you would point out and say boy, if it wasn't for that one you wouldn't have double-digit growth.

Okay.

And then just Janet if you could give us an idea of how many points of growth TSA contributed in the third quarter in the services side.

TSA standpoint third quarter, remember we said the contract started the initial ramp up in the third quarter which was a very small amount.

It continued to grow as -- into the fourth quarter, into the first quarter, and then starts to tail down as we go forward.

With regard to the services growth in the fourth quarter, I would say that is probably about -- services growth, probably about half of the growth coming from TSA.

Adjusting for currency, but about half of the growth coming from the TSA, Home land Security area.

Great.

Finally maybe an higher level question, if we see a better demand environment kind of emerge in kind of the more discreet project base consulting work next year in the, private sector I know the government is doing pretty well right now.

How many points of delta do you think you see in your services operating margin over the next couple of years, if we kind of see, you know, a stable pricing environment on the outsourcing side and you know, steady performance on the government side, and if we were able to kind of, you know, maybe see some increases in utilization in bill rates on the commercial side, how many points of delta do you think we could maybe move towards at a high level longer term in the services business?

Joe, if you look at where we would like to be, we want operating margin in the service business to get to at least 10%.

And a good part of that will be fueled by what we have to accomplish in the systems integration or as you call the project based kinds of assignments.

But I give you just a little more flavor on the third quarter which would give you an indication that we are not pessimistic, although you know, we don't want to declare victory yet that capital expenditures are all moving in the right direction.

If you look at our industries, the five industries we concentrate in, we had double-digit growth in financial services, federal, and transportation in the third quarter.

We haven't seen that with three industries in some period of time.

Now, as we look at it going forward, without pension income as I mentioned, our services were down -- our services were 3.5% operating margin in the third quarter we expect at least a couple hundred basis points improvement in the fourth quarter and we think that we will continue in '04 to see improvement.

But you're not going to see it in 200 basis point pops a quarter to get to 10%.

I mean, unless the market just came back, you know, unbelievably strong, which I don't think is going to happen, certainly in the first half of '04, probably not for the whole year, Joe.

Great, that makes sense.

Thanks a lot.

Thanks Joe.

Thank you.

Your next question is coming from John Jones of Soundview.

Please go ahead with your question.

Good morning, high hi, Larry.

First question expanding on the safe commerce win, as I read it they budgeted $58 million for round 1 and 2 of the program.

You guys got 24% of the money in the four deals you won.

Is there -- are there more selections coming, or is this all the front-end money on safe commerce?

That's question No. 1.

And when will they deploy to more than the three ports that they're focused on right now?

Can you give us some input on that?

Sure, John.

First off, if you look at Operation Safe Commerce, this is basically a pilot program that is begun by TSA and Home land Security.

As everybody knows there's a great concern today about cargo coming into our ports.

We have won four more than anybody else of the contracts in this area.

We're going to do different tests with each one of the fourth contracts.

At the end of approximately a one-year period, TSA intends to look at the results of all the tests and make determination as to how the deployment should take place.

So they do not intend to deploy fully in the beginning of '04 until we go through the pilots.

We are seeing, though, a lot of interest in this area from other countries around the world, but more importantly, companies are now saying we ought to take a look at this in connection with our supply chain.

And we think that there's going to be a lot of impetus in our supply chain consulting.

So you shouldn't expect to see a lot of dollars coming out of TSA in the next nine to 12 months on this.

But at the same time, there's a tremendous opportunity here, because the government is going to deploy something.

I can't tell you exactly what it is, whether it's RFID or whether it's biometrics, probably by the end of '04, certainly going into '05.

And the activity we're taking here, I assume from your comments, is generating activity in the international sector as well, but I would assume you're involved in --

Yes, the interest level is really perking.

As a matter of fact we just wrote a white paper just on the whole IT industry which we gave to the European Union and we are beginning to have discussions there.

This is something that has applicability to portion everywhere although many countries outside the United States are not as concerned at the moment.

I think everybody down deep has a concern.

Right.

Just two follow-up questions.

You mentioned 12 proposals in the pipeline for more than 100.

Any of those are greater than a billion?

Um -- I'll take the Fifth.

The answer appears to be yes but I understand your reaction.

Let the record show I took the fifth John.

Can you or Janet give us any insight on what the pension impact is going to be in '04?

This was a tough year, and you know, up [72] million-ish over the -- over last year from an impact standpoint.

Are we going to see that level out or are we going to see another challenging hill to climb in '04?

Well, the hill -- first off, I believe the difference is something like $114 million between '02 and '03.

It was 70-something different than what you were expecting earlier last year.

Well, that was -- yeah.

That was between December '03 and January '03.

But it's $114 million, that was our hill to climb.

And you know basically about 23 cents.

And that's why you know, although earnings per share looks like it's down a penny for the quarter, I mean it's up significantly when you take that out.

Right.

It's hard to tell right now.

We use an 8.75% long-term rate of return.

We use a 6.75% discount rate.

And December 31, this is crazy, but on one day, you make a determination what that number is.

There's no way the hill to climb will be $114 million.

But I really can't give you a good estimate at this point, John.

Okay, thank you.

Good luck.

Thank you.

Thank you.

Your next question is coming from James Kissane of Bear Stearns.

Please go ahead with your question.

Larry, systems integration and consulting has been leading the service growth and you recently announced the KPMG acquisition over in Europe. [Technical Difficulty].

Is it more to get in for business profits outsourcing, just kind of elaborate on that, thanks.

Yes, Jim, as I've articulated since I've been here, we were very interested in business process outsourcing, we love the idea of annuity revenue, we go into the quarter in BPO space, 85, 90% of our revenue is already there in backlog as we go into the quarter.

But as you look at what's happening in the marketplace, pure BPO, the pure take over my transaction, do it for less cost, we think that's moving to the transformatation and then eventually to the utility that I talked about earlier.

As you move to the transformation, that systems integration capability and consulting capability becomes critical.

We are not trying to be a strategic consulting firm.

We have no interest in that.

That's not our business.

But we need the strategic consulting understanding in a domain industry knowledge, so that we can provide the transformational changes that are required.

And the best example is, Jim, think about Check 21.

Thank you.

At this time, I would like to turn the floor back over to our speakers for any further comments.

Well, thank you everybody.

As you can tell, we're all excited about the quarter.

We feel particularly good, when you take out the pension income, that this whole team, all 37,000-plus people at Unisys really produced this quarter.

We thank you for your interest, and look forward to talking to you all again.

So thank you, and bye-bye.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.