Unisys Corp (UIS) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Unisys Corporation fourth 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.

If at that point you do have a question you may press 1, followed by 4 on your touch-tone phones.

It is now my pleasure to introduce our host, Mr. Jack McHale, Sir the floor is yours.

Thank you operator.

Hello everyone and thank you for joining us this morning.

About an hour ago Unisys released our fourth quarter and full year 2003 financial results.

This was a strong year for Unisys.

We significantly grew our profitability and generated substantial free cash flow.

With us this morning the to discuss our results are Unisys Chairman and CEO Larry Weinbach and our Chief Financial Officer Janet Haugen.

Before we begin I want to cover a few housekeeping details.

Today's conference call and the Q and A session are being webcast by the Unisys investor website.

A replay of the call and webcast will be available on our website shortly after the conclusion of the live event.

Second, you can find on our investor website this morning's press release, and presentation slides we will be using this morning to guide the discussion.

These materials are available for viewing as well as printing and downloading.

Please note that today's presentation, which is complimentary to the earnings press release, will include some non-GAAP financial measures and a reconciliation of these measures to GAAP results.

These reconciliation are also available on our website for viewing or downloading.

Finally, I'd like to remind you 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 the expectations.

These factors are discussed more fully in the company's periodic reports as filed with the SEC and copies of these SEC reports are available from the SEC and from Unisys investor websites.

With that, now let me turn the call over to Larry.

Thanks, Jack, and hello everybody.

Thanks for joining us this morning to discuss our fourth quarter, as well as our full-year 2003 financial results.

I'd like to cover three areas in my remarks this morning.

First, I'll briefly highlight our results for the fourth quarter.

Then following up on our analyst meeting back in December, I'll provide a final report card of our achievements for the full year of 2003 against our strategic objectives for the year.

And third, I'll review our strategic objectives for 2004 and provide our financial outlook going forward.

So to begin our discussion, I ask you to please turn the slide 1 of the presentation materials for an overview of the fourth quarter.

We closed out 2003 on a very strong note.

By continuing to focus and execute against our strategy, we met our earnings target for the fourth quarter as well as for the full year of 2003.

We also delivered very strong cash flow from operations as well as very strong free cash flow.

At the top line, we grew our revenue by 5% over the year-ago quarter.

On a constant currency basis, our revenue was down slightly in the quarter.

We continue to deliver solid growth in our services business.

This business grew 10% in the quarter and 9% for the full year of 2003.

All services areas grew in the fourth quarter, led by 19% growth in outsourcing.

We continue to enhance operating margins in our services business.

On a reported basis, our services operating margin in the quarter was 7.2%, up from 7.1% in the prior year.

But when you exclude the impact of pension accounting in both periods, the margin improvement was significant, and I'll show you that in a moment.

Our technology business also turned in a solid profit performance in the quarter.

While our technology revenue was down, largely due to lower sales of specialized equipment, a good mix of clear path service shipments allowed us to achieve a 51.6% gross profit margin and a 14.6% operating profit margin in this business in the quarter.

At the bottom line, we reported fourth quarter 2003 earnings per share of 33 cents, which was up over 22% from the 27 cents in the fourth quarter of 2002.

Our fourth quarter 2003 results did include a tax benefit of $3.8 million, or about 1 cent per share, from the positive resolution of a tax matter.

On a full-year basis, we achieved 2003 earnings per share of 78 cents per share, or 77 cents excluding the fourth quarter tax benefit.

This met our earnings target for the year.

As I mentioned, when you exclude the impact of pension accounting, our profit improvement in 2003 was impressive.

Slide 2 summarizes this profit improvement.

The left graph shows our reported 2003 net income, which rose 16% from 2002 levels.

The right graph shows our net income excluding the impact of pension accounting in both years.

Our reported earnings in 2003 included $23 million of pretax pension income compared to $144 million of pension income in 2002.

Excluding the impact of pension income, our net income increased 92%, to $243 million from $127 million in 2002.

Slide 3 presents this information on an earnings per share basis.

We grew our earnings per share from 39 cents in 2002 to 73 cents in 2003, an increase of 87% from operations, excluding pension accounting in both years.

This was a great performance.

And it speaks to the focus that Unisys people worldwide continue to show in executing our value-added services-led technology-enabled strategy.

I'm also extremely pleased with the progress that we've made in cash management.

We had an outstanding cash flow performance in the fourth quarter.

For the full year of 2003, we generated $529 million of operating cash flow, more than 60% above the prior year.

This was an excellent accomplishment, and it speaks to the focus we've placed on winning higher margin, higher quality business.

We also continue to place a very strong focus on building our company and our capabilities.

We continue to invest in selectively hiring senior consulting talent and industry leaders.

We continue to invest in training and development.

We continue to invest in revenue-generating capital expenditures to build our capabilities and business process outsourcing and other growth areas.

In 2003, we invested $286 million in revenue-generating capital expenditures.

These investments are paying off.

They're paying off in strengthening our competitive profile and our ability to win in the marketplace.

Even after considering these investments in capital expenditures, we generated free cash flow of $134 million in 2003, compared to a usage of $12 million in 2002.

We're very pleased with this result, and with the progress we continue to make in this area.

Our Chief Financial Officer, Janet Haugen, will provide more details on our financial results for the fourth quarter and full year.

But now, I'd like to close out 2003 by providing a final report card of our accomplishments against our strategic objectives for the year.

For those of you who attended our analyst meeting in December, you will recall that I summarized our accomplishments through nine months of 2003.

Now I'll update our goals with our full-year results.

In December of 2002, we announced six key objectives for 2003, and you can see them in slide 4.

I'm pleased to say that we accomplished all six objectives.

The first objective was to produce double-digit growth in our annuity-based outsourcing business.

Slide 5 shows how we did.

For the full year of 2003, we grew our outsourcing business by 17%.

This was driven primarily by business process outsourcing, and our outsourcing revenue has grown significantly in recent years, and it now exceeds $1.6 billion.

During the year, we closed a number of major multi-year outsourcing contracts in various geographies and industries.

These clients include Royal and Sun Alliance, H. Boss PLC, the cities of Minneapolis and Chicago, the West Virginia Department of Health and Human Services, the Board of Airline Representatives in Australia, and that's to name a few.

We closed 2003 with $9 billion of services backlog, which included $2.6 billion of unfunded U.S. government orders.

In addition, we have a number of large U.S. government ID/iq contract vehicles.

These have been awarded to us but are not included in our backlog.

Turning to slide 6, our second key objective in 2003 was to drive continued growth in our infrastructure security business, an area where Unisys has strong capabilities, a growing market reputation, and significant opportunities for growth.

We signed dozens of new security contracts in 2003 and continue to build our base of security clients.

On the commercial side, new security clients in 2003 include Deluxe Check, Bally Total Fitness, Starwood Hotels and Resorts, Telecom Italia, and Provencia [Duroma].

We also announced pending acquisition of certain assets of [E-Presence], which will enhance our capabilities in identity management.

We continue to expand our leadership and security in the U.S.

Federal Government space, building on our ongoing work with the Transportation Security Administration.

In 2003 we were selected to lead four pilots for the U.S.

Operation Safe Commerce program to evaluate and test security technologies at key U.S. ports.

We were also awarded a contract from TSA for the Airport Access Control Pilot program to evaluate and test bio metric technologies to address security vulnerabilities at airports.

We have about $450 million of security opportunities in our pipeline, so we're continuing to build our market position for enterprise security services.

Moving to slide 7, our third strategic objective in 2003 was to drive improved margins in our services business.

I was pleased with our progress in this area.

Despite a tough market in 2003, for IT consultants and systems integrators, we grew our systems integration and consulting revenue by 10% in 2003.

This was primarily driven by growth in our federal business, although we have seen encouraging signs of improved demand in the private sector.

Excluding the impact of pension accounting, we improved operating margins in our services business by 220 basis points in the fourth quarter, and 110 basis points in 2003.

This improvement comes from utilizing the consulting talent that we brought into the company, so we could pursue and win higher value-added business in our focused industries.

Slide 8 shows our operating margin trends over the past three years, excluding the impact of pension accounting in all these years.

We've shown steady improvement in our services operating margins each quarter over this period.

We continue to work toward our long-term target of a 10% operating margin for our services business, and we hope to be at this run rate by the end of 2005.

Our fourth strategic objective in 2003 was to continue expanding the market for our high-end Intel-based ES7000 enterprise servers.

Slide 9 shows how we did in our enterprise server business in 2003.

For the full for the full year of 2003 our ES7000 customer revenue grew more than 25%.

We continue to win new clients for our ES7000 platform.

More than 40% of our ES7000 sales once again in 2003 went to new Unisys customers, adding to a steadily growing client base.

In the fourth quarter, some new customers were Debeers of south Africa which purchased four systems to support HR function in its S.A.P. environment.

U.S.

Life and Health Insurance Provider U.I.C.I. ordered nine systems to consolidate commodity 32-bit database applications on to our 64-bit technology, and G-Ron Networks purchased two ES7000s to power the U.S.

Do-Not-Call Telemarketing Registry.

Also, the Karachi Stock Exchange, the largest stock exchange in Pakistan, has chosen the ES7000 to run its operations.

In 2003 we saw a growing number of multi-unit orders for the ES7000.

These multi-unit ES7000 orders doubled in 2003 from 2002, and half of our ES7000 sales in 2003 were part of multiple system orders.

Also, about half of our ES7000 sales in 2003 came through working with external partners.

These are all very positive signs, signs that our marketing efforts are working and momentum is building for the ES7000.

Our final two objectives for 2003 were to enhance our brand image in the marketplace and to continue exercising tight control over costs.

I spent some time at the December analyst meeting going through our achievements in enhancing our brand image, and I won't spend time elaborating on that here, but let me say that we achieved some real milestones in 2003, in gaining recognition for the Unisys transformation among some key media and industry analysts.

We also expanded our coverage on Wall Street.

As for our cost control in 2003, Janet will provide a summary of that in her remarks.

But there again, I'm very pleased with our accomplishments.

So looking forward, we have five strategic objectives in 2004 which you can see in slide 10.

These objectives are not significantly different from the objectives we had in 2003.

We continue on course with our services-led technology-enabled strategy to pursue value-added opportunities that deliver profitable revenue growth.

Our first objective is to continue the success we've had in growing our long-term annuity-based outsourcing business, particularly business process outsourcing and managed infrastructure services.

We look to grow our outsourcing business at a double-digit rate in 2004 overall.

We continue to work with a robust pipeline of over a dozen potential BPO opportunities worth in excess of $100 million.

Our second objective is to derive continued growth in our services margins.

We'll do this through industry-focused initiatives such as Check 21 services for US Banks and through the continued evolution of our business blueprinting services.

With check 21, we are currently working with about 10 banks on various consulting and re-engineering project with many other opportunities in the pipeline.

With business blueprinting, we're also working with a growing number of clients.

One of our early blueprinting clients, the ING Group, recently expanded its work with us beyond an early life and pension project to now include its European property and casualty business.

The third objective is to achieve double-digit growth in enterprise security, building on the success we've had in this area in 2003.

I already mentioned some of the many new security clients we won in 2003, and we want to continue building that client base in 2004.

Continue to deepen our reputation and our capabilities in this emerging market, so that Unisys is seen as a clear leader in enterprise security.

We have many opportunities to build on.

Our relationship with TSA, our work with Operation Safe Commerce, our work with commercial organizations and shippers, our capabilities in bio metrics, RFID, identity management.

We're pursuing major security opportunities with the U.S.

Federal Government with foreign government agencies, with private sector organizations.

We believe we are very well positioned to capitalize on these opportunities.

Our fourth objective is to significantly grow sales volume of the ES7000.

While we continue to invest in clear path, as the backbone of our technology business, we see our Intel-based ES7000 line as the future driver of growth in our technology business.

We will continue to invest in marketing and promoting this platform with our partners such as Microsoft.

Finally, our last goal for 2004 is to continue enhancing global awareness of the Unisys brand.

We'll continue to do this in a highly focused way, by developing industry-oriented thought leadership articles and white papers, by having our industry experts present at leading conferences, by representing Unisys capabilities to the press and to industry analysts, and supporting all of this with our Imagine it done global advertising program.

Not shown our list of 2004 objectives but always a a constant at Unisys is cost control.

We'll remain focused on controlling discretionary expenses in 2004, focusing our spending on areas that drive revenue and drive margin.

So those are our strategic objectives for 2004.

We enter this new year with a lot of momentum.

Clearly, our industry is competitive, and we work very hard to win business and achieve our goals, but our strategy is working.

It's producing consistent results, and we're all excited about the progress we're making.

Turning now to slide 11, let me briefly review our financial outlook for 2004.

At the analyst meeting in December we provided our preliminary view of 2004, and we are reiterating that outlook today.

We continue to look for mid single-digit revenue growth for the full year of 2004 driven by growth in our services business with slight revenue declines in technology.

At the bottom line, we look for 2004 earnings per share, excluding the impact of pension accounting, of about 83 to 87 cents compared to the 73 cents earned in 2003.

We also look for continued improvement in our operational cash flow, since we refocused our business on higher value-added areas three years ago our operational cash flow has grown significantly, and we are now generating free cash flow.

We want to continue that progress and generate in excess of $100 million of free cash flow again in 2004.

For the first quarter of 2004, we expect earnings per share of 11 to 13 cents, excluding the impact of pension accounting on single-digit revenue growth.

So overall, 2003 was a very good year for Unisys.

And now I'd like to turn the call over to Janet Haugen who will provide more details on our financial results in the quarter and full year.

Janet.

Thanks Larry, and hello everyone. 2003 was indeed a strong year for Unisys.

We continued to focus and execute against our strategy, and we continued to deliver consistent results in a challenging environment.

From a financial perspective, we went into the year with clear objectives.

To significantly increase our earnings despite the impact of pension accounting, to continue controlling costs and improve our operating margin, and to executing against our goal of generating free cash flow.

In each of these areas, we get high marks.

We achieved our exceeded our objectives.

In particular, our cash flow performance in the quarter and for the year was extremely strong.

As we've done throughout 2003, I will provide a comparison of our operating margins by segment with and without the impact of pension accounting.

In addition, following up on our analyst meeting in December I will update our pension accounting assumptions for 2004.

Let's begin with a quick note on why we are providing our information on our results both including and excluding the impact of pension accounting.

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

Because pension accounting is nonoperational but does significantly impact the understanding of our operating results in 2003 and that will continue in 2004.

As Larry mentioned, pretax pension income for Unisys declined from $144 million in 2002 to about $23 million in 2003.

Since this flows through our income statement it is important to look at our margins and earnings excluding pension accounting.

We have provided a reconciliation of our reported results on a U.S.

GAAP basis compared to our results excluding the impact of pension accounting in both 2003 and 2002 on the Unisys investor website.

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

Please turn to slide 12 for an overview.

We sold double-digit growth in our non-outsourcing service orders in the fourth quarter, this was driven by our systems integration and consulting orders which were particularly strong.

Outsourcing orders, which you know can vary significantly from quarter to quarter, due to the size of the contract and the timing of customer decisions, were down significantly in the quarter from a very strong year-ago quarter.

Due to the outsourcing orders decline, our overall worldwide orders showed a double-digit decline over the fourth quarter of 2002.

Overall, in 2003 our orders were relatively flat year-over-year, and we ended the year with about $9 billion of services backlog, including our unfunded U.S.

Government orders.

We continued to be selective in pursuing only attractive value-added services opportunities, and we continued to have a strong backlog of proposals in the pipeline.

Now moving on to our operating results in the fourth quarter, please turn to slide 13 for review of our fourth quarter revenue by geography.

Our U.S. revenue grew 3% in the fourth quarter, and this was driven by continued growth in our U.S.

Federal Government business.

Our international revenue increased 7% in the quarter on a constant currency basis our international revenue declined five percentage points in the quarter.

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

For the year, on a constant currency basis, our revenue grew 1%.

We anticipate the currency will have about a six percentage point positive impact on our first quarter 2004 revenue if rates remain the same as today.

Moving on to our fourth quarter revenue by business segment, please advance to slide 14.

Services represented 79% of our revenue in the fourth quarter with technology accounting for 21% of our revenue.

Services revenue grew 10% in the quarter.

This was our third consecutive quarter of double-digit growth in our services business.

Our technology revenue declined 9% from a year ago, primarily reflecting lower specialized equipment sales.

Slide 15 breaks down our services revenue in the fourth quarter.

Our outsourcing revenue grew 19% in the quarter.

This was driven by continued strong growth in BPO as well as growth in managed infrastructure services.

Systems integration and consulting revenue grew 7% in the fourth quarter.

In terms of our other services line, both infrastructure services revenue and core maintenance revenue were up 3% in the quarter.

Turning to technology, please turn to slide 16.

The primary driver behind the technology revenue decline in the fourth quarter was a 20% decline in specialized equipment sales.

The decline primarily reflected our continued de-emphasis of low-margin third-party product sales.

Our enterprise server business declined 5% in the fourth quarter.

However, grew 6% in the second half of 2003 following a better than expected performance in the third quarter when we closed some key second-half deals.

Now moving to expense trends in the fourth quarter, please turn to slide 17.

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

As a percentage of revenue, SG&A expenses declined to 16.5% of revenue in the fourth quarter of 2003 compared to 16.7% of revenue a year ago.

Our R&D expenditures in the fourth quarter were flat at $81 million in the quarter.

Our focus on higher margin business along with continued expense control allowed to us achieve an operating margin of 9.7% in the fourth quarter.

As Larry mentioned, pension accounting had a significant impact on the comparison of the reported margins in the fourth quarter, as we swung from pension income of 35 million in the fourth quarter of '02 to 200,000 of pension expense in the current quarter.

Excluding the impact of pension accounting in both 2003 and 2002, we made significant progress in our operating margins in the fourth quarter.

Slide 18 shows this comparison for the overall company.

Excluding pension accounting, in both periods, our operating margins increased 2.2 percentage points to 9.7% from 7.5% in the year-ago quarter.

Slide 19 compares operating margins in our services business in the fourth quarter of '03 compared to the year-ago period.

Excluding the impact of pension accounting, our services operating margins improved to 7.5% from 5.3% a year ago.

Slide 20 shows the operating margins in our technology business.

Excluding pension accounting, our technology business generated a 13.6% operating margin in the fourth quarter of 2003, up from 12.9% in the fourth quarter of 2002.

So we continue to make progress in enhancing our margins and improving the profitability of our operations.

Two more notes on the income statement in the fourth quarter.

First, in other income and expense line, which can vary from quarter to quarter, we had $20 million of other income in the fourth quarter.

The primary drivers were a one-time gain from our Japanese joint venture and foreign exchange gain.

Secondly, our tax provision in the quarter benefited by $3.8 million, or 1 cent per share from the positive resolution of a tax matter.

This put our overall effective tax rate at 32% for 2003.

As we look to 2004, we expect our effective tax rate to be at 32% based on the implementation of certain tax planning strategies.

This will be offset at the EPS level by an anticipated increase in our share count for 2004.

Our estimated share count for diluted EPS increases to 342 million shares for 2004 and 339 million shares for the first quarter of 2004.

Before I move on to the cash flow highlights, just a few slides to show you how our full-year 2003 revenue breaks out by geography and by business segment.

Slide 21 shows our 2003 revenue by geography.

The United States represented 47% of our revenue in the full year while international business represented 53% of our revenue.

Slide 22 shows our 2003 revenue by business segment.

Services revenue for the full year of 2003 grew 9% and represented 79% of our revenue for the full year.

Technology revenue declined 8% and represented 21% of our revenue in 2003.

Slide 23 shows our 2003 services revenue by business area.

Outsourcing revenue grew 17% in the year and represented 36% of our services revenue.

Systems integration and consulting grew 10% in 2003 and represented 34% of our services revenue.

Infrastructure revenue grew 1%, representing 18% of our services revenue, and core maintenance grew 3%, accounting for 12% of our services revenue in the year.

Slide 24 shows our 2003 technology revenue by business area.

Our enterprise server business declined 3% in 2003 and represented 76% of our technology revenue in the year.

Specialized equipment declined 21% and accounted for 24% of the total technology revenue for the full year.

Now moving on to the cash flow and some balance sheet highlights, please advance to slide 25.

We had a very strong cash flow performance in the fourth quarter of 2003.

We generated $367 million of cash from operations in the quarter, up from $255 million in the year-ago quarter.

The cash performance reflected continued working capital management and higher levels of customer deposits and prepayments for outsourcing project, which are generally timed to offset capital expenditures.

As indicated in slide 26, for the full year of 2003, we generated $529 million of cash flow from operations which was up 63% from 2002 levels, a very strong performance.

Total capital expenditures in the fourth quarter were $108 million, up from $79 million a year ago.

For the full year, our capital expenditures were $395 million, compared to $336 million in 2002.

After deducting capital expenditures, we generated $259 million of free cash flow in the quarter, and $134 million of free cash flow for the full year of 2003.

This was an excellent performance, and it demonstrates the progress we have made in focusing our business on higher value-added opportunities and in transforming our business model to be a generator of free cash flow.

A reconciliation of cash from operations with free cash flow can be found on our Unisys investor website.

A few other notes on cash flow on the balance sheet.

Depreciation and amortization was $96 million in the fourth quarter of 2003, compared to $82 million in the year-ago quarter.

For the full year, depreciation and amortization was $343 million.

We ended the quarter with no borrowings against our revolving credit facility, and driven by our strong cash flow performance, our cash positioned increased by $233 million in the quarter, and we ended 2003 with $636 million of cash on hand.

Looking forward, our expectation for capital expenditures for the full year of 200 is in the $370 to $390 million range, and our expectation for depreciation and amortization for '04 is in the $360 to $380 million range.

As we said in December and as Larry mentioned, we are targeting free cash flow of more than $100 million for 2004.

Moving to slide 27, I'd like now to briefly discuss pension accounting and review our pension accounting assumptions for 2004.

As you may recall, our U.S. pension plan accounting assumptions for 2003 were an 8.75% expected long-term rate of return and a 6.75% discount rate.

Our actual return on the U.S. pension plan assets, based on the asset allocation strategy and the strong performance of the equity market, was a 25% return in 2003.

For our U.S. pension plan in 2004, we are again assuming an 8.75% expected long-term rate of return on our assets.

Based on our current interest rate environment, we are reducing our assumed discount rate on our U.S. plan by 50 basis point to 6.25%.

Based on these and other actuarial assumptions and including our international defined benefit plan, we expect approximately $85 million of pretax pension expense in 2004 compared to a pretax pension income of $23 million in 2003.

From a cash standpoint, we expect to make cash contributions, principally to our international defined benefit plan, of about $66 million in 2004.

This compares to cash contributions of $63 million in 2003.

We made no cash payments in 2003 into our largest defined benefit plan, the U.S. qualified plan, and no cash payment is required for this plan again in 2004.

In closing, 2003 was a strong year for Unisys.

We met our financial target, controlled costs, reported strong earnings growth, delivered an outstanding cash flow performance, and generated $134 million of free cash flow, a good year.

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

Thank you very much, Janet and Larry, that was a great update.

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

Thank you.

If you do have a question you may press 1 followed by 4 on your touch tone phones.

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

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

Our first question is coming from Julie Santoriello of Morgan.

Thank, good morning.

Larry, you mentioned the pipeline was now up to over 12 deals for BPO business valued at over $100 million each.

I think it was probably about midyear of '03 where you first put out a pipeline of about the same number of 12 deals.

I'm wondering if you can give us an update between midyear '03 and now of deals in the pipeline that you've won, that you've lost and how many you may have added.

Julie, good morning.

We said over 12 deals.

If you go back over the last six months, we have won several.

We did lose one which was in the Federal Government space.

We have one that was deferred into late '04, and we have one where the client decided to insource rather than outsource.

Nevertheless, if you look at the size and number of deals that we're working on right now, compared to where we were in June, there's more dollar value and more number of deals in the pipeline today than there were before.

But I want to reiterate something which I have said many times.

We are very careful on the deals that we close.

These are long-term deals.

You make a mistake, you live with it for a lot of years.

I mean, just last week we closed about $70 million of new deals, and we obviously would have liked to close them before December 31, but once again, we're very cautious on what we're doing there.

On these big outsourcing deals sometimes it takes longer than we would like, and if we don't like the deals, I will also tell you we walked away from one.

We got involved in one, and we didn't like where it was going, and we just said, you know, we're going to check out, so to speak.

So we still believe, as I said, in 2004 that you'll see double digit growth in our outsourcing business.

We believe the orders will pick up quarter to quarter we don't give an estimate in orders because we are being selective and don't want to get on the merry go round of having to meet a quarter.

So, Julie, I remain optimistic on the BPO work and the strategy that we've been following, but again, it's like a roller coaster.

If I can get one follow-up to that, Larry, thanks, some of your competitors have talked about some of the kind of Catch-22 issues of new BPO contracts in that great wins up-front and trying to win the business but in that ramp-up period sometimes for 12 or 18 months there can be some margin pressure.

Are you concerned about that at all for '04 in that the more deals you win the potential for margin pressure next year, for this year?

Julie, we have always been conservative in the way we've accounted for it.

We never touch percentage of completion.

The amount that we capitalized in the pre-start-up-front costs are the minimum that we have to capitalize, so, yes, there is some pressure when you sign up new deals.

We have obviously considered that as you look at the course of the year, again, it's hard quarter to quarter to know the impact, but based on the estimate's that we've given, we have taken that into consideration.

We have never front-loaded the deals.

We will not front-load the deals, so we're not concerned in '04.

We do believe that we will be able to achieve our goals and not be concerned about the issue.

Thank you.

Thanks, Julie.

Thank you.

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

Good morning.

Congratulations on the nice quarter.

Big story here seems to be cash flow, I have two questions.

Following the year in which you generated $134 million in free cash flow for the year, why stick with the lower $100 million number?

Second question, are there any new thoughts on dividend at some point down the road?

Sorry, Ashwin, can you repeat the second part of your question?

Because it cut off.

Are there any thoughts on a dividend at some point down the road?

Ashwin, thank you.

This is Larry.

On the first part of your question, you know, we are very proud of the $134 million in '03.

We worked very hard, we said that free cash flow was one of our objectives, and we have really gone after it.

In '04, we have never said 100.

We said 100 plus, and as you look at what we accomplished in '03, we're going to go after it again aggressively in '04, but I'm not prepared to put out what that plus would equal to at this moment in time.

So we continue and I want to point out, we continue to invest very heavily in capital expenditures, in the investments we're making, in some of the BPO deals, we think this is going to pay off long term.

You can see the margin improvement even though, as Julie mentioned, there is some front-end pressure when you take on these new deals.

We factored that in, but we certainly anticipate it will be a nice plus next to the 100.

As far as a dividend goes, every year our board considers this.

We have said that once we have consistent cash flow, that we seriously need to take a look at it.

And I think there's three or four dimensions.

One, do you use the cash to continue to build your business, do you use the cash in a dividend, do you use the cash to pay down some debt, do you use the cash for a stock buy-back.

Even when we weren't generating free cash flow, we made it part of our annual board session, usually in mid-year, to kind of review it, and we will do it again, but one of our objectives at this point, of course, is to also get to the point where we become investment grade, and we want to have some discussions with the rating agencies because we're proud of the 134 cash generation, and we anticipate that they will look favorably upon what we've been able to do.

Okay.

Thank you.

Thanks, Ashwin.

Tank you.

Your next question is coming from Julio Quinteros of Goldman Sachs.

Good morning.

Real quickly Janet can you talk a little bit about the F X impact?

I guess this time instead of cutting by the way you guys cut it in the slide, can you talk a little bit about the F X impact in services and technology as a discrete business line?

Good morning, Julio.

They're about the same when you apply it.

Maybe just a little bit, half a point more in service than in technology, but roughly overall the same.

Okay.

Great.

And, Larry, if you wouldn't mind, can you peel the onion a little bit, maybe by verticals, if you can kind of go through the services line and the technology line, I'm just trying to get a sense on where the strength in demand was from a vertical perspective.

Sure.

Julio, the strongest sector for us was the public sector in the fourth, I assume you're talking about the fourth quarter.

Correct.

In the fourth quarter the public sector continued to be the strongest sector, but, you know, it may surprise people, we did see, you know, a little pick up in our communication business.

We saw a pick up in our transportation business.

The number of project-based deals and financial services picked up, although the revenue didn't pick up as much as I would have liked in financial services, and the commercial business again we're beginning to see some pickups in project-based kinds of assignments.

So what I said in my remarks is there's no question that the public sector, led by federal, by the fact that we're beginning to see improvement in these project-based assignments kind of makes us feel a little better.

We're not ready to declare victory yet but we do feel better about it.

What about on the hardware side?

On the hardware side, I think if you really want to understand the hardware side in the fourth quarter, you got to look at the third quarter and fourth quarter kind of together, and, you know, we had a very strong third quarter.

We had a good fourth quarter.

You put the two together, as Janet mentioned, our enterprise servers were up 6%, if you put them together for the two quarters.

We did say early in the year that we expected a budget flush.

We got a budget flush, but the surprise to us was that it was more evenly pushed between the third and fourth quarter where as in prior years it was much more back-ended into the end of the fourth quarter.

So the second half of our year really turned out to be a better than what we would normally expect to see just being in the month of December or the fourth quarter.

Okay.

Great.

And, Janet, maybe one last question.

This might be too early, but do we have any sense yet on pension in impact in 2005?

No, we don't.

Julio, let me answer that because people are concerned.

I don't know what the expense is going to be but let me give you a few parameters.

If one looks at 2005, we're at 6.25% right now with a discount right.

Right.

Every quarter of a point changes our obligation by $100 million.

So if we were to see interest rates start to come up, that obligation goes down, which means if we got back to 6.75, we would have 200 million less in an obligation.

Right now we're under funded in the U.S. plan, slightly under 200 million.

That's one issue.

A second issue is, we had very good earnings on our pension plan in '03, 25%, against an 8.75 estimate.

As Janet mentioned we're looking at 8.75 again in '04, we hope we get a 25% return.

I'll let you guess that.

That's not my business.

Right.

But what it means is that for the two years where we lost money in our pension plan because the market was down, you have to make that up in our case over a four-year period, so it's very hard for us at this point to come out and prognosticate what '05 is going to look like without really knowing or getting some better idea what the market performance will be in '04.

So we're not hiding behind the number.

We just want everyone to understand all of the assumptions we've made, why we've made the assumptions, and, you know, quarter by quarter this year we'll keep everybody up to date and, you know, we'll understand where the market is going and be able to assess it better as the year goes on.

Thank you very much.

That was very helpful.

Thank you.

Our next question is coming from Michael Maestas of Merrill Lynch.

Thank you.

I just wanted to see if you could give us an update on some of the big outsourcing contracts, specifically maybe the [Wamu] deal, how that is progressing.

Also if you could tell us about interest by other financial institutions in Check 21.

You said there was quite a bit of consulting and reorganization work.

Is there interest in larger BPO deals?

Michael, thank you.

First off, the Wamu deal progresses very, very well.

We have opened our centers in New Jersey, a center in Florida.

We have four more centers that we're now working on and we are able to use those centers, by the way, not just for Wamu but for other clients at the same time.

So we are very pleased with that relationship and, you know, I've spent some time with some of the senior executives there and I think they, too, are pleased that things are progressing the way they wanted it to progress, so I think this is going to be a very strong relationship for both of our parties, a real partnership.

As far as economic goes, we said we really don't see the economics in the Wamu contract to '05.

We continue to be conservative.

There isn't a whole lot of revenue because we only have two centers up and we're basically going to break even, roughly, in Wamu, so the real impact of that comes in '05 based on the investments we're making.

Again, it goes back to Julie's comments which I think were right on, on BPO.

As far as Check 21 goes I mentioned there's about ten project-based deals.

I think what's happening right now is a lot of financial institutions are reviewing the capital cost of trying to meet the Check 21 objectives, and they're trying to decide do I do it in house, do I do it outhouse.

The project we're working on in many cases is building the business case which is going from the senior management and eventually from the senior management to the board.

We're working very, very closely with them.

A lot of them are considering outsourcing because they understand that the utility concept may work better for them than being on a sole source.

At the same time, given that some of the activity in mergers and acquisitions in the banking community has kind of thrown some people's thoughts up in the air, there's -- I don't have to tell all of you on the phone, you know, there's a lot of assumptions of what's going to happen in the financial service community.

Regardless of what happens people have to deal with this issue, so we remain comfortable that this is going to be a big issue.

We also believe that for the next three to six months, we will continue to have these kind of project-based assignments which will enable companies to determine what's the best vehicle for them to go forward.

Okay.

Great.

Thanks for taking the question.

Thanks, Michael.

Thank you.

Your next question is coming from John Jones of SoundView.

Good morning Larry.

Thanks.

Hey, would you talk about the pricing environment in the systems integration consulting and also your orders were flat for the year but your backlog was up $2.3 billion, or 34%.

Can you talk a little bit about that?

And, Janet, I make the deposits and prepayments between $80 and $90 million.

Can you confirm that and tell us how much the one-time gain from the Japanese JV was?

Let me start on the systems integration, you know, I've been looking, as I know you do, John, at all the information that comes out from the various analysts as well as what the other firms are talking about.

We're up, as Janet said, 10% in the quarter.

We continue to see pretty good revenue and project-based assignments starting to come in, but there's no question that there's still excess capacity in the market for systems integration and consulting and with that, excess capacity, pricing is an issue.

We have tried to be very diligent, and you can see that in our operating margins.

The operating margins, putting aside all this pension accounting impact, but the operating margins from, '02 to '03 in our service business were up up in the first quarter from 5.3% in '02 to 7.5% in '03.

So I'm not blaming everything on pricing but I'll tell you pricing is still an issue.

So it's still tight.

It's still tight.

On the orders issue, the orders were, you know, relatively flat, and you said but it looks like it went up 2 plus billion.

If you look in our 10-K we have consistently put in the 10-K two sets of numbers.

We put in a number which is what we call funded backlog, then we have what's known as unfunded backlog, which is government contracts that we've won but they get funded on an annual basis, and accordingly, we have shown the two numbers for this year if you put the two numbers together it's about $9 billion.

So if you go back in the 10-K you can see the numbers last year, I think the numbers last year were eight something.

I don't -- I'm sorry, John, I don't remember the exact number, but for everyone on the call it was spelled out under backlog in our 10-K.

Let me mention one thing on Japan.

Just to put something into context, and then I'll let Janet respond.

You know, if you look at our results, you can look at Japan, say it's a one-shot, it's about $10 or $11 million pretax.

But remember at the same time, even in the fourth quarter with all the stuff we've talked about on pension, our pensions, which we had estimated to be about $7.5 million of income turned out to be $200,000 of expense.

So we kind of looked at it, you know, we probably had about 10 or 11, we got through NUL, but at the same time about seven or eight that we lost here.

To us, the real extraordinary item that we had in the quarter was we settled, you know, a tax issue and picked up a penny impact for the year.

But with that, let me turn to Janet on the deposit issue.

Great.

Thank you.

John, two things.

Larry didn't mention the pension gain.

We did have the net impact for Japan in our other income is $9 million.

Great.

Thanks.

It's $9 million.

So you've got the ongoing operations and the seasonality of how that comes through, so the net impact is $9 million in the oid line.

With regard to the deposits and prepayments the net effect is $48 million, there are some other items that are in that other accrual account, including the restructuring reserves, that have gone down year-over-year.

So the net impact you're looking at is 48.

Yeah, I can't find 40 of it, so maybe we can talk later.

Let me also say, for everyone on the question of prepayments, I mean, we have looked at cash, and we said that cash management is one of the real keys for us, and I think Janet mentioned something I want to reiterate.

What we're trying to do is to get pre payments to match up again the capital expenditure requirements that we have on the front end of these contracts, so although, coming all way back to the first question that Julie mentioned, you know, sure, there's a little pressure on the BPO, because you have a start-up phase, you don't have the earnings, but if we can work with our clients to be able to cover the cash we feel that, you know, we are able to sign a good contract and yet at the same time you'll see the margins on our BPO deals increase quarter by quarter by quarter when it's up and running.

So I just wanted to mention that, John.

Thank you.

Thank you.

Thank you.

Your next question is coming from Joseph Vafi of Jefferies & Company.

Good morning.

Solid progress in the business.

A few questions.

I thought maybe we could drill down a little bit more into the Q4 operating margin in the services side.

Clearly, you know, a strong progress there.

Was wondering if you could, Janet or Larry, talk a little bit about, you know, potentially some of the drivers there, especially on a sequential basis, if there's some seasonality driving the operating margin lift in the services business, in Q4, and maybe other things going on inside the business other than seasonality that might have also been driving that lift.

Okay.

Joe, let me take a crack at it, and Janet may have some additional comments.

If you look at the operating margin in services, and I'm going to give you just a -- reiterate a couple numbers we had on one of Janet's charts.

On the reported basis, our margin was 7.2 in '03 versus 7.1 is in '02.

Basically flat.

But when you take out all of the pension stuff, we're up about 220 basis points in the quarter.

Some of that has come from just doing a better job managing our business.

Some of it has come from the fact that our systems integration business was up 10% in the quarter, which means we got more project-based kinds of assignment coming through, which helps us, and at the same time, we worked pretty hard at this.

I will say, though, that there is a little seasonality in the fourth quarter if you look back historically you'll see it.

We go through a pretty thorough cleanup, sometimes there's change orders that we have in various of our businesses, and as you start coming to the end of the year, you do have some cleanup there.

So we look at the fourth quarter does have a little bit of a pop, it's not that great, but, you know, I would be kidding you if I didn't say that as you end up the year there is a little cleanup there.

Just to follow up on that a little bit more, it sounds like maybe just some volume increases overall in the service line are helping bring margin up there, and is that something to be kind of focused on as the main driver for margin expansion moving forward in the service business then?

Well, certainly it's the most significant driver.

There's another driver I'll come to, but it's the most significant driver, and when we talk about, you know, getting up to a 10% services operating margin run rate by the fourth quarter, the end of '05, it's really predicated on, you know, this turnaround, if you will, on technology growth.

Not a dramatic turnaround where we've got to get to 15% compounded growth, although we'd love it, but it is talking about real growth and the pickup in spending.

The other thing though is this whole thing in BPO.

Again, in the early stages of outsourcing we have low margin as these contracts get to a little maturity, you know, a couple years into it, Joe, the margins pick up, and we're now at a size where our run rate is over 1.6 billion.

We're now at a size where even if we bring on some new deals they don't impact us upfront the way it did two or three years ago when we had a lot more impact, because the base was smaller.

Okay.

Fair enough.

And then, Janet, I know you mentioned on the cash flow side that you had some working capital efficiency gains.

I actually haven't calculated the DSO, but if you could talk a little bit about some of the working capital efficiencies and if you think those are sustainable moving forward.

Sure.

Joe, the working capital DSO for the fourth quarter is about 56 days for the fourth quarter compared to about 55 a year ago, so we continue to get the seasonal improvement in the quarter.

Inventory turns continue to be strong at 15 times a year consistent with the third quarter performance, and the DSO performance at 17 days, the way we calculate it, is actually less than it was at the end of 2002 at 20 days, but kind of consistent with the performance line we've had throughout 2003.

As we go forward into 2004 we are anticipating that some same level of DSO performance for us, the A.R.D.S.O. is the main driver for us to make sure that we get the unbilled bills and that we timely collect against our account.

That's our main focus in the working capital management and we anticipate that that performance level will stay at that same level as we go through 2004.

Inventory turns as the services become more of a business the inventory on the balance sheet will be a less so we'll see probably an improvement in overall turns maybe a day or two there, then the payables will stay around the same level we've got now.

Okay?

Okay.

Fair enough.

If I could just sneak one quick one in, if we could get a feel exiting '03, if we looked at the enterprise server business, how big of a piece is ES7000 versus Clearpath at this point?

Okay.

On the ES7000 program, for this year, Larry, you want to comment on the overall ES7000 program performance for '03?

Well, for '03 in the ES7000, we were up by over 25% for the year.

We continue to look for these companies and deals where we can have multiple units as opposed to the single unit.

When we first started what we were doing was going after people and kind of trying to try one test and see if you like it, some of the deals I talked about now are four, nine units.

We also are working much closer with the I.S.V's and about half of the deals are coming through what we call the external partners.

So our anticipation again is double-digit growth in ES7000 as we go into '04.

We'll have some upgrades in some of what we're doing in the second quarter, and maybe again in the third or fourth quarter so we do have some modifications to our technology for '04 which also should help us in '04, Joe.

Great.

Just for modeling purposes, if we exit --.

Joe, we've got to move on.

We're running out time.

We have time for a few more questions, but I'd like each person just to ask one question.

Thank you your next question is coming from Jim Kissane of Bear Stearns.

Thanks, Jack.

Larry, Janet, can you just comment on the visibility for clearpath, following up on Joe's question, clearpath and ES7000, would you characterize your visibility better today than six months ago?

And, Larry, just to put it to bed, can you grow your outsourcing business and your free cash flow at the same time?

Jim, Jack said one question, I don't know which one you want me to cover so I'll have a run-on sentence here.

On the visibility of Clearpath in the ES7000, we had a prediction in December of '02 for '03.

We made our prediction.

We were a little surprised by the balance between the third quarter and the fourth quarter, but if you look at the last six month together, we said it was back-loaded, and we see that back-loaded.

I think what we've put forward for '04 is reasonable.

We do have much better visibility into Clearpath than you do into the ES7000.

We know where our base of business is in Clearpath.

We follow it, we work very closely with it.

But with 40% of the sales in the ES7000 coming from brand-new customers it isn't as easy for us to pinpoint.

We're talking lots and lots of people, but we're not able to project with the same accuracy what will happen as we can in Clearpath.

So we have pretty good visibility again on the overall program, but greater on the Clearpath side.

As far as can you grow outsourcing and free cash flow, the answer is we did it in '03, we're going to do it again in '04.

We are working very hard on making sure that monies that come in get matched up against the capital expenditures.

If you look at what Janet said on the capital expenditures for '04, compared to the depreciation and amortization, we've got maybe a $20, $30, $40 million swing, but depending on whether you look at the low end or the high end.

So it isn't like we got this enormous gap.

Our goal is to prove that you can be in the outsourcing business, you can do the other things we're doing and generate free cash flow because the market has asked us for free cash flow.

We really delivered in '03, and we will really deliver in '04 again.

Thanks, Larry.

Thanks, Jim.

Thank you.

Your next question is coming from Bill Zinsmeister of Deutsche Bank.

Thanks, Larry one question.

On the specialized technology business, at what point are divestitures end in that business, and moving forward, what is the size of that business on a steady state basis?

That business, Bill, is for the year, specialized technology was 24% of our business in '03.

You know, we're not excited about all this other stuff.

We kind of like our enterprise servers, we're not excited about the rest of it, but we get into situations where a client says, hey, here's a $50 million deal, and here's what I want from you, and by the way, I want to get it all from you.

And we're not going to walk away from it.

You know that we have said we're not interested in being a reseller.

We have de emphasized third-party hardware, but yet at the same time, you know, there's a practicality here.

We will never get to zero.

We'd like to, but we'll never get to zero.

What we would really like is to be able to control it, and the only time you're really looking at specialized technology is when it's part of something bigger.

And when it's part of something bigger we'll chase it.

So, you know, sometimes we don't have the flexibility we would like because the client, the marketplace dictates what you're going to do as opposed to us.

We have time for one more question.

Thank you.

Our final question will be coming from Peter Laber, of Nutmeg Securities.

A lot of companies have been getting more optimistic, particularly the computer room suppliers, and I'm wondering how much economic growth you think we have to have to tighten up the service industry, which still appears to have some slack.

Or isn't that a good way to look at it?

Are you -- I missed one word.

Peter.

Are you saying to tighten up the capacity, excess capacity in the industry?

Yes.

That's what I'm saying.

You know, two years ago I would have said we need a lot of growth.

The one thing we're seeing today is that with some of the improvements in the technology, that people are sitting with some old technology, and it isn't so much just the pure growth, it may be that if you want to operate faster you want to move into a wide buy environment, you want to upgrade your e-mail system within the company, there's things that are happening today which are making people question, you know, can I live with something that's three, four, five years old.

So I think if we, from a hardware standpoint, Peter, if we see any kind of reasonable growth in technology spending, and I think there's all kind of prognostications out there.

I've seen some people have talked about two or three percent, some people think 5 or 6%.

We said we think our revenue will increase mid single digits but we think the technology, the pure hardware side, will probably be lower than that.

So I think that there's an improvement, but I don't think there's, at least from my standpoint, wide optimism that we're going to see high single digit or double-digit growth in the hardware side of the business in '04.

Okay.

Thanks a lot.

Thanks, Peter.

And again, everybody, I know we ran a little over.

We had a lot of questions, but sorry for those who we couldn't get to.

Once again, we had a really great year in '03.

I think everyone at Unisys worked hard.

We're very excited about what we could produce in '03 in a tough environment but we're particularly excited about $134 million of free cash flow.

People have wanted it, they've asked us, when are you going to have it, and I think that we showed we can produce it, and we can produce it while we're growing our outsourcing business at double digit for the entire year and 19% in the fourth quarter.

We're optimistic that we can meet our objectives for '04.

We thank you once again for listening to the call for your interest in Unisys, and everybody, bye bye.

Thank you.

And thank you callers.

This does conclude today's conference.

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