Unisys Corp (UIS) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Unisys Corporation first quarter earnings release 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, operator.

Hello everyone and thank you for joining us this morning.

About an hour ago, Unisys released our first quarter 2004 financial results.

The profitability of our operations continues to improve, and again we generated free cash flow in the quarter, an important area of focus for us.

With us this morning to discuss our results and market trends 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 with you.

First, today's conference call and Q&A session are being webcast by the Unisys investor website.

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

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

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

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

These reconciliations are also available in the earnings release and on the website.

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 can cause actual results to differ materially from expectations.

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

So to start off today's call, let me please turn it over to Larry.

Thanks, Jack, and hello everyone.

Thank you for joining us this morning to discuss our first quarter 2004 financial results.

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

We got off to a very good start in the first quarter of 2004, continuing our focus on execution.

We grew our earnings per share by 30%, and that excludes the impact of pension accounting, and we met the high end of our earnings target for the quarter, which we had announced in January of 2004.

To obtain a better understanding of how are business actually performed on an operational basis, the rest of my comments this morning will all exclude the impact of pension accounting.

Janet will cover the impact of pension accounting and our GAAP results for the quarter in her remarks a little later.

We continue to execute against our 2004 strategic objectives, and we saw the benefits in our operating results.

We also continued to make significant progress in our cash flow.

We generated $116 million of cash from operations, and $16 million of free cash flow in the quarter.

This was a $170 million improvement in free cash flow from the year-ago quarter.

Slide 2 summarizes the key financial highlights of the quarter.

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

On a constant currency basis, our revenue was down 2% in the quarter.

Our services business grew 5% in the first quarter, fueled by outsourcing.

Our technology business also grew in the quarter, with revenue up 2%.

We saw a strong double-digit growth in our ES7000 servers, as well as growth in certain of our specialized technology lines.

We grew our net income year-over-year by 29%, and we achieved earnings per share of 13 cents in the quarter, up 30% from earnings per share of 10 cents a year ago.

So we continue to enhance the profitability and the cash flow of our core operations, and we're doing this by focusing on executing our strategy and pursuing value-added assignments.

Now I'd like to step back and review the demand environment that we're seeing in the marketplace.

And for this, I ask you to please turn to Slide 3 in the presentation materials.

We continue to see a gradual improvement in demand conditions for IT services and technology.

As was the case in 2003, this demand improvement is being lead by the United States, although we did see improvement in Europe, and South Pacific in the quarter.

We also continue to see a good level of business activity in the U.S.

Federal Government arena, and that's driven by the need for security solutions, managed services, and project-related services.

Overall, our orders were down in the quarter on a reported basis.

But this was against the very tough comparison in the first quarter of 2003 when we booked a more than $450 million outsourcing contract with a UK insurance company.

I want to remind all of you that we record orders only as contracts assigned or as task orders are awarded.

When you look at the major multiyear wins that we were awarded or selected for in the first quarter of 2004, they add up to more than $850 million of potential business over the next five or so years.

But the majority of these wins were not included in orders in the first quarter.

Slide 4 summarizes our major wins in the first quarter.

In the Netherlands, we signed an agreement with Interpay to outsource payment processing for five Dutch banks.

This contract has an estimated value of $110 million over five years, but equally important, this new arrangement will allow us to establish a new business process outsourcing utility to pursue payment processing opportunities for financial service firms across all of continental Europe.

In our Federal Government business, we were awarded a five-year agreement with the Department of Defense, Counterintelligence Field Activity Branch, or CEFA, with a potential value of up to $345 million to Unisys.

We'll be helping CEFA develop a system that integrates all counterintelligence activities of the U.S. military services, defense agencies, and joint staff and combatant commands.

Given our approach to recording orders, we only book the initial $11 million funded task order in the first quarter.

We're also pleased to have been notified by the state of Louisiana of its intent to award us a contract to provide Medicaid administration services for the Louisiana Department of Health and Hospitals.

This is another of the major opportunities that we have been pursuing, and we look forward to finalizing this contract in the very near future.

This award will be booked as an order when the contract is executed.

Other key wins in the quarter include a five-year infrastructure managed service contract with Avis Europe, and we're going to support more than 5600 desktops in some 1200 Avis offices and rental stations in 13 countries in Europe.

We won a multi-year contract from a major U.S. supplier of healthcare products for Global Health[inaudible] Services and a three-year IT outsourcing contract from WMC Resources in Australia.

So we are encouraged by the deal activity we saw in the quarter.

And we continue to go forward with a strong pipeline of opportunities, particularly in business process outsourcing, and infrastructure managed services.

Turning now to Slide 5, I'd like to highlight accomplishments in our services business during the first quarter.

First, we continue to enhance operating margins in our services business, which, as you all know, is one of our key strategic objectives for 2004.

We've been making steady progress over the past three years, and in the first quarter of 2004, we improved our services operating margins by 120 basis points, to 4.1% from 2.9% a year ago.

We look for continued margin progress this year as we work toward our target of achieving a 10% services operating margin on a run rate basis by the fourth quarter of 2005.

Beyond this financial progress in our services business, the first quarter was significant from a strategic perspective.

During the quarter, we unveiled 3D Visible Enterprise, or what we call 3D VE for short.

Building on our business blueprinting launch in 2003, 3D VE allows our clients to create digital maps, we call them blueprints, of their organizations, and that link, vision, processes, and the IT systems that support them.

It represents an overall solutions vision.

The beauty of these blueprints is that they're fully traceable.

Imagine if you're an executive.

Being able to see the information circuitry of your organization, the linkages between strategy, processes, applications, and platforms.

With such a blueprint, executives can see the potential cause and effect impact of changes before making a decision.

This is what 3D VE enables.

The benefits are significant.

They're significant in cost savings, in higher productivity, and in greater strategic alignment across the organization.

We believe 3D Visible Enterprise is a key differentiator for Unisys in the marketplace.

It's a unifying vision, it's a methodology for building end-to-end solutions from the various service lines we offer at Unisys.

We rolled out 3D VE globally in the first quarter, and we are seeing good interest from clients and potential clients.

We drew more than 1400 executive-level attendees to our global launches.

We're now conducting about 30 workshops with potential clients to show them the power of 3D VE.

We're also actively applying the 3D VE strategy and tools with such diverse clients as Qantas, western Australian courts, southwest China regional airports, Virgin Blue, and several major U.S. banks.

We're also using 3D VE in our operations Safe Commerce project, with Motorola and with Sara Lee.

Also in the first quarter, we continue to enhance our services and consulting skills through a niche acquisition.

We acquired the former KPMG IT consulting practice in Spain.

The acquisition adds about 300 skilled people, people skilled in the areas of strategic development, process reengineering, and business and IT consulting.

This action follows our acquisition of KPMG's former IT consulting practice in Belgium, in 2003.

These niche acquisitions enhance our service capabilities in key countries that we believe offer attractive growth opportunities.

Finally, in the first quarter, we continued to enhance our capabilities and our offerings in our strategic growth services areas, such as business process outsourcing, security, and Check 21 services.

Slide 6 highlights the key growth drivers that we're focussed on in our services business in 2004.

First, business process outsourcing continues to be a major growth focus for us this year.

We remain focussed on continuing to expand and to grow our BPO business in payment processing, remittance processing, insurance processing, Medicaid claims processing, cargo administration, and other vertical industry areas.

We want to continue to add business to our existing BPO utilities, and to selectively add new BPO utilities in attractive growth areas.

As I mentioned, our new business with Interpay gives us a strategic new BPO utility in the Netherlands, and this will enable us to grow our payment process business in continental Europe.

This utility adds to our existing payment process utilities in the United Kingdom, and in Australia.

Second, consulting and systems integration remains a key growth focus for us in 2004.

Following 10% revenue growth in 2003.

With the new people, and niche acquisitions we've added to the business, plus our new offerings in 3D VE, we believe we're well-positioned to capture industry-specific growth opportunities in business blueprinting, Check 21, and other areas.

We continue to strengthen our offerings in the Check 21 area, both in services and hardware.

In services we're doing consulting and reengineering work for more than 10 major U.S. banks.

And there are many other proposals in the pipeline.

We expect activity to increase in the second half of 2004, and into 2005.

Also, last week we announced an enhanced series of check-processing systems and services that provide improved check image quality and other features supporting Check 21 requirements.

The new systems also enable interbank exchange of check images among financial institutions.

The federal market is the third key growth focus for our services business.

After very strong growth in our federal business in 2003, we're focussed on keeping the momentum going in 2004.

I mentioned earlier the CEFA win in the first quarter.

We're also bidding on many other potentially significant opportunities in the federal market.

We have a talented management team in place, and we believe we're well-positioned to win our fair share of these proposals.

Security is the fourth key growth focus for our services business in 2004.

We continue to win new security business.

New security clients in the first quarter included the New York Power Authority, Vodaphone, and Premieracross[ph].

We have a strong pipeline of more than $300 million of security proposals, roughly equally split between federal government and commercial opportunities.

We also continue to work on existing major security projects, such as our ongoing work with the Transportation Security Administration in airport security, and our pilot projects for seaport security with the Operation Safe Commerce program.

Moving now to our technology business, please turn to Slide 7, for a summary of our accomplishments in the first quarter.

We are essentially driving a two-prong strategy in our technology business.

We're working to modernize our existing ClearPath mainframe client base, while at the same time growing our revenue and client base with our newer Intel-based family of ES7000 servers.

Our technology team is doing a good job of maintaining our ClearPath base.

They're doing this by offering attractive new models with leading-edge features that allow our clients to modernize and to expand their environments while continuing to take advantage of mainframe-class performance and security capabilities.

Recently, we introduced our new ClearPath LIBRA500 series, which offers our clients higher levels of price performance along with modern features, such as a pay-per-use metering option.

With this technology, customers will be able to purchase systems with a specified level of performance, and then buy extra performance in increments as consumed.

Think of it like your cell phone.

You purchase a certain number of minutes per month, and if you go over, you pay extra for that usage.

The LIBRA500 also supports an open-source application environment, making it more attractive to clients wanting to run open, JAVA-based applications in a robust, secure environment.

We believe the enhanced performance, features, and flexibility will entice customers to upgrade to the new systems.

The metering and modular features will also allow clients to more easily justify infrastructure investments and expenses that are visibly driven by business demand and usage.

In our Intel-based ES7000 server family, we saw strong double-digit growth in our revenue in the first quarter.

This was driven by strong shipments of the new systems that we announced in 2003, when we completely refreshed our ES7000 product line.

We continue to bring on new-name Unisys clients with the ES7000.

New clients won in the first quarter include Cox Communications;

Safeco Insurance;

Pier 1 Imports; and TPG Post, the largest postal mail delivery organization in the Netherlands.

We continue to see about 40% of our ES7000 sales coming from new-name Unisys clients.

Our marketing efforts to reach out to independent software vendors and systems integrators are also working.

About half of our ES7000 orders in the first quarter came through working with outside partners such as SAP, CIBOL, PeopleSoft and others.

This is a positive sign that the ES7000 is increasingly being viewed as an ideal platform for implementation of big Windows projects.

So we continue to invest in our enterprise server families to drive growth and profits for our company.

And you will see additional enhancements across our enterprise service lines over the next six months.

Before I cover our financial outlook, let me briefly remind you of our strategic objectives for 2004.

You can see these in Slide 8 of the presentation.

As I discussed with you back in January, we have five strategic objectives for 2004.

The first four objectives deal with growth.

We want to continue double-digit growth in our BPO annuity-based business.

In enterprise security.

And in the ES7000, as we did in the first quarter.

Another key goal is to continue to expand and to grow our services operating margin as we work towards our 10% target.

This improvement also continued in the first quarter.

Our final strategic objective is to continue enhancing the Unisys brand in the marketplace, which is also key to growth.

We'll continue to do this through focussed thought leadership, selective advertising, analyst relations and other efforts.

We believe we continue to make progress.

Although, it's harder to measure.

And finally, you can be sure we will continue to keep tight controls over expenses.

Now, I'd like to make a brief comment about the announcement we made last week regarding succession planning at Unisys.

The Unisys Board of Directors takes very seriously the issue of succession planning at all levels of senior management in the company.

As for my position, as I'm approaching the retirement age of 65 for elected officers, the board and I have been putting a great deal of thought and a great deal of work into this issue over the last year or so.

To ensure an orderly and a smooth transition plan.

I plan to continue as Chairman and Chief Executive Officer until January 2005.

At that time, at the board's request, I plan to stay on for another year until January 2006 as full-time chairman.

Also as part of this announcement, the board has elected Joe McGrath as President and Chief Operating Officer.

Joe, who joined Unisys in 1999, has been running our consulting, systems integration, and outsourcing business.

He's been instrumental in reshaping this business, and in bringing in new leadership, and new consulting talent.

He's also the driver behind our new 3D VE methodology, which we believe is key to differentiating Unisys in the marketplace.

Joe and I have been working closely together for more than five years.

We share the same vision of where the marketplace is going, and I am confident that he is the right person for this new position as President and Chief Operating Officer.

Also, we've named George Gazerwitz as Vice Chairman.

You can be sure that the process is being handled proactively with the goal of a smooth and orderly transition.

Please now turn to Slide 9.

And I'd like to update our financial outlook going forward.

Our view for 2004 remains the same as we discussed in January: We continue to look for mid, single-digit revenue growth for the full-year of 2004.

And that's going to be driven by growth in our service business, with a slight revenue decline 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, and that's compared to the 73 cents earned on a comparable basis in 2003.

For the second quarter of 2004, we expect earnings per share of 14 to 17 cents, again, excluding the impact of pension accounting, on mid single-digit revenue growth.

In conclusion, we got off to a solid start in the first quarter of 2004.

And we remain focussed on achieving our stated strategic and financial objectives for this year.

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

Thank you, Larry.

And hello everyone.

I, too, was pleased with our continued operational discipline.

We met our financial goals by staying focussed and executing.

This morning, I will provide details on our financial results in the quarter.

Including business segment results, expense trends, and cash flow highlights.

Certain financial comparisons will be with and without the impact of pension accounting.

As we have previously discussed and disclosed, we believe providing this non-GAAP information is meaningful to fully understand our operating performance.

Because while pension accounting is not operational in nature, it does impact our reported results.

And also, we have no requirement to fund our largest plan, the U.S.

Pension Plan, in 2004, and we anticipate no funding requirements in 2005.

Our reported results in the first quarter of 2004 include $22.2 million of pension expense, compared to $6.4 million of pension income in 2003.

A 21 -- sorry, a $29 million swing.

On the Unisys investor website, we have provided a reconciliation of our reported results on a U.S.

GAAP basis, compared with our results excluding the impact of pension accounting.

Now, moving on to our operating results in the quarter, please turn to Slide 10 for a review of our first quarter revenue by geography.

Our U.S. revenue grew 3% in the first quarter, as we continued to see a gradual, broader recovery in U.S. demand conditions, particularly in short term project work.

Our international revenue increased 6% in the quarter, driven by Europe and South Pacific.

On a constant currency basis, our international revenue declined 7% in the quarter, while both Europe and South Pacific were up slightly on a constant currency basis.

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

We anticipate the currency will have about a 4 to 5 percentage point positive impact on our second quarter 2004 revenue comparison if rates remain the same as today.

Slide 11 shows our first quarter revenue by business segment.

Services represented 80% of our revenue in the first quarter, with technology accounting for 20% of our revenue.

Services revenue grew 5% in the first quarter, and our technology revenue also increased slightly in the quarter, growing 2% from a year ago.

Slide 12 breaks down our services revenue in the first quarter.

Outsourcing remains the largest portion of our services business.

And let me refresh your memory that the first quarter of 2003 included the initial ramp-up of the Transportation Security Administration contract.

Excluding this contract, all components of outsourcing grew double digits in the quarter.

Overall, our outsourcing revenue grew 8%, and represented 38% of our services revenue in the first quarter.

Consulting and systems integration revenue grew 6% in the first quarter, and represented 33% of our revenue in the quarter.

In terms of our other service lines, infrastructure services revenue was down very slightly in the quarter, and core maintenance grew 3%.

Turning to technology, please turn to Slide 13.

Our enterprise server revenue declined 7% in the first quarter of 2004.

Within enterprise servers, ClearPath revenue was down, while ES7000 sales had strong growth.

Our specialized equipment business grew 30% in this quarter, driven by higher sales of our semiconductor test systems.

Sales of these systems can vary significantly from quarter to quarter, depending upon customer needs, and we don't anticipate the strength to continue through 2004.

Moving to expense trends in the first quarter, please turn to Slide 14.

SG&A expenses increased in the first quarter due to currency and the impact of pension accounting.

Excluding the impact of pension accounting, SG&A expenses represented 17.5% of revenue in the first quarter, compared with 17.6% of revenue a year ago.

Our R&D expenditures in the first quarter were up 7% from a year ago on a reported basis.

Excluding the impact of pension accounting, R&D expenditures were flat in the quarter.

We continued to invest in our high-end enterprise servers, and our 3D VE industry solution programs.

Turning now to margins, please turn to Slide 15 of the presentation materials.

We continue to make year-over-year progress in improving our operating margins.

As we focus on higher value-added business and maintaining tight cost controls.

Excluding the impact of pension accounting in both periods, our overall operating margin increased 50 basis points, to 5.5%, from 5% in the year-ago quarter.

This progress was driven by continued progress in our services business.

Slide 16 compares our operating margins in our services business in the first quarter of 2004 to the year-ago period.

Excluding the impact of pension accounting, our services operating margins improved 120 basis points, to 4.1%, from 2.9% a year ago.

Slide 17 shows the operating margins in our technology business.

Excluding pension accounting, our technology business generated a 9.5% operating margin in the first quarter of 2004, down from 9.9% a year ago.

The slight margin decline was largely driven by a lower mix of ClearPath shipments in the quarter.

Now, moving to cash flow and balance sheet highlights in the quarter, please advance to Slide 18.

We had a strong cash flow performance in the first quarter of 2004.

We generated $116 million of cash from operations in the quarter, which was an improvement of $181 million from an operational cash usage in the first quarter of 2003.

This improvement was driven by several factors.

First, higher net income, excluding pension accounting.

Second, higher level of advanced payments for outsourcing projects, which are generally timed to offset the capital expenditures on those projects.

And third, lower restructuring payments.

Total capital expenditures in the first quarter were $100 million, up from 89 million a year ago.

As we continue to invest in our outsourcing business.

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

This was a strong performance in what typically is a seasonally weak quarter for cash flow.

Please note that a reconciliation of cash flow from operations with free cash flow, a non-GAAP measure, can be found on the Unisys investor website.

A few other notes on the cash flow and balance sheet, depreciation and amortization was 89 million in the first quarter of '04, compared to 80 million in the year-ago quarter.

We ended the quarter with no borrowings against our $500 million revolving credit facility.

And driven by our strong cash flow performance, we ended the quarter with $671 million of cash on hand.

Looking forward, our expectation for capital expenditures for the full year of '04 is in the 380 to 400 million dollar range.

And our expectation for depreciation and amortization is in the 360 to 380 million dollar range for 2004.

And we continue to target free cash flow of more than 100 million in 2004.

In closing, we got off to a good start in the first quarter of 2004.

We met our financial targets.

We grew our earnings 30%, excluding pension accounting.

And delivered significantly-improved cash flow.

And now, I'd like to turn the call back over to Jack.

Thank you very much, Janet and Larry.

Operator, we'd now like to open the call up for questions.

Thank you.

The floor is now open for questions.

If you have a question, please press star 1 on your touch-tone telephone at this time.

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

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

Our first question is coming from Julie with Morgan Stanley.

Please go ahead with your question.

Thank you, good morning.

My question is about services operating margin.

Clearly, there was a strong improvement over 100 basis points year-over-year.

But I might have thought that it could have been even a little bit higher, especially given the greater mix in short-term project work.

I'm wondering, Larry, if you could comment a bit on pricing and utilization, other things that may be offsetting some of the other margin improvements.

Well, thanks, Julie.

First off, we thought a 100 basis-point improvement was pretty good, so we do feel good about the improvement.

As we've said, quarter-to-quarter, we are shooting for that improvement and by the fourth quarter of '05 on a run-rate basis, we expect to be at a 10% operating margin.

As far as pricing goes, you know, I have said very openly in the number of occasions that given some of the impact of offshoring, what we're seeing is not a whole lot of opportunity for price increases, and frankly, there is a deflationary impact on the technology business as you go offshore.

Nevertheless, that doesn't mean that you can't be profitable and make money in the business, but it does mean that we've got some head winds that we're going into.

So I would say pricing remains competitive, offshoring, particularly what's going on in India and certain other countries, has reduced the overall gains in revenue that one would expect because in every case, there's a sharing with the complaint of some portion of the savings, which is generated by going offshore.

So from a pricing standpoint, that's occurring.

From a utilization standpoint, we continue to see improvement in utilization.

We continue to enhance our performance management capability, and you know, those who aren't performing as the bar gets raised every quarter, every year, we are having to deal with those people.

So the utilization is increasing, the pricing is still stiff and I believe you know, there's not much elasticity in pricing at the moment.

Thanks, if I can get one quick follow-up on the offing issue.

Could you help us understand a little bit the magnitude of that for Unisys, perhaps maybe the number of client relationships that you have that include an offshore presence or the percentage of new deals in the pipeline that include offshore?

Well, we break the business into two components.

If you look at the public sector, federal government and other governments, obviously, they are -- we do outsourcing but we don't do offshoring, Julie.

If you look at the other part of the business, particularly on the outsourcing part of that business, there is a growing interest on the part of all clients that some portion of the business be done in an offing basis.

Some want 10%, some want 20, some want 30, I mean, there's no single cookie-cutter that people are using to define what should be done onshore versus offshore.

But we are seeing increasing numbers of clients requesting an offshore capability, and as you know, we've been doing global sourcing now for more than 20 years at Unisys, we do it in a number of countries and we're prepared to meet the competitive demands of our clients.

Okay.

Thank you.

Thanks, Julie.

Thank you, our next question is coming from Julio with Goldman Sachs.

Please pose your question.

Good morning, guys, Larry, before I start on my questions, I do want to congratulate you on your success as you begin to prepare for your retirement.

My question, just as a follow-up to Julie's question is kind of related.

Can you give us a sense on the services side what percentage of your revenue is now from the federal government business and related to that?

How much work that you're doing in the federal government work sector actually has a subcontractor usage in it and what's kind of the mix in terms of contribution from subcontractors,, if any?

Well, first off, the percentage of business coming from federal business, it's maybe around 15, 610%, 15 to 20% of our business.

But there's a lot of subcontractors that are included in that business.

As you know, the government requires you to have small business and requires us to have a number of companies in that business as subcontractors.

So we need to deal with that as required.

But I would say, you know, you can assume roughly somewhere around 20, 25% is subcontractors.

We think the, you know, the federal business is still a strong business, if we're in the 15 to 20% range for our federal business, that's kind of like where we would like to be on a proportionate basis, Julio because we do think that these things all go in cycles and we don't want to be too disproportionate on the pure federal part of the business.

So, you know that's basically how we're approaching it.

But it continues to be strong.

There's a number of contract potentials that we are going to be involved in, either as a prime or a subcontractor.

And we continue to have high hopes for the growth of our business.

Great.

And just as a quick follow-up, switching gears to the technology side, can you just clarify something for me?

The -- under the ClearPath bullet you guys stated you have some major new product enhancements in 2004.

Have those product enhancements actually been rolled out to date?

And if they have, do we have a sense on what sort of the adoption or conversion of existing ClearPath clients is at this point?

The ClearPath LIBRA 500 where you spay on usage as a metering that I was talking about, Julio, that was brought out on March 29th.

Okay.

So it really -- and we should see the real impact of that probably the end of the second quarter, end of the third quarter.

When you bring out something new, there's always a slowdown waiting for the new announcement, then when the new announcement comes out, people want to get to understand better exactly what you're doing.

So we're now explaining the metering concept, how it working with client, talking to them about it.

So I think you should expect to see more of an impact in the second half of the year than you will -- you didn't see anything the first quarter because it came out the end of the first quarter.

Right.

And I think it will be more the third and fourth quarter.

Okay, great.

Thank you very much.

Congratulations, good luck.

Thank you.

Thank you.

Our next question is coming from Ashwin Shirvaikar with Salomon Smith Barney.

Congratulations on a strong quarter, particularly the cash flow performance.

My question relates to the cash flow performance.

First, to what extent is the improvement a function of relatively weak outsourcing bookings in the last couple of quarters?

In other words, is it sustainable now that you've signed a couple of large nice contracts this quarter?

And second, on the working capital thing, Janet, could you provide some details on the accounts payable and accrued liability of these lines, what caused that?

I'll answer the first part on the outsourcing, and Janet will answer the part about the payables and accrued liabilities.

If you look at the first part on outsourcing, we had a huge, as Janet mentioned, a huge ramp-up on TSA the first quarter, a little bit of the second quarter of '03, that makes it look like we only had an 8% gain in outsourcing when you include that in there.

The outsourcing continues strong.

We expect to have 380 to 400 million of capital expenditures, probably 65, 70% of that will be in revenue-producing kind of assets.

But if you look at the fact that our depreciation and amortization will be 360 to 380, we kind of caught up.

And I had said a while ago that as we took on more and more of these outsourcing deals and didn't have the big ramp-up we had in the last several years, we believe that we could continue to grow the outsourcing business, and at the same time, generate free cash flow.

And we said free cash flow on an annual basis.

We're not trying to look at this thing quarter to quarter or month by month but on an annual basis.

So we stick by our 100-plus free cash flow for 2004.

We stick by the fact that our outsourcing should grow double digit, except for, as I mentioned, this one piece of the TSA huge ramp-up.

And we still think if we continue to stay focussed, on our value-added propositions, that we can build an outsourcing business, generate the right kind of returns and have free cash flow.

That's really what we're doing.

Let me turn it to Janet now to respond to the second part of your question.

And andwin we may need to do a follow-up because it was a little cut off on the phone, I don't know if I've heard the question correctly.

In the quarter, from a working capital management standpoint, we had an overall slight improvement that contributed to the free cash flow.

If the question was with regard to the seasonalization of the payables when you compare the first quarter of '04 to the first quarter of '03, two things happened.

There's a little bit of a timing difference, but as we said previously, in the fourth quarter of '02, when we had the ramp-up of TSA, some of those payables were on the balance sheet at December 31 and got liquidated down in the first quarter of '03.

So you don't see as much of an impact seasonally-wise as you may have seen in the first quarter of '03 and also the first quarter of '02, where the fourth quarter of '01's revenue was a little bit back ended towards the end of the quarter.

So there an overall basis when I look at working capital improvement, we do see an improvement from year-over-year in the overall trends.

In looking at the customer deposits and prepayments, which really need to broaden that category to be something, which I refer to in my comments as advanced payments from outsourcing projects.

They are one of two things: They are either the deal structure, and which as you know as a company we focus not only on the P&L contribution, but we also focus on the cash flow structure of the deal to make sure it is appropriate and beneficial for Unisys.

We do have those deals structured so that there are cash prepayments from the customer to offset periods of high capital expenditures.

In addition, those deals are generally structured that there is an advance payment for the next quarter's work.

So as the outsourcing business has grown, obviously we see a benefit of that in the cash flow in the quarter.

Okay.

And if I could sneak one more in, this is on the pipeline.

Particularly the state and local side Medicaid.

My understanding is now that you have resigned Louisiana, you only have Kentucky to defend in the next several quarters.

And so but the opportunity to gain share is quite big.

There are about nine or 10 Medicaid contracts coming up.

Could you comment on that and maybe your product set in Medicaid?

Andwin, it cut off in the middle.

Can I rephrase and tell me if you're on point.

The question you're asking is what does the Medicaid pipeline look like for us, how much -- what do we have in recompetes in the near term and which ones we're going after?

Yes, that's correct.

Okay.

All right .

Going forward, we obviously have our sights set on a number of states as we go out in the next 18 months.

There are more than 10 states that we expect to have an RFP out in the next 18-month time period.

We -- on that list, there is only one, actually two that are installed base of customers.

We are anticipating that we will continue to go out and compete and bid on a number of contracts that the RFP is outstanding for.

So you would expect that given the win rate that we have had in the work and the Medicaid business, like our west Virginia win and like the Louisiana one we talked about today, we would hope the win rate would continue and you would see an expansion of our Medicaid business.

But I would add one thing, Andwin, we're going to win Medicaid business when we believe that it's a win-win for the client and us.

And we're not going to win it just because we're going to, you know, strike through what the right profitability level ought to be to win a contract.

So this is something that we understand the business, we know it's competitive, and we also know that when we go after these, we have to do it on a way that can be profitable to our company.

Okay.

Thank you.

Thanks, Andwin.

Our next question is from John Jones of sound view.

Please pose your question.

Thanks.

A couple questions, Larry, if I could.

Can you give us a -- kind of a status on the U.S. visit program?

You, IBM and Lockheed are bidding as one group, it's a rather large contract.

My notes say it should get awarded next month.

The month of May.

That's one question.

Secondly, Janet, Larry's talking about 10% operating margin target for services.

Will you adjust that on a residented basis and tell us what that number will look like reported this year?

On the first heart R part, on the U.S. visit proposal, we are participating in this competition and we are working with Lockheed and IBM.

Lockheed is -- the Lockheed team is one of, I believe, three teams that are now competing for the work.

We think that our team has offered a very strong solution, but it is a competitive bid.

We're certainly one of the major players with Lockheed, and, you know, we got our fingers crossed that our team will be successful in connection with that visit. -- with that proposal.

The timing of that, it's supposed to be sooner rather than later, John, but I can't give you an actual date.

We've seen some slippage in some of the dates that we've been getting on some of these federal contracts, and we're like you.

We're expecting it in the second quarter, but I can't give you an exact date.

Okay.

John, with regard to the impact of pension accounting, I guess the best way is to point you to the 2004 results for the first quarter.

Where when you look at the information that we've disclosed, the impact of pension accounting is about a point and a half between the as-reported results and the numbers excluding pension accounting.

So that will flow through for the year or so, 8 1/2 ends up being 10 on a X -- Right.

And obviously, it depends on what happens in the market and where that number moves.

I just want to reiterate that our target is to come out of the fourth quarter of '05 on a run rate with a 10% operating margins in the services business.

So that's a run rate for '05?

No, a run rate for the fourth quarter, John.

The fourth quarter of '05 we expect to be at 10%, meaning going into '06.

Okay.

That's what I mean by the run rate of the fourth quarter of '05, not for the year '05.

Okay, great.

Thank you.

Thank you.

Thank you.

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

Please pose your questions.

Thanks.

Janet can you break out the foreign exchange impact by segment, services and technology?

Sure.

Jim, as previously has been happening as we've talked about, the currency impact generally is the same across the services and the technology business.

In this quarter, the little bit more to the services business and less in the technology business, but not more than a point or so difference between the two businesses.

Okay, great.

And Larry, the past three-quarters, sir,s orders have been a little bit light.

Can you comment on your market share during this period?

And also, you know, sales cycles; have sales cycles extended here?

Jim, you know, I think when it looks like our orders are light, I think you have to step back and look at the way we record orders and the way others in the industry record orders.

We have consistently taken the position we're not going to record an order until -- if it in the government arena, until we actually get the task order.

That's different than others in our industry.

So when I talk about $850 million coming in at the first quarter, that doesn't mean we booked it.

As a matter of fact, we booked probably around 200 or so million, maybe 20, 25% of that in the second quarter, maybe we'll book another 15, 20% of that, and then as the task orders come in, we'll go forward.

So I think when you look at our 10-K and we talk about backlog and we split it out, we really look at it more on what the total backlog is, but on top of that, we have all of these other contracts that we have won.

So, for example, on the CEFA deal, we did not put 345 million in in order, even though we were awarded a contract with a value up to 345 million.

We put 11 million in in the first quarter.

So that's all that we had in the task order.

We expect obviously a lot more.

Now, as far as the sales cycle goes, I think in the outsourcing business, it continues to be more than a year.

The cycle went up sometime ago, probably a couple years ago and it's been in the -- more the 12 to 15-month range in outsourcing, and it kind of stays there.

On some of the smaller project-based work, actually the timetable has gotten smaller.

It's been reduced in time.

But those tend to be the small deals.

I'm talking about the under a million dollar project-based assignments.

Thanks, Larry.

Thanks, Jim.

Operator, we have time for one more question.

Our final question is coming from Joseph with Jeffries.

Please post your question.

Good morning, good results.

I'll be quick.

Janet, I wonder if you could give us color on the cash flow, generally how we might see timing of bones payments predicate out over the course of the fiscal year?

And secondly maybe a little color on the infrastructure services line being down a percent.

If there was anything special going on there driving the down number?

Thanks.

Hi, Joe, how are you today?

Just to refresh on the bonus, our bonus is paid in the first quarter of '04.

There are no bonus payments that are scheduled for the rest of the year.

The delta, obviously, reviewing our proxy, you would know the bonus amounts paid were less than a year ago, but the delta is only 10 million.

In year-over-year.

That is all reflected in the first quarter.

With regard to the infrastructure line item that we said was down slightly, once again, that does include the short term project-based infrastructure work which continues to show some pressure points.

That market really hasn't recovered from an overall global demand basis.

Okay.

Thank you very much.

Thanks, Joe.

Joe, thank you.

And everyone, you know, we appreciate your listening to the call.

We think and believe that this was really a strong quarter.

I know that some of you look at this with pension, some look without pensions, but when you look at the swing that takes place year to year in our pensions, the only way 0 objectively understand what we're doing from an operating basis is to look at this without pensions.

And, therefore, we're not trying to confuse, we're trying to make sure that people can see operationally what we have been doing, the progress we're making, how we're improving those service margins, how we're going to get to our stated objective in 0 knife.

And when you put in the pension expense and look at particularly in the first quarter of this year, but in the first quarter as Janet mentioned a 29 million swing between pension in two years, it just kind of distorts everything that we're trying to accomplish.

So we look at the business, we run the business, we're managing the business, excluding the pension expense so we can really see what's happening from an operational basis.

I understand that each and every one of you have your own requirements in your companies but I wanted you to understand how I'm trying to run the business so that we make sure we can continue our operational performance.

With that, again, I thank you for joining us this morning.

And look forward to having the chance to meet all of you in the not too distant future.

Thanks and bye-bye.

Thank you.

This does conclude today's teleconference.

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