Unisys Corp (UIS) 2005 Q3 法說會逐字稿

Good day everyone and welcome to the Unisys third quarter 2005 results conference call.

Today's conference is being recorded.

At this time, for opening remarks and introductions, I would like to turn this call over to Mr. Jack McHale, Vice President of Investor Relations at Unisys Corporation.

Thank you, operator, hello everyone and thank you for joining us this morning.

About an hour ago we released our third quarter 2005 financial results, and with us this morning to discuss these results are Unisys CEO, Joe McGrath, and our Chief Financial Officer, Janet Haugen.

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

First, today's conference call and Q&A session are being web cast by the Unisys investor web site.

A replay of the web cast will be available on our web site shortly after the conclusion of the live event.

Second, you can find on our investor web site the earnings release and the associated spreadsheets, as well as 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.

Third, today's presentation, which is complementary to the earnings press release, includes some non-GAAP financial measures.

Certain financial comparisons made in this call will be with and without the impact of pension accounting.

We believe that providing this non-GAAP information is meaningful to fully understand our operating performance, because while pension accounting is non-operational in nature it does impact our reported results.

On the Unisys investor web site we have also provided a reconciliation of our reported results on a U.S.

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

Finally, I would 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 expectations.

These factors are discussed more fully in the earnings release and in the Company's reports as filed with the SEC.

Copies of these SEC reports are available from the SEC, and from the Unisys investor web site.

Now, let me turn the call over to Joe.

Thanks Jack.

Hello everyone and welcome to today's call.

To begin our discussions this morning, please turn to slide one for an overview of the quarter.

As we announced early last week our results came in below the expectations we had laid out in our last call in July.

We reported a preliminary net loss per share of $0.05 in the third quarter, excluding $0.09 of pension expense, and a $0.02 charge for the debt tender offer that we conducted during the quarter.

This compared to our guidance of earnings per share, excluding these items of $0.04 to $0.06 in the quarter.

So we missed our earnings guidance by about $0.10.

At the top line, our revenue came in at 1.39 billion, which was down 4% from the third quarter of 2004.

We had expected revenue to be up mid-single digits in the quarter.

In a few minutes our Chief Financial Officer, Janet Haugen, will provide more details on our third quarter financial results.

Let me say clearly that our third quarter performance was unacceptable.

We must and can do better for our stockholders, for our employees, and for our clients.

We are committed to delivering the kind of consistent revenue and earnings growth that will drive shareholder value, and we are taking decisive actions to get there.

These actions require us to review the recoverability of our 1.6 billion deferred tax asset.

This review will be completed by the time we file our 10-Q in November.

The results of this review could impact our final third quarter operating results.

Now, let me share with you my agenda for our call this morning.

You can see this on slide two of the presentation materials.

First, I will briefly discuss the business reasons behind our third quarter earnings shortfall.

Many of the factors behind our third quarter miss we are addressing as part of our strategic review and action plan.

Second, I will update you on the status of the two challenging outsourcing operations that have been impacting our results.

Third, I will discuss the aggressive actions that we're taking to address these challenges.

The steps we are taking are comprehensive and far reaching and involve significant changes to our corporate focus, our cost structure, and our operations.

These actions are all designed to improve profitability and drive revenue growth.

At that point, I will turn the call over to our CFO, Janet Haugen, for more details on our third quarter financials before taking questions.

To begin, please turn to slide 3 for an overview of the third quarter.

We have conducted a thorough analysis of our third quarter and have identified three primary drivers behind the shortfall in our results against guidance.

First, we saw weaker than expected demand in our technology business, specifically, our enterprise server business.

Our technology revenue was down 29% in the quarter, driven by double digit declines in ClearPath sales.

In our ClearPath business, a few transactions that we had expected to close late in the quarter did not materialize as clients deferred decisions until later periods.

There was one very large technology transaction in particular that did not close when we expected it.

We expect to close this deal in the fourth quarter.

Because of the lower than expected sales of enterprise servers in the third quarter the technology revenue volume was not high enough to cover the fixed costs in this business.

We clearly need to lower the break even point in this business.

And, as I'll discuss later, we are taking actions to do so.

Overall, about 60% of our earnings miss versus guidance in the quarter came from lower than expected sales in our technology business.

So this had the biggest impact on our shortfall in the quarter.

Second, we incurred some costs associated with renegotiations of one of our large challenging outsourcing contracts, I'll discuss the status of this contract in a moment, but the costs associated with this renegotiation accounted for approximately 20% of earnings miss in the quarter.

The remaining approximately 20% of our earnings miss in the third quarter came from lower than expected revenue in our services business, in particular, in our project base services work in systems integration and consulting.

Our systems integration and consulting revenue declined 3% in the quarter against our expectation of growth in this business.

We saw some slippage of expected deals, as well as some missed milestone revenue.

The lower than expected services revenue along with startup costs on some new infrastructure services projects negatively impacted our services margins.

Additionally, we have overcapacity in our services business that needs to be addressed.

This overcapacity issue is a significant factor for us and as I'll discuss later we are taking actions to reduce these underutilized resources and better leverage our services delivery resources.

These were the primary factors behind our shortfall in the third quarter.

Before I discuss the actions that we are taking to reposition the Company and improve our results let me update you on where we stand on two large challenging BPO operations that have been impacting our results.

For this please turn to slide 4 of the presentation.

As I've discussed in our previous conference calls this year these two challenging contracts are both large, multi-client utility operations.

Operational issues in these contracts have had a very significant impact on our services margins and cash flow in 2005.

One of these operations is our IPSL check processing joint venture in the United Kingdom.

This operation represents more than 200 million in annual revenue.

We have made good progress in working with our clients to improve this operation.

We recently signed a memorandum of understanding with our joint venture bank partners in IPSL and are working toward reaching a final definitive agreement by the end of the year.

All of the parties understand the importance of this operation and are all helping to improve it.

Under the MOU, Unisys will retain 51% ownership of the joint venture and continue to service these bank clients for check processing activities, but at higher rates that are more reflective of the true economics of the operation.

This new agreement, when signed, will enable us to significantly improve the economics of the IPSL operation moving into 2006 and beyond.

We believe that the expected cash flows from this operation under the new agreement will be sufficient to recover our deferred costs.

We also continue to address issues in the other challenging BPO operation that have been negatively impacting our results.

This one is taking longer to work through, but we are working aggressively to address the issues and renegotiate the client contracts and we expect to see improvement in early 2006.

Now, let's move to discuss the broader actions that we are taking to fundamentally reposition the Company and address our performance issues.

We have been engaged in a thorough and comprehensive strategic review of our business and how we operate in the global marketplace.

We have annualized the forces that are reshaping the IT industry, we analyze the needs of the market and where our clients are and will be and focusing their spending.

We annualized our competition and their strengths and weaknesses and we took an in-depth look at our own capabilities and resources.

As a result of this review, we concluded that Unisys has tremendous strengths and capabilities to build on, value added services, deep vertical domain expertise, powerful high end server technology, a large global client base.

To drive improved profitability and revenue growth, however, we need to better focus our resources.

Specifically, we need to move away from niche, compartmentalized programs and focus on large, mainstream high growth markets where we can better leverage our resources, build critical mass, and accelerate our profitability.

Through the strategic review process we selected which growth businesses to focus our investments and resources going forward.

We had very specific financial criteria.

You can see these on slide 5 of the presentation.

The first criteria is that we will focus our investments on businesses where we can grow at a double-digit compound annual growth rate.

The second criteria are that these businesses must build to at least 500 million in revenue by 2008.

We also had specific overall corporate financial objectives over the planning period.

We targeted overall Unisys revenue growth at or above the industry average, we are also targeting an overall Company operating profit margin of 8% to 10%, excluding pension expense by 2008.

This process of focusing our business on growth also meant that we had to take a hard look at businesses that were not attaining these financial criteria.

As a result, we have made decisions to exit or divest certain businesses that cannot meet our objectives.

In addition, to support and reflect our more focused business model we need to right size our cost structure and significantly reduce expenses.

As a result of this process we selected four major high growth market areas where we will be directing our resources and investment over the coming years to drive profitability and revenue growth.

You can see these in slide 6 of the presentation.

First, we will be focused on the market for outsourcing.

Outsourcing is one of the fastest growing segments in the servicing market.

Overall, the outsourcing market is nearly 300 billion in size, growing annually between 8% and 10%.

Within the outsourcing market, Unisys has strong capabilities in distributed infrastructure outsourcing, in data center outsourcing, and in certain segments of the BPO market.

We will build on this position by making investments in targeted high growth segments within these areas.

We believe that by targeting these high growth areas we can drive double-digit growth in outsourcing while significantly increasing our profitability by changing our delivery model as I'll discuss in a few minutes.

Our second focused area of growth is the market for enterprise security.

This is approximately a $15 billion market, growing about 20% annually.

Clients are spending an increasing percentage of their IT budgets on security and we want to capitalize on these growth opportunities.

Unisys has strong credentials to build on in the security area.

We are one of the top three IT service providers to the Department of Homeland Security, we are one of the key providers to the registered traveler and Operation Safe Commerce programs; we have arguably the most comprehensive set of solutions in the area of global visible commerce and supply chain.

We created and manage one of the world's largest RFID networks for the U.S.

Army, and we have large, innovative contracts in other security areas such as border and access control, in transit visibility, and asset tracking and security certification.

We will build on this foundation by aggressively pursuing security opportunities in both the U.S. and internationally.

For example, we plan to leverage our success in the U.S. federal market to pursue security opportunities within the European Union and other global public sector regions.

Major opportunities include RFID and asset tracking, port security and border access control, integrated justice, national ID cards and management, and anti-counterfeiting.

As just one example, you may have recently read in the press that the metropolitan police in the UK have selected the team of Cap Gemini/Unisys and British Telecom as the preferred bidder in a high profile effort to modernize the Met police's information systems and security network.

We are very pleased to be part of this team and we are currently negotiating the final terms and conditions and we hope to finalize this by the end of the year.

So security will be a major focus and we believe we can significantly grow our business in this area.

The third area of growth focus will be the market for open source and Linux solutions and support.

This is approximately 15 billion market, growing at about 20%.

As with security, clients are spending an increasing percentage of their IT budgets on open source and Linux solutions.

There are major areas of need in this market, particularly for open source integration and support.

As open source goes mainstream clients gain many advantages, such as standardization, widespread availability of applications, lower costs, and open access to source code.

The downside, however, is that there is no single source or provider to integrate and support all of these technologies.

In fact, in one recent survey clients identified that the lack of open source support is one of their biggest impediments.

We plan to capitalize on these growth opportunities.

Unisys has years of experience in integrating and building open IT environments made up of multi-vendor, standards based technologies such as dot net, J2EE, and JBoss.

We also have one of the world's most powerful enterprise server platforms, the ES7000 that consistently scores at the top of the TPCC bench marks and in running Linux, Microsoft, Oracle and other applications.

Building on this position we plan to drive a significant services business around supporting and servicing enterprise class open source solutions.

We will provide services to build and manage standards-based IT environments made up of open source software and platforms from multiple vendors.

We will also drive growth in open source hardware and software through the ES7000 platform.

By pursuing these programs, we believe we can grow a very significant business in open source and achieve a leadership position in this market.

Fourth, we will be focused on the market for services and solutions surrounding the Microsoft software suite.

This market is estimated to be 20 billion and it is growing at at least 10%.

We see tremendous demand both within our own client base and in the broader market for value added services to design, build, manage and support enterprise class Microsoft environments.

Across our various industries and businesses Unisys has developed strong services and skills surrounding the Microsoft product suite.

Through the ES7000 we also have the largest market share in the big window server market, that is servers using Microsoft that sell for over $50,000.

We plan to integrate our diverse services and technology skills into an integrated across Unisys portfolio of Microsoft solutions and services.

Specifically, we will be targeting opportunities in such areas as Microsoft managed services outsourcing, security invisible commerce, implementation of the new Microsoft technology, upgrade for SQL server, and big windows ES7000 servers.

Across all of these competencies and industry markets we will leverage the Unisys 3D-VE tools and methodology, which we believe is a significant differentiator for Unisys in terms of bringing value added consulting and services capabilities for our clients.

So these will be our four targeted growth segments going forward, outsourcing, security, open source, and Microsoft solutions all utilizing the Unisys 3D-VE methodology.

We will drive growth in these areas through our vertical line of business approach to the market.

Clients value our deep industry expertise and we will build on this key differentiator to drive our success.

Turning to slide 7, in addition to the four focused growth areas that I have discussed in our technology business we will continue to invest in our ClearPath and ES7000 platforms.

We remain strongly committed to these systems.

In recent years, this hardware has increasingly become commodotized.

The intellectual value add for ClearPath has shifted to software in the operating system and that's where we will be placing our emphasis to meet client need.

Through our ClearPath modernization program we will continue to offer leading edge features and functionality.

The drive increase MIPS usage on clear path we will continue to open up the operating systems through support of open source allowing our clients to run open J2EE, Windows, and Linux applications on their ClearPath platforms.

As we focus on operating systems in software we will leverage industry advances in the area of hardware design and manufacturing.

For instance, we plan to leverage advances in Intel processing power to further standardize our enterprise server platforms on Intel.

Also, to create greater efficiencies in our R&D and manufacturing we are in serious alliance discussions with a major international technology firm.

Under this alliance, Unisys plans to partner with the firm to collaborate on hardware design and share R&D costs on future platforms.

We also plan to gradually outsource hardware platform manufacturing over the next one to two years.

We believe this alliance will enable both firms to better leverage our technology spending and offer our client base expanded access to innovative engineering capabilities.

Moving to slide 8, to support and reflect our more focused business model we plan to make significant changes and reductions in our cost structure.

In our services business we plan to downsize excess capacity in our delivery resources.

This will allow us to increase utilization and enhance our margins.

We will also expand use of offshoring capabilities to lower cost base and improve the competitiveness of our offerings.

In our technology business we plan to rightsize our cost structure and rationalize our manufacturing and R&D spending through the actions I just discussed.

As we focus our R&D spending on value added operating systems and software we believe we can reduce our overall R&D spending by about 15% by 2008.

In addition, as we rationalize our technology business we will continue to consolidate manufacturing facilities.

In the third quarter we sold our Rancho Bernardo manufacturing facility and plan to consolidate activities into our Mission Viejo operation.

Within the overall Company, we will continue to drive down SG&A cost by rationalizing head count and making greater use of outsourcing and offshoring.

Overall, we plan to take actions to reduce worldwide head count by about 10% over the next year.

We expect to take cost restructuring charges of approximately 250 million to 300 million through 2006 for these actions.

These actions are expected to yield approximately 250 million of annualized cost savings on a run rate basis by the end of 2007.

We believe these actions will allow us to create a competitive cost structure that dramatically increases and enhances our margins.

Turning to slide 9, as we focus the business on high growth areas we will divest non-core businesses and assets that do not fit the criteria I outlined earlier.

We have identified these non-core areas and have begun exploratory discussions with some potential interested buyers.

Given the sensitivity of these discussions and our ongoing business needs we cannot disclose which areas we are targeting for divestiture.

However, overall these non-core businesses account for about 500 million in annual revenue.

We have dedicated a full-time senior executive to drive our divestiture program working with an outside financial adviser we have retained.

We plan to use the proceeds from these divestitures, primarily, to fund our cost reduction actions and some selected tuck-in acquisitions that provide us critical mass in our targeted growth areas.

This process of divesting non-core assets is now underway and will continue into 2006.

Moving to slide 10.

To support our focus on the high growth segments we will need to make if fundamental changes in geographical operations, client focus, delivery resources and technology business.

Across all of these areas we are taking significant actions to drive focus and reduce costs.

Geographically, we will make changes in our coverage model to concentrate our resources on countries of highest potential growth and impact.

In terms of selling and supporting our entire portfolio of services and solutions, we will focus our efforts on going forward on 10 countries that currently account for 85% of our revenue and represent the largest potential markets for our targeted services and solutions.

For the other 30, or so, smaller countries where we do business we will restructure our operations and go to market in a much more simplified manner.

In these countries, we will focus on serving the needs of specific accounts rather than going to market in these countries with our full portfolio as we do now.

This will allow us to take costs out of these smaller country operations.

We will also be more focused in our approach to clients.

We will focus our sales and marketing efforts on our top 500 accounts and prospects.

These clients account for about 85% of our revenue currently, and we want to expand our share of their IT spending dollars by selling them the full portfolio of Unisys services and solutions.

For smaller clients we will increase the use of telemarketing, web-based support and other means of servicing these accounts.

We believe this approach will maximize the impact of our selling and marketing.

We also plan significant changes in our services delivery model.

Unisys has a large global force of more than 7,500 systems integration consultants who deliver services to clients around the world.

This does not include the 16,000 plus people who provide dedicated services as part of our outsourcing and our field maintenance and help desk support.

As we analyzed our operations in recent months we identified a major opportunity to increase utilizations of these delivery resources by changing the way we manage consulting personnel.

Currently, our delivery people are compartmentalized, that is they are dedicated to specific niche applications and services.

This limits our ability to fully utilize and leverage these delivery resources across the entire Company.

To increase our ability to leverage our delivery work force we will be pooling all of our delivery resources to improve utilization and build critical mass in our high growth areas of security, open source, and Microsoft solutions.

These people will receive additional intensive training to deepen our skill base in these areas.

For instance, we will deepen our delivery skills in such areas as RFID, global visible commerce, dot net, and J2EE applications, and Linux -- all areas where there is tremendous pent up demand for skills in the market.

We also plan to accelerate our offshore activities, particularly in India, China and eastern Europe.

This will allow us to leverage low-cost delivery resources in these areas to increase our cost competitiveness.

We believe these changes in our service delivery model will enable us to significantly increase our utilization rates, improve our margins, and accelerate our growth rates in our targeted markets.

Finally, as I mentioned earlier, we will be taking actions to rationalize our manufacturing and R&D investments through greater use of outsourcing and partnering in the areas of hardware design and manufacturing.

This, too, will be key to reducing costs and increasing our focus.

Moving to slide 11, the last critical ingredient in our repositioning effort is to put in place aggressive sales and marketing efforts to drive growth in our focused market areas.

This effort has been underway throughout 2005 under the leadership of Peter Blackmore.

In earlier earnings calls this year, I have discussed some of the changes we are making in this area, including enhancing our client account coverage, recruiting experienced new sales professionals, providing high impact training and centralizing our marketing spending and functions.

In the third quarter, we significantly upgraded our sales leadership around the world to ensure we have the right people to drive the new strategic focus and direction of the Company.

We hired a new vice president of sales for North America, a new vice president of sales for continental Europe, a new vice president of sales for worldwide technology.

We also hired a new vice president of global alliances who is responsible for driving growth through a focused set of alliance partners globally.

These are highly experienced, top caliber better people who will hit the ground running.

We believe they will make a great impact on our success in the marketplace.

Also, during the third quarter, we continue to make preparations for a major relaunch of the Unisys brand to support our focused business model.

Our goal through the relaunch is to clearly identify Unisys in the market, what we do and offer, and our key differentiators and capabilities.

We are planning some high profile events next week to unveil the new Unisys brand and key messages and actions supporting it.

This will be followed by a series of customer events in different regions of the world over the fourth quarter and into 2006.

Look for more details on our brand relaunch over the coming days.

To summarize, please turn to page 12.

We have covered a lot of ground here and I hope you see the extent of the changes we are making in the Company.

We are taking significant, far reaching actions to focus our business on high growth areas and drive profitable growth.

The actions we are taking are intended to position Unisys in large mainstream fast growing markets where we can achieve double-digit growth and build sizable businesses.

To support our new more focused business model we are taking aggressive actions to reduce expenses and rightsize the Company's cost structure.

We are making changes in our delivery resources to significantly improve utilization and margins and to complement our targeted growth areas.

We plan to divest non-core businesses and assets.

We will rationalize our technology cost structure and R&D operations by expanding the use of partnering and outsourcing for hardware design and manufacturing.

Our overall goal is to create a much more focused Unisys, a Company that is investing more resources on fewer high growth, high potential areas where we can deliver strong profitability and enhance shareholder value.

Through this repositioning effort we are driving toward overall Company financial objectives of 7% to 8% annual revenue growth, and an 8% to 10% overall operating profit margin, excluding pension expense by 2008.

So overall we believe we are taking the tough actions to focus the Company, return to a growth profile, and expand our profitability.

I am excited by the changes we're making and I look forward to reporting on our progress over the months ahead.

Now, here's Janet for review of our third quarter results.

Janet?

Thank you, Joe, and hello everyone.

I, too, was disappointed with our performance in this third quarter of 2005.

We did not execute against our plan for the quarter.

I believe the actions Joe discussed will get us back on track and enable us to accelerate profitable growth.

This morning I will go through our results for the quarter and discuss our outlook for the fourth quarter.

To begin, please turn to slide 13 for details on our financial results in the quarter.

This slide summarizes our original expectations for the quarter as we communicated back in July and our final results for the third quarter of 2005.

At the top line we had originally expected to show mid-single digit revenue growth over the third quarter of 2004.

This would have put our third quarter 2005 revenue in the $1.5 billion to $1.53 billion range.

Our revenue came in at 1.39 billion, down 4% year-over-year.

At the bottom line, we originally forecasted EPS, excluding the impact of pension expense and the $0.02 charge for the dead tender premium of between $0.04 to $0.06 in the quarter.

Our results, excluding these items, came in at a loss of $0.05.

So we missed our EPS target by about $0.10.

About $0.06 of the earnings shortfall came in the technology business due to technology transactions that did not occur in the quarter as expected.

The remaining $0.04 of the earnings shortfall was in our services business, with $0.02 cents related to the renegotiations of one of our large challenging outsourcing operations, and the remainder from lower than expected revenue in our project based business.

Slide 14 shows more details on our third quarter results.

As I mentioned, our revenue was down 4% from the year ago period.

Services revenue grew 2%, while our technology revenue declined 29% in the quarter.

Our as reported results include pre-tax pension expense of $44 million, or $0.09 per share.

This compares with pre-tax pension expense of $24 million, or $0.05 per share in the year ago quarter.

Our third quarter 2005 results also include the $0.02 impact from the cash tender offer that we conducted in the quarter for 8 and 1/8 senior notes.

Our year ago results include a net benefit of 8.2 million, or $0.02 per share, related to a tax benefit net of a cost reduction charge.

Our operating margins in the quarter were impacted by weak enterprise service sales in technology, underutilization of personnel, the two challenging outsourcing operations and higher pension expense.

Excluding pension expense, we reported a third quarter 2005 operating margin of negative 2.3% in the quarter, down from a negative 1% a year ago.

On a GAAP basis, we reported a $0.16 per share loss in the quarter compared to a $0.07 profit a year ago.

Turning to orders, please turn to slide 15 for an overview of our orders in the quarter.

Overall, our orders showed double-digit declines in the quarter.

Service orders were down double digits, driven by outsourcing, which can vary quarter-to-quarter based on the timing of the signing of multi-year deals.

However, we did see double-digit order growth in our systems integration and consulting business.

Turning to slide 16, we won a number of major services contracts in the quarter.

We won two very significant awards in our federal government business.

The U.S.

Department of Health and Human Services awarded us the managed service outsourcing contract, under which we will support 8,000 users across eight HHS operating divisions.

The contract is worth an estimated $65 million over the base three-year term, plus $35 million two-year renewable option.

The U.S.

Federal Bureau of Prisons selected Unisys to provide systems and services for the nationwide deployment and operation of a next generation federal inmate telephone system.

The estimated value of the three-year base period of the contract is $37 million, and the value could be as high as $96 million if the three additional one-year options are exercised.

In Europe, Lufthansa Systems awarded us a significant multi-year contract to provide the Unisys airline systems solution, or AirCore, as the basis for Lufthansa Systems next generation airline passenger management system.

We also won a five-year $30 million outsourcing contract from ABN AMRO, under which Unisys will assume processing of the bank's paper-based payments in the Netherlands.

The processing will be done at the Unisys payment services and solutions operation, or UPSS.

So we did win some significant services contracts in the quarter and we continue to work with a healthy pipeline of opportunities going forward.

Please turn to slide 17 for an overview of our third quarter revenue by geography.

Our U.S. revenue grew 3% and represented 48% of our revenue in the quarter.

Within our U.S. business we saw single-digit growth in our federal business.

Revenue from international regions declined 10% in the quarter and accounted for 52% of our revenue in the quarter.

Currency had a 1 percentage-point positive impact on our revenue in the quarter.

On a constant currency basis, our overall revenue was down 5%, and our international revenue was down 12%.

Now moving to revenue by business segment, as you can see on slide 18, services revenue increased 2% in the third quarter, and services represented 85% of total revenue in the quarter.

Our technology revenue declined 29% in the quarter, reflecting continued weak conditions in this market.

Technology revenue accounted for 15% of our total revenue in the quarter.

Please turn to slide 19 for more details of our revenue by business segment.

In our services segment, we saw growth in our outsourcing and infrastructure services businesses.

Growth in these areas offset declines in systems integration and consulting and core maintenance.

Turning to slide 20, within technology we saw revenue declines in both enterprise servers and specialized equipment.

Enterprise server revenue declined 32%, while specialized technology sales declined 14% in the quarter.

Within enterprise servers, ClearPath and ES7000 sales were down double digits against an unusually strong third quarter for enterprise server sales a year ago.

One more note on the income statement, in the third quarter of 2005 we reported a $13.3 million of other income, which included a gain on the sale of our Rancho Bernardo manufacturing facility.

Now please turn to slide 21 for a discussion of our cash flow and balance sheet.

We use $68 million of cash from operations in the third quarter of 2005, compared to $6 million of cash generation from operations in the third quarter of 2004.

The decline in cash flow was primarily due to the loss in this quarter compared to income a year ago.

Capital expenditures in the third quarter of 2005 were $85 million, about flat with $84 million in the year ago quarter.

About $60 million of our capital expenditures in the quarter were for revenue generating assets.

Cash from operations, less the capital expenditures with a usage of $154 million of cash in the third quarter of 2005 compared to $78 million of cash usage in the year ago quarter.

Depreciation and amortization was $91 million in the third quarter of 2005.

And looking forward for the full year of 2005 our expectation for capital expenditures continues to be in the $365 million to $380 million range, and we expect depreciation and amortization to be in the $365 million to $375 million range.

At the end of the third quarter we had no borrowings against our revolving credit facility.

During the quarter we issued $550 million of senior notes, we used the proceeds to fund the cash tender offer for 8 1/8 senior notes.

Holders representing $342 million of the original $400 million of senior notes tendered their notes.

Reflecting the incremental cash from the debt offering, our cash on hand increased to $466 million at the end of the third quarter.

During the quarter, we reached an agreement with Nihon Unisys, Ltd. and UL for licensing fees related to the exclusive distribution of Unisys products and the use of Unisys' name in Japan.

NUL's business model, like our own at Unisys, is changing and moving toward a services based model.

Under the new agreement, NUL will pay $225 million to Unisys covering all future licensing rights to Unisys technology.

After the payment was received in October of 2005, with the other half to be received in October, 2006, the new license fee will be recognized over a three-year period.

Under the agreement, NUL will continue to pay Unisys a separate annual support fee of $20 million for technical support of Unisys products in Japan for the next three years, with a two-year renewal option.

As Joe mentioned, these third quarter results are preliminary.

Because of the planned actions outlined on the call today we are in the process of updating our analysis on the recoverability of our $1.6 billion deferred tax asset.

This analysis assist will be completed over the next several weeks.

Should an additional valuation allowance be required the preliminary numbers reported today would be modified, with the impact reflected in tax expense and non-impact in cash.

Turning to slide 22, I would like to now update our financial outlook going forward.

We expect to close out 2005 with a profitable fourth quarter before considering the impact of any of the planned action.

This will be driven by stronger sales of ClearPath systems, which we expect to be up over our ClearPath sales in the year ago quarter.

However, this will be dependent on closing a number of very significant ClearPath transactions in the quarter.

Given the changes that we are making to our business, we are providing a conservative range for our earnings in the fourth quarter.

Excluding pension expense in the impact of our planned actions, we expect fourth quarter 2005 earnings per share to be about $0.10 to $0.15 positive.

We anticipate revenue to be up low-single digits versus a year ago.

Based on today's rates, currency should have about a 1 percentage-point negative impact on our fourth quarter 2005 revenue comparison.

Again, our fourth quarter guidance is dependent on us closing a number of significant ClearPath transactions, as well as other technology and services deals in the pipeline.

There is always some additional uncertainty during periods of significant change.

Now, I would like to turn the call back to Jack.

Thank you, Janet, and thank you, Joe.

Operator, we're now ready for the question period.

Thank you sir. [OPERATOR INSTRUCTIONS] We will pause for a moment to assemble our roster.

And our first question will come from Ashwin Shirvaikar with Citigroup.

Hi, thanks for taking the question.

Given this is the second time in the very recent past that you pre-released, without any explanation, can you possibly talk to internal processes and systems?

What causes management of the Company to sort of come all the way to the end of the quarter and then say there's going to be a big miss with no explanation like you did in your release last week?

This is Janet.

As we commented in the call, as we went through the quarter we had a number of technology deals in the pipeline.

We were negotiating a few of the deals, particularly the one large deal that Joe mentioned, all the way down through September 30th and our full expectations were those deals would close and be reflected in operations results for the quarter.

That accounted for $0.06 of the $0.10 range difference in the final results versus our actual results.

The $0.02 additional came from a result of the renegotiations, as Joe mentioned.

We reached an MOU in October with the bank parties and that was a very significant accomplishment for all of the parties in the IPSO operation to reach this memorandum of understanding, but it did impact our results by $0.02.

The remaining $0.02 came from lower than expected demand.

We gave a range of $0.04 to $0.06, that's anywhere from a $0.09 to $0.11 miss, and we think that was generally around noise level.

So the majority of the reason for the miss against our guidance is coming from technology deals that were in the pipeline and were working and with full expectation they were going to close by September 30th and they didn't.

The $0.02 additional came from the impact of the renegotiations that was completed in October.

And so we do believe that we have underpinned our outlook as we start through the quarter.

We continue to execute against it, unfortunately we did have misses in the technology business.

It is part of the reason that we have relooked very significantly at the fourth quarter determining what the appropriate range should be.

And being very specific that our guidance is dependent upon closing these ClearPath transactions.

Okay.

That's helpful.

If I could have another question, with regards to the MOU that was signed, specific to that contract could you talk about what kind of -- that's obviously been a drag on earnings all of this year, what kind of a swing on margins will that settlement have going forward?

Ashwin, this is Joe.

We haven't commented how much it impacted us on the way down, and we aren't prepared to be specific on the way back.

But let me give you a view of it.

This was our single biggest drag as a problem contract over all the issues we had to deal with.

We believe we finally have the right structure of this.

But I also want people to recognize that we don't expect this to move back to our traditional margins.

We expect this to move back to essentially break even, it could be a little up, it could be a little down.

But its loss was so significant before that by itself it was a very significant drag.

So we're pretty excited about this change.

As you heard earlier we fully expect to complete this by the end of the year.

And it's largely due to cost reductions and a change in the rate structure and increases in rates for all of the clients of that service.

Okay.

And of the two problem contracts would you say that the one that you settled was about 60%, 70% impact?

I wouldn't go that far.

I would say it was the larger of the two.

The other is a very significant one.

We have made incremental progress on that one in terms of renegotiating with unions about our ability to restructure that operation, as well.

We have taken costs out of that and that's also moving slowly because we're renegotiating almost not the same, but similarly with a number of clients within the contract.

And so while you might think it's pretty straightforward in negotiating one-on-one it's not, it's one-on-N, and we have to resolve each of those independently of each other.

And it's moving a little bit slower than the first one.

Okay.

Thanks.

Thanks, Ashwin.

We will take our next question from Jason Kupferberg with UBS Investment Bank.

Morning, guys.

Morning.

Just a question to follow up on the last one, it sounds like from your commentary that there was one particularly large technology transaction that slipped here and that caused a good portion of the miss.

Obviously, by the time you guys put out your press release I think on October 10th you knew that deal had not closed by September 30th.

Just curious why you chose not to lay that out specifically in the press release last week to give people some sense of where the shortfall was concentrated?

Let me start and Janet can feel free to jump in.

That was the clearest part of it.

Unfortunately, what we found, that's one of the reasons we have been conservative in the fourth quarter, that occasionally when we have very, very large transactions they have a disproportionate impact on our profit.

That particular deal, you're right, was a very large portion of the technology miss and that particular deal we believe will close in the fourth quarter.

In the other part it was somewhat more problematic.

We have been negotiating, Janet mentioned the iPSL contract for some time, and as we march toward this MOU one of the things we had to examine was some of the assets that were on our balance sheet as part of that and should they be part of this enterprise going forward.

That was one of the tougher analyses that we had to work our way through.

Not just ourselves, but in collaboration with our clients in terms of the reuseability of that software going forward.

I think the most disappointing part for us was actually the third part.

There were a number of milestones that we had fully expected to meet and to be able to both book revenue and the associated profit with it, that was the more disappointing of the three.

And that was the one that we had the least visibility to.

Okay, that's helpful.

I just wanted to drill a little bit into the consulting SI business.

As far as some of the impact on your people that some of these changes that are being planned may have, you talked about pooling all these folks and re-skilling them a bit, obviously, a large number of people, I mean how long will something like this take and would you guys expect, you know, some impact on -- things like that, because it's a radical change in terms of how you go to market it sounds like?

In terms of delivery, which is the first part of your question, we're not prepared to be specific because we're very concerned as you might imagine around morale and those types of things, so we're not going to call out which region of the world and so on.

But I would like to believe that we can move in a carefully planned way and with the exception of some of the things like unions that we still have to negotiate with and workers' council, I think we can execute that with a minimum of morale impact going forward.

In terms of some of the other parts, they're frankly pretty upbeat.

If you look at the people we believe will move into these pools and we're reluctant to use even this word pool, but think of it as an integrated competency.

We intend to make major investments in their training and development, and so many of those people will see this as a very, very positive change, as opposed to a negative impact.

We are also training them in very high demand, high growth areas, so their value to not just us and our clients, but in the marketplace goes up pretty significant.

We have to make sure we communicate this in a very effective way.

At the end of the day, if we look at the whole program, whether it's delivery or sales or even some of the R&D things, we think it will probably take us somewhere between six and 12 months to accomplish.

Okay.

Just last question, how much of the restructuring costs of the 250 million to 300 million will be cash based, and is it possible you will start seeing some of the cost savings be realized in the second half of '06?

Jason, the vast majority of the $250 million to $300 million estimate that we gave relates to head count actions, which would require cash.

We are clearly committed to working that through as quick as possible, and if we execute on our plan, we should be able to see some benefits in the second half of 06, but as Joe mentioned, this is a plan that we expect to roll through to have the full effect completed on a run rate basis coming out of 2007.

Thanks guys.

Thank you.

And we will take our next question from Julie Santoriello with Morgan Stanley.

Thanks, good morning.

Morning.

Joe, I wanted to ask you a little bit more about the restructuring, sort of in a big picture way, I guess.

How should we be looking at the milestones of the success you're having and the progress you're making in this restructuring?

Now I know you pointed to a target of 8% to 10% operating margins by 2008, but what should we begin to look for in near term, say in 2006, should we expect to get a gauge for the success of the program, should we expect to see an acceleration in top line growth, should we expect to see a gradual improvement in margins, quarter-by-quarter, how should we be looking at this?

Thanks Julie.

In terms of the top line growth, we think that's really the focus around the portfolio.

If you remember we talked about doing a much more intense job in fewer areas with much greater depth, core competencies and critical mass.

The other area of focus, this is top line, is around, I think you heard on the call that 85% of our revenue comes out of 10 countries, and so it's a focus area, as well.

And finally, in the area of accounts, 85% of our revenue comes from the top 500 accounts.

So around top line growth it's really in those areas.

What you should look for in terms of the restructuring is really in nearly every major line item.

You will see our actions and delivery affecting our services growth margin.

Clearly you will see directly our actions in R&D affecting our R&D line.

Our actions in general and administrative expenses and our SG&A line, you will see it in nearly every major line.

But the one other thing I think that's important for people to recognize is you're also going to see an impact on our top line as a result of these divestitures.

So we're going to try to give you the right levels of visibility of where the growth is coming from, but you're going to see offsetting impact on our top line from these divestitures and we will try to insure that you get clarity there.

Okay, thanks.

If I can get another one, on the outsourcing contract signings being weak in the quarter, I was a little bit surprised because the number of announcements that you had in the quarter seemed like activity was pretty good, plus you had some good momentum earlier this year, IBM talked about some good outsourcing contract activity, can you explain a little bit more what you think happened in the quarter with outsourcing?

You mean in terms of orders?

Orders, yes.

First of all, I think you saw that revenue growth was good at 11%.

Orders as you know, is a lumpy thing for us in terms of outsourcing, and it gets bigger swings.

So there was a couple orders we expected in the quarter that moved to the fourth quarter.

There frankly was a couple that we just lost.

There was a number of very large state and local government ones that we thought we were in pretty good shape and they did not happen.

But we're still pretty excited about our two areas that you would see the highest, very large deal growth, which is outsourcing overall and our federal business and expect to see positive movement in those two areas in the fourth quarter.

Okay, if I can get one more question.

On the fourth quarter guidance, clearly it's down a lot so I imagine you're taking a relatively conservative stance here.

Because what you're dealing with is somewhat binary, you have the large main frame wins that may come, that may not come, can you help us understand a little bit how you're forecasting those, what assumptions are you building into your fourth quarter guidance for those large contract wins?

Do you assume you win 80%, do you assume you win 20%, how do you look at that?

That's a great question.

The answer is because of what just occurred, and the very big implication of one deal alone, I mean technology had a big implication on the third quarter, but one deal had a big impact on us, we have been much more conservative on outlooking the fourth quarter.

Again part of the issue was there were a few very large deals that just as you said a second ago are digital, they're in or they're out.

So we looked for very high probabilities to put them in.

It's entirely possible that we can overachieve this outlook, but we didn't want to be in a position to surprise and disappoint again.

Great, thanks Joe.

And we will take our next question from Greg Smith with Merrill Lynch.

Hi, good morning.

I just wanted to go back to the iPSL joint venture and MOU, can you just explain what exactly will change as far as what you're doing, your ownership of the joint venture?

It sounds to me it's just really pricing changing, is that, in fact, correct?

No, what we tried to do, one of the struggles that we had when we first created this is, frankly, we might have bit off more than we could chew.

If you remember there's 11 different clients in that, there's the three joint venture partners, but there's 11 different clients in that.

We tried to move all of these financial institutions to a single common platform.

We all had the same vision in the very beginning, but the implications of the changing marketplace for them had an ongoing continuous change of us -- our ability to move them to this common platform.

So, in part, one, we have chosen not to go to this common platform.

That was a big change for us, because that was the vision that we all shared in the beginning.

The second part of it is they finally recognized that the pricing model we had required changes for this to be much more balanced and so it's based on a combination of activity levels and essentially transaction-based pricing going forward where the rates increased for the major banks that participated.

As part of our commitment is to aggressively take costs out, remember we're not going to the common platform any more, and because of that stability, meaning not constant ongoing change, we believe we can help on our side to much more aggressively take costs out of that and it will be a win-win for both sides.

Doesn't not going to the common platform reduce the leverage potential for the contract overall?

Yes, and that's the reason that we wanted to go there in the first place.

But you also have to recognize, in that operation we process 70% of the checks in the United Kingdom.

So how much more leverage is there?

Unfortunately, we could not agree on this common platform shared vision and so we made the right compromises to take costs out, raise rates, and make it a better financial situation for everyone involved.

Okay.

Thanks a lot.

And then just thinking about the businesses that you intend to divest, what's the margin profile of those businesses?

They're all very different.

And I would be kind of reluctant to be more specific because you would be able to kind of call those out and we have been trying to keep that fairly confidential as we move this all forward.

Okay.

And then just lastly can you comment just on pricing trends in the consulting and systems integration business?

There's been pricing pressure in a generic sense over the last couple of years for everyone.

A lot of that pricing pressure has been most aggressive in Europe for many of us.

And we have had to respond to that.

But there's two ways, one is lowering price, lowering cost, we're in the process of doing that, more offshore, we're in the process of doing that.

But the other is the ability to raise rates by having unique skills in specific areas.

We believe because of this focus in these high growth, high demand areas that we will start to be able to change the dynamics here, we will be able to raise rates, because of -- because of the demands in areas like open source and Linux and in security where we believe we have fairly unique differentiation.

But we have to play both at the same time, we have to reduce costs, global sourcing, and take some of our costs out.

And increase differentiation simultaneously.

On your other question, as well, as we move forward for this we intend to give you visibility into these divestitures as we move them forward, but we're not prepared to do it today.

Thank you.

Thanks.

We will take our next question from Julio Quinteros with Goldman Sachs.

Hi, guys.

Real quickly on the divestitures, did you guys actually layout a timing on when you expected the divestitures to be completed by?

Well, we did internally, we're not prepared to share it.

That's fine.

Then with regards to the iPSL business, when you changed the pricing did you also get volume guarantees or do you have any volume guarantees in that new MOU?

Yes, there's an expression in the industry called caps and collars, really what that means is there's kind of ranges of pricing.

We built that into the methodology that we have and we think that's important going forward and here's why.

Overall the check processing market on a global basis declines about 8% a year.

I think that's true in the UK, as well.

And so we believe we have the right protections vis-a-vis that decline in the structure of the pricing going forward.

One other point on the divestitures, and I don't mean this to be flippant, but it's as soon as possible.

It's our objective to move aggressively on those, we just didn't want to set false expectations on how fast we could move, and because we want to get the right price.

Understood.

And I guess as you come out of the current restructuring new sets of initiatives and sort of the strategic repositioning of the Company, Joe, maybe if we could talk about who you see yourself competing with when it's all said and done, where does Unisys end up on the sort of food chain of competition versus the IBM's and [INAUDIBLE] at one extreme, then the offshore companies at the other extreme, where exactly will you be be positioned when all is said and done?

Yes, it's a great question.

We think the model we have currently implemented in federal business is the right model for us.

It's an account centric model and it's about driving the entire portfolio across a number of these major federal agencies.

For example, we have 100-million-plus accounts, so it's a combination of the right competencies in the right industries with the right accounts to drive much greater share of wallet.

In that business, whether it's various divisions of the Department of Defense, Department of Justice, Homeland Security, you know we're very successful in, GSA, we have done precisely this strategy with very good results and that's what we intend to execute on a much broader basis.

Clearly the federal business is much more insulated from competition, you're not going to see the offshore onslaught there, obviously.

On the commercial side, however, if you look at those same top 500 type accounts and you're looking at the commercial, is the increased presence of competition something that you have to worry about, or how do you continue to grow your wallet share, if you will, within those existing top 500 accounts as you're going through this transition process?

One of the key elements is a focus by industry.

So when I describe the federal success story let me broaden that a bit.

The illustration I gave a second ago was the European Union.

The key for us is real depth in the places we choose to compete.

So for example, we have taken a lot of the things we have learned from security in the U.S. federal government, we have a frame agreement in place in the European Union to do the equivalent of Homeland Security consulting as the lead for the entire European Union, and then we follow that trail out to the implementations of things like customs and border patrol, of all the central eastern European countries, and then do the implementation there.

So it's capture the intellectual property from some of these large federal wins, replicate it to other federal governments around the world, and take those competencies and continue to cookie cut them.

Now back to your question about a lot of the large Indian firms, you're right, we're insulated in the federal business there.

But most of the areas that they have been successful it's mostly been in application outsourcing up till now.

Today, that's not a big market for us, and so we don't face off against Wipro and Infosys as much as some of our competitors do.

Right, understood.

Maybe for Janet then, I guess in terms, I know you guys have not commented on CY '06 but, obviously, we're going to need to think about the outlook there, can you talk about two things, one the pension impact as we start thinking about '06 and just remind us of some of the mechanics there, then, two, I'm assuming that the divestitures at some point in '06 will need to be sort of reflected in the numbers, whether it's first half of '06 or second half of '06, I guess we don't know yet, but that total revenue base of 500 million or so that you guys are suggesting should all come out in '06?

Well, first let me deal with the pension part, then I'll defer on some of the other issues to Janet in a second.

As you know, pension has been -- has had a big impact on you are business for the last few years.

We're in the process of a deep study of the economics of it as you might imagine, the big differences between defined benefit, defined contribution and what many of our competitors have done.

And so that has a big impact on our business.

We're completing a very serious evaluation there.

And I think you will see us make some changes there in the future.

What kind of changes are you referring to?

We're not prepared to discuss them today.

But if you look at what our competitors have done we believe they're in the right direction.

You should expect something from us by the end of the year.

Can you refer to a specific competitor in terms of what they have done?

No, because then you would know where we're going.

All right, that's fine.

Then maybe, Janet, just in terms of the mechanics how we should be thinking about the pension expense into next year?

Right, Julio, the mechanics on the pension expense were that we have a measurement date December 31st for which we will set the discount rate, which is a significant driver in the determination of the pension expense going forward.

As Joe mentioned we are in the process of reviewing the pension plan design and reviewing the overall areas so our expectation would be to give you guidance on the pension when we release our fourth quarter earnings.

Your comment with regard to divestitures, you are right, as Joe mentioned, we are trying to get the right price, but get them done as soon as we can.

We truly anticipate that you will be able to track us as we go through with visibility into the divested areas of the businesses and the impact that they have.

And, once again, we're committed to getting these actions done as quick as possible, because, as Joe mentioned, we view that as a significant, the significant source of cash to enable us to take the planned actions to improve our competitive structure and our positioning in the marketplace.

Then do you have any sense now on what operating cash and free cash flow should look like for the rest of this year?

Julio, obviously, with the change in our expectations for earnings the last guidance we had given on free cash flow was at the end of the third quarter.

Obviously, we're disappointed that we had to revise the guidance today, but that is a significant negative that will affect our free cash flow calculation.

We obviously have a number of moving parts right now with the discussion on the divestitures, the restructuring, the deals, when the deals close, so my comment on free cash flow would be limited to saying that the main driver in any change in that free cash flow line will come from the change in our expectations for earnings levels in the second half of the year.

Okay, great, thanks, good luck.

Thanks, Julio.

Unfortunately, we have run out of time.

What I would like to do is just summarize.

We really believe that this strategic evaluation of our business and our real focus on our portfolio will pay dig dividends.

We're focusing on a much smaller portfolio of very high growth areas where we believe we have very strong core competencies and great references and qualifications from prior executions.

We're making some tough decisions in delivery around pooling, but we believe that will have big payoffs, as well, because that's mapped against that same portfolio strategy.

Much deeper skills, aggressive training for the people we have put in these pools, adding much greater value to our clients.

The focus also extends out into geography, top 10 countries, our accounts, top 500 accounts, and divesting assets that don't fit into that picture, as well as taking costs out that are not supported around that vital few, cost and delivery, cost in R&D, manufacturing and SG&A.

And so we believe we have stepped up to some of the tough issues that have been nagging our business for some time.

As you have heard it will take some time for this to pay off, but we believe we have made the right, tough decisions going forward.

Thank you very much.

And ladies and gentlemen, this does conclude today's teleconference.

You may now disconnect and have a great day.