Unisys Corp (UIS) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to the Unisys third quarter 2006 financial results conference call.

Today's call is being recorded.

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

Please, go ahead.

Thank you, operator.

Hello, everyone, and thank you for joining us this morning.

About an hour ago Unisys released its third quarter 2006 financial results.

And with us this morning to discuss our 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 the Q&A session are being Webcast via the Unisys investor website.

This Webcast includes the question-and-answer session, it is being recorded and will be available as a replay on our website shortly after the conclusion of the live event.

Call participants are in a listen-only mode until the Q&A session.

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

These materials are available for viewing as well as down loading and printing.

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 made with and without restructuring charges and the impact of pension accounting.

In the presentations, we have provided a reconciliation of our reported results on a U.S.

GAAP basis compared with our results excluding these items.

Finally, I'd like to remind you that all forward-looking statements made in this conference call are subject to various risks and uncertainties that could cause actual results to differ materially from expectations.

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

And you can find copies of these SEC reports from the SEC and also on the Unisys investor website.

Now let me turn the call over to Joe.

Thanks, Jack.

Hello, everyone, and welcome to today's call.

To begin our discussion this morning, please turn to slide 1 for an overview of the quarter.

We made solid progress in the third quarter in our strategic repositioning program that we announced late last year.

As you know throughout this year, we've been taking aggressive broad-based actions to focus our resources on large-growing markets and reduce our cost structure, all designed to significantly enhance our profitability in 2007 and 2008.

In the third quarter, we continued to execute against this plan.

Orders and margins improved over the year-ago period and sequentially from the second quarter.

Services orders grew double digits over a year ago, and both services and Technology orders grew sequentially from the second quarter, which is typically not the seasonal pattern.

We continue to aggressively implement our cost reduction program and we have increased our target for the annualized cost savings to more than 340 million by the second half of 2007.

We continued to expand our use of low cost offshore resources as part of the transformation of our global services delivery model.

We won many exciting strategic client awards in targeted growth areas, such as security and outsourcing, and we are building momentum in these programs.

We also began to see benefits from our repositioning efforts in our financial results.

Before restructuring charges and pension expenses, we generated operating profits overall and in two of our business segments in the quarter, a key milestone in our repositioning program.

Overall, I believe we're starting to benefit from the tough actions we've been taking this year and we hope to build on this progress as we close out 2006 and move into 2007.

Please turn to slide 2 for an overview of our financial results in the quarter.

Our revenue grew 2% in the quarter, driven by 4% revenue growth in our services business.

Within Services, we saw double digit revenue growth in outsourcing.

Revenue in our Technology business declined 10%.

However, we did see some strengthening in our ClearPath business as we began shipments of new ClearPath models in the quarter.

Our ClearPath revenue was down year-over-year but up sequentially from the second quarter of 2006.

Our GAAP operating loss improved significantly over a year ago.

As you know, our goal is to get our business to 8 to 10% operating margins excluding retirement-related expense by 2008.

This-- the first step toward that goal is to generate operating profits before pension expense and restructuring charges, and we did that in the third quarter as you can see on slide 3.

Before the restructuring charge and pension expense, we generated 37 million of operating profit in the third quarter.

This is nearly a 70 million improvement over the comparable results a year ago driven by a 46 million year-over-year improvement in Services operating profit, and a 28 million year-over-year improvement in Technology operating profit.

Looking at our business on a sequential basis, slide 4, shows our operating results in each quarter of 2006 including restructuring charges and pension expense.

Slide 5 shows our progress towards our long-term goal of 8 to 10% operating margins excluding retirement-related expense in 2008.

As you can see, our non-GAAP operating margin has been improving each quarter as we've moved through 2006.

Our operating profit excluding restructuring charges and pension expense was essentially break even in the second quarter and turned positive in the third quarter.

So, on this basis, we believe we've turned the corner in terms of profitability.

And we are working very hard to build on that progress going forward, but significant work remains ahead.

Our Chief Financial Officer, Janet Haugen will provide more details about the financial results in her remarks.

Please turn to slide 6 to discuss demand trends in the business.

We saw strength in our Services orders in the quarter.

Services orders grew double digits from a year ago, driven by order gains for outsourcing Services.

We have now achieved double digit Services order growth in three of the last four quarters.

As expected, Technology orders declined versus a year ago, but were up sequentially from the second quarter.

Our Technology business is not a backlog business, so orders here basically track revenue.

Overall, orders in the quarter were up single digits from the year-ago quarter.

It's also important to note that our orders in the quarter do not reflect some significant wins, such as SBInet with the Department of Homeland Security, and approximately 100 million outsourcing awards with the Australian Department of Immigration and Multicultural Affairs that we were not able to book in the quarter.

We have a strong pipeline of Services opportunities, as you may recall, we are strategically targeting higher value-added opportunities in our top 500 client accounts.

Among our top 500 clients, our pipeline of Services opportunities is much greater entering the fourth quarter of 2006 than it was entering the fourth quarter of 2005.

We expect continued double digit order growth in Services in the fourth quarter.

Clients are responding favorably to the new portfolio of focused services and solutions that we've been rolling out this year.

We are winning strategic deals in each of our growth areas.

Given the importance of these initiatives to our growth, I'd like to spend a few minutes highlighting two growth areas, where we're seeing particularly strong demand, Enterprise Security and Outsourcing.

To discuss our Enterprise Security business, please turn to slide 7.

We chose Enterprise Security as one of our key growth initiatives because it is a large, fast-growing market and it's also an area where Unisys offers significant expertise.

The market for Enterprise Security Solutions today is about 20 billion worldwide and it's growing about 20% annually.

Unisys has deep expertise in providing Enterprise Security Solutions using leading-edge technologies from our RFID tags and Smart Cards to Biometric and Fingerprint Technology.

For the U.S.

Department of Defense, we built and managed the world's largest network using RFID technology to track supplies and logistics.

We designed and created one of the world's largest civilian data bases of fingerprint identification, covering some 43 million citizens in South Africa.

We created a multipurpose smart card integrating thumbprints and key card readers for use by nearly 40 million citizens in Malaysia.

And of course, most of you know our work over the past four years building out a modern communication network for the U.S. airports, working with U.S.

Transportation Security Administration.

Though our work with these organizations-- through our work with these organizations and many others, Unisys has gained a reputation as an industry leader in Enterprise Security.

Just one example of this, Microsoft's Federal Sales Organization, recently recognized Unisys as its 2006 Partner of the Year for Homeland Security and Intelligence.

During the third quarter, we began to achieve some real momentum in our Enterprise Security program, particularly in the area of Border Security.

Slide 8 shows some of our significant security wins in the quarter.

In September, the U.S.

Department of Homeland Security selected a team that included Unisys to implement the first phase of its groundbreaking Secure Border Initiative, or SBInet.

SBI is a comprehensive, three phase program to secure the U.S. borders from illegal entry whether by illegal immigration, smuggling, our terrorism.

Boeing is the prime contractor for SBInet.

Unisys is Boeing's co-integrator on the program.

Unisys is working with Boeing to create a common operating platform, or COP, command and control system.

The blueprint for much of this system was done via the Unisys 3D visible enterprise methodology.

This contract is for a three-year base period with three one-year options.

DHS has not disclosed a specific value to the contract, but we believe it will be very significant to Unisys over the coming years.

Unisys is currently negotiating the terms of this contract.

As a result, we did not record an order for this contract in the third quarter.

We expect a minimal amount of orders in revenue in the fourth quarter as the team rolls out an initial SBInet pilot project along the 28-mile stretch of the Arizona/Tucson [corridor].

We expect orders and revenue to ramp-up through 2007.

In another key security win, Unisys will create and manage for the FBI a next generation DNA indexing system that will support 178 U.S. laboratories and labs in 26 other countries.

The solution will make use of a highly sophisticated search engine technology to accelerate the DNA matching process in linking convicted offenders to violent crimes.

The contract has a two-year base period with an estimated value of 11 million, and a two year option and two one-year options.

If the FBI exercises all option years, the contract has a total estimated value of about 50 million.

Outside the U.S., we're working on an engagement with Citizenship and Immigration Canada for a six-month biometric pilot testing fingerprint and facial recognition technologies at several Canadian ports of entry.

In Australia, we received a significant contract in the third quarter from The Department of Immigration and Multicultural Affairs, or DIMA, for an identity management solution to help secure the country's borders.

The solution will begin at immigration detention centers and ultimately move to airports.

The project will use biometrics, facial recognitions, and fingerprint scanning technology and will also integrate technology from our new partner, NEC, as we continue to leverage this partnership.

The total value of the government's program is about 37 million, of which our contract is a significant part.

In a separate project, enterprise security is key to another major outsourcing award with the Australian DIMA.

Unisys was recently selected by DIMA for a wide range of IT services including e-mail and internet security.

We are currently working with a client on contractual terms.

The potential value of this contract is about 100 million over a four-year period.

We will continue to aggressively pursue global opportunities in a broad range of enterprise security areas.

In Europe, for instance, we're teaming with our global partner Microsoft to pursue systems integration engagements linking the national police and immigration databases of European countries in projects that are scheduled to be awarded in 2007.

Overall, I'm excited about the success we're seeing in enterprise security and we hope to continue building on that momentum over the months ahead.

Moving to slide 9, we also continue to see a strong pipeline of opportunities for outsourcing services, which is another of our focused growth areas.

In infrastructure outsourcing, we have a strong focus on managed services, the management of distributed computing environments.

This is a growing area where Unisys has achieved a leadership position.

In outsourcing, we typically target mid-sized deals, from 10 million to 150 million where we can clearly differentiate ourselves from our competition and achieve a good margin by adding value for our clients.

We are seeing an increased trend of clients looks to disaggregate large outsourcing procurements, the so-called megadeals of the past that have proven troublesome both for providers and clients.

Instead, clients are shifting towards multisourced outsourcing contracts where different segments of the contract are bid to different sets of providers.

This opens an opportunity for Unisys as these multisource projects come to market.

Multisourcing also puts us in a better position to partner with other firms, such as Indian-based firms to pursue large opportunities.

For example, we've partnered with a leading India-based IT services firm, Wipro, to win a five-year, 27.5 million outsourcing contract in the third quarter with a U.S.

Fortune 500 company.

Under the contract, which was not recorded as a third quarter order because of our order booking rules, Unisys will provide managed services to the client as a subcontractor to Wipro.

This is another new client for Unisys.

Slide 10 shows some of the outsourcing contracts that we signed in the third quarter.

We were very pleased to win a significant managed service contract with Starbucks Coffee Company, a new Unisys client.

In a five-year contract Unisys will provide a wide range of IT services, including data center support, security services, network and server monitoring, service desk, and help desk to support Starbucks expansion into international markets.

In this contract with Starbucks, we will be their partner in rolling out the IT infrastructure to support their business in international regions.

As you may have seen in our press release yesterday, these managed services will be key to enabling Starbucks to expand its presence from over 3,600 locations to 20,000 stores in international markets.

In the federal government, the U.S.

Centers For Disease Control awarded Unisys a contract in the third quarter to continue managing and expanding its data center operations.

Under the contract, Unisys will expand the client's data center to support new applications, including realtime surveillance of disease outbreaks across the U.S.

The contract term has a base -- one-year base with an estimated value of approximately 11 million and four additional one-year options.

If the CDC exercises all options, the contract has an estimated total value of approximately 50 million.

In the U.K.

BT group awarded Unisys a five-year 23.5 million contract to host the client's data center operations.

Before we move from orders, let me note a couple additional third quarter contracts that are in some of our other focused areas.

The European Commission awarded a frame -- awarded frame contracts for IT services to a consortium led by Unisys.

The contracts, which have a combined potential value of approximately 200 million to the consortium cover a wide range of IT services including systems integration and application development and support.

In a separate transaction, the European Commission awarded a contract to a consortium led by Unisys to create and manage a centralized internet-based data base of open source software that can be shared across all member states.

This is a key win in our open source program, one of our key growth focus areas because it gives us good visibility into how open source projects are emerging across most of Europe.

So we're very encouraged by the demand we're seeing for our strategic growth programs.

And we expect to translate this into continued services order growth in the fourth quarter.

While we work to grow the business at the topline, we also continue to take actions to reduce our costs and enhance margins.

Please turn to slide 11.

You'll recall from our last call in July that we used this slide to show how we plan to get to an 8 to 10% operating margin target, including retirement-related expense by 2008.

We continue to expect more than half of the margin improvement to come from cost reduction.

We are on track to achieve our stated targets in terms of head count reductions and cost savings and in fact we increased these targets in the third quarter.

As I mentioned earlier, during the third quarter, we took a charge for approximately-- additional approximately 100 position reductions primarily in continental Europe.

Combined with our previously announced reduction, this brings our total number of planned position reductions to about 5600 worldwide, and brings our total annualized cost savings to more than 340 million, up from the 325 million we talked about in July.

Turning to slide 12, let me note as we implement head count reductions in high-cost and underutilized areas, we continue to expand our use of lower cost offshore resources.

Our global sourcing center in Bangalore is now fully staffed by Unisys employees.

This month, we are opening a second offshore sourcing center in India, and we are planning to open a third center in India in the first half of 2007.

Overall, we now have approximately 2100 resources in India, China, and eastern Europe.

About half of these are Unisys direct employees.

We continue to target having 6,000 resources in India, China, and eastern Europe by 2006.

That would mean we would have about 20% of our resources in low-cost countries, which we think is appropriate given our profile and the amount of business we have in the public sector, where offshoring is often not an option.

Turning to slide 13, in summary, during the quarter we made solid progress in our repositioning program.

We are seeing good demand from customers for our strategic-focused growth programs.

We continue to move aggressively to implement our cost reduction program, we are starting to see the benefits of our repositioning program in our margins and profitability and we look to build on that progress in the fourth quarter and in 2007.

Now here's our CFO, Janet Haugen, for more details on our third quarter results.

Janet?

Thank you, Joe, and hello, everyone.

This morning, I'd like to provide more details on our third quarter 2006 financial results including cash flow.

To begin, please turn to slide 14 for an overview of our third quarter results.

At the top line, we reported revenue of $1.41 billion for the third quarter of 2006.

This was up 2 percentage points from a year-ago period.

Currency had a 2.0 positive impact on our revenue in the third quarter.

Based on current rates, we expect currency to have about a 2.0 positive impact on our fourth quarter revenue and on a full-year basis, we expect no impact from currency on the revenue comparison.

We recorded a pretax charge of $36.4 million in the quarter for the cost of an additional approximately 100 headcount reductions primarily in continental Europe.

Our third quarter results also include a $43.4 million of pretax pension expense.

Including the restructuring charge and pension expense, we reported a third quarter 2006 pretax loss of $61.5 million, which compares to a year-ago pretax loss of $80 million, which included no restructuring charge, but $44.2 million of pretax pension expense.

With regard to taxes, as we have said previously, our tax rate will vary significantly quarter to quarter depending upon the geographic distribution of our income.

In the quarter, we had tax expense of $16 million despite the fact that we had a global pretax loss.

In the third quarter of 2005, we recorded a tax provision of $1.55 billion driven by a non-cash charge of $1.57 billion for an increase in the Company's deferred tax asset valuation allowance.

Including restructuring charges and pension expense, we reported a bottom line net loss of $77.5 million or $0.23 per share.

By comparison, in the year-ago quarter, we had a net loss of $1.63 billion or $4.78 a share.

Please note that at the end of this presentation, we have provided supplemental slides showing details of how the restructuring charge that was taken in the quarter flows through the P&L.

We have also provided a slide showing details on pension expense in the quarter.

With regard to pension expense, we continue to project full-year 2006 pretax pension expense of approximately $135 million compared with $181 million in 2005.

The principal reason for the 2006 decline is the $45 million curtailment gain recorded in the March 2006 quarter.

Based largely on the actions we took in the first quarter on the U.S. pension plan, we expect total pension expense to decline in 2007 and again in 2008.

Obviously, those estimates are based on the current interest rate and market conditions and may change over time.

Now turning to revenue, please turn to slide 15 for an overview of our third quarter revenue by geography.

Our U.S. revenue represented 45% of our revenue in the quarter and declined 5%, primarily due to low double digit revenue decline in our federal business.

The federal government marketplace has been challenging this year as budgets and appropriations have moved to the right, and for us, as many of you know, we have lower revenue from TSA compared to a year ago as a result of the migration to the bridge contract.

Revenue from international regions grew 8%, 4% in constant currency, and accounted for 55% of our revenue in the quarter.

Moving on to slide 16 for our revenue by business segment, Services revenue grew 4% in the quarter and represented 86% of our third quarter revenue.

Our Technology revenue declined 10% and represented 14% of our revenue in the quarter.

For more detail on the Services revenue, please advance to slide 17.

Within Services, we sold double digit revenue growth in Outsourcing and single digit growth in Infrastructure Services.

Our Systems Integration and Consulting revenue declined slightly in the quarter, and we saw a continued secular double digit decline in our Core Maintenance revenue.

Turning to slide 18 in our Technology business, revenue from Enterprise Servers declined 14% in the quarter.

Within Enterprise Servers, revenue from ClearPath Systems declined double digits from a year ago, as expected, but ClearPath revenue was up sequentially from the second quarter of 2006.

We also saw double digit revenue declines for the ES7000.

Now on to operating expenses and margins, as Joe mentioned, we are beginning to realize the cost and margin benefits from our ongoing cost reduction action.

Slide 19 shows our operating expenses as a percentage of revenue for the full year 2005 and by quarter for 2006 on a GAAP basis.

Operating expenses here include both SG&A expense and research and development expenses.

Slide 20 shows our operating expenses over this period excluding restructuring charges and pension expense.

On this non-GAAP basis, operating expenses have declined from about 22% of revenue in the full-year 2005 and the first quarter of 2006 to 21% of revenue in the second quarter of 2006 and 19.9% in the current quarter.

Slide 21 shows a year-over-year comparison in our third quarter operating margins on a GAAP basis.

In slide 22 shows a year-over-year comparison in our operating margins excluding restructuring charges and pension expense.

On this non-GAAP basis, our overall company operating margin improved 4.9 percentage points in the third quarter of 2006 from the third quarter of 2005.

Also on this basis, our Services operating margin improved to a positive 1.8% in the third quarter of 2006 from a negative 2% a year ago.

And our Technology operating margins swung to a positive 7.6% in the current quarter from a negative 3% in the third quarter of 2005.

While we have a great deal of work to do to get to our long-term target of 8 to 10% operating margins, excluding retirement expense, we are beginning to realize benefits from the tough actions we've been taking to refocus the business and reduce costs.

Now please turn to slide 23 for an overview of our cash flow in the third quarter.

We generated 27 million of cash from operations in the third quarter of 2006.

This compares to a $68 million cash usage from operations in the third quarter of 2005.

Our third quarter 2006 operational cash flow included three significant items.

First, we used $71 million of cash in the quarter for restructuring actions, which was up significantly from $15 million of cash used for restructuring payments in the year-ago quarter.

Second, our operational cash flow in the current quarter included a 112.5 million payment from Nihon Unisys Limited for licensing rights to Unisys Technology.

This was the second half of the overall $225 million licensing payment under the agreement we reached a year ago with NUL for future licensing rights.

We received the first half of this payment in the fourth quarter of 2005.

Third, there was a reduction of approximately $46 million in the amount of receivables sold through our U.S.

Securitization program.

Total capital expenditures in the third quarter of 2006 were $60 million, down from $85 million in the year-ago period as we continue to place tight controls over capital expenditures.

The principal decline was in outsourcing capital expenditures, which obviously can vary depending upon new outsourcing projects and other property additions.

After deducting capital expenditures, we used $33 million of free cash flow in the third quarter of 2006 compared to a free cash usage of $153 million in the year-ago quarter.

Depreciation and amortization was $96 million in the third quarter of 2006, and for the full year of 2006 we continue to expect depreciation and amortization in the 375 to $385 million range.

The Company ended the quarter with a cash balance of $612 million.

Now turning to slide 24, I'd now like to give a brief update on our cost reduction actions.

In the third quarter, we completed about 1400 reductions, combined with the reductions implemented in the second quarter we have completed about 3600 reductions so far in 2006.

In the fourth quarter, we expect to implement another approximately 1400 position reductions, so we are on track to complete about 90% of our overall reductions by the end of 2006.

With the remaining 600 positions eliminated in the first half of 2007.

We expect the additional position reductions in continental Europe to yield additional benefits for us and overall net of the investments in other areas such as [indiscernible] global sourcing, we expect approximately $280 million of annual cost savings by the end of 2006 and more than $340 million of annualized cost savings by the second half of 2007.

For the full 5600 headcount reductions that we are implementing, we are expecting to use a total of about $330 million in cash.

Through the nine months of 2006, we have used $98 million of cash for headcount reductions, we expect to use approximately $84 million of cash in the fourth quarter and the remaining $148 million of cash in 2007 and thereafter.

In closing, I was pleased with our execution in the third quarter.

We showed continued good discipline in our operations and we are beginning to benefit from the cost reduction actions we are taking.

We want to build on that progress in the fourth quarter.

And now I'd like to turn the call over to Jack for questions.

Thank you, Janet and Joe.

Operator, we'd now like to open the floor for questions, please.

Thank you very much. [OPERATOR INSTRUCTIONS] Our first question today will come from Julie Santoriello with Morgan Stanley.

Thank you, good morning.

Joe, could you talk a bit about the Technology business heading into the fourth quarter?

It's typically a very good quarter for Unisys.

I know you have an important upgrade cycle going on.

We've heard some good things from users at your recent conference.

Can you comment on what you think you may see in Technology revenue growth or orders for the fourth quarter?

Yes.

Thanks, Julie.

First of all, you saw the beginning of our recovery of the ClearPath business in the third quarter.

We expect that to accelerate in the fourth quarter.

If you remember at the very end of the second quarter, we announced new models for both of our ClearPath families.

We began to see some of that pick up in the third and you'll see it accelerate in the fourth.

As you know, that we always have the strongest quarter in the fourth quarter for our Technology business.

We also expect to see a pickup in our ES7000 business.

We're rolling out a series of new solutions for the ES7000.

We're expanding a series of our alliances around Microsoft, Intel, Oracle and others and we have some aggressive marketing programs in some of our new focused areas like Open Source, where we offer a full stack for that.

So, the answer to the question is, an acceleration of the ClearPath business and we expect to get some traction on our new programs in our ES7000 business in the fourth quarter.

Thanks.

The operating margin improvement in that business has also been impressive.

Even though there was actually a decline in the year-over-year revenue growth, can you talk about the operating margins in Technology, where the big improvement came from?

Did this business get disproportionate benefit from either lower pension or from the restructuring?

Thanks for the second question as well.

In terms of the overall Technology business, we were more aggressive and acted earlier there in some of our other businesses in restructuring.

If you remember, we said that there's a direct connection between our NEC alliance and our ability to take costs out of R&D and manufacturing in the Technology business.

You've heard on earlier calls that we closed our southern California manufacturing plant and actually sold the building.

We've moved manufacturing into one of our R&D labs until that eventually moves over to NEC long-term.

We have been able to right-size our chip part and hardware part of our R&D operation.

The NEC-combined platform, which is what we're collaboratively designing is actually slightly ahead of schedule, which allowed us to be more aggressive in taking some tough actions in the Technology business.

So, again, they were the first one out of the chute in terms of restructuring.

The NEC alliance is essentially on track, slightly ahead of track, which allowed us to make some tough decisions earlier in that business than we're able to in some of our other businesses.

Thanks for that.

If I can just get one from Janet.

I wanted to ask about CapEx, you came down a lot.

I know there's been a concentrated effort there to keep CapEx lower.

Is the $60 million of quarterly rate a good one to expect going forward, or with the increase now we're seeing in Services orders should we expect CapEx to start to pick up?

Thanks, Julie.

We will continue to make sure that we construct our deals appropriately to have the appropriate cash return in those deals, and we believe that we have been able to hold the capital expense down in an environment where we have been growing the Outsourcing business over the past couple of quarters.

So we think that this level that we're operating in capital expenditures should be around a level that we would need for the Outsourcing business.

But that may vary over time depending on deals, but right now, we think that this is an approximate level that we need to run the business on.

Great.

Thank you very much.

Our next question will come from Ashwin Shirvaikar with Citigroup.

Thanks.

Joe, question on the strategic outlook for Unisys.

Given the progress you've made to date on the turnaround, should we rule out Unisys' pursuit of a sale or breakup of the Company, parts of the company, company like you were originally looking at?

Ashwin, thanks for the question, and you know we can't comment on things like that.

But I'll gladly give you a second question.

Okay.

Second question is on operating margin target clarification.

When you talk about 2008, is that first before the 8 to 10%, just to clarify, is that a GAAP operating margin target?

And secondly, in terms of, is it a full-year 2008, or is it a year-end 2008 type of number?

On the first part of it, it is not a GAAP number.

As you'll see on all the slides that we've communicated, and you'll see on the website, it excludes pension and it excludes the restructuring charges that we've been talking about recently, but by then that will be behind us.

And it's on a full-year basis, we believe we can hit that range.

That's what I was getting to.

If by 2008 you really won't have that much by way of restructuring and you'll have essentially the pension expense behind you, then it's --

Well, it won't be behind us.

As you can see from the table that Janet communicated, that's a real expense.

So we haven't communicated whether or not we can get there without excluding pension.

What we've communicated in the past is excluding pension.

I don't know if I'm very clear on this.

By that, I mean full retirement expenses, pension plus 401K.

Maybe we should be looking at that in the future.

But right now that's what we've been tracking to.

Ashwin, we do provide on the website, as I mentioned in our comments, our view with regard to what we think that retirement-related expense would be in '07 and '08 based upon the current market.

But as we have discussed before, our goal remains at 8 to 10% operating results excluding the retirement-related expense, and you can see or view, based upon the current market on that retirement-related expenses, both on the website and the last supplemental chart in the charts accompanying today's presentation.

Okay, thanks.

Next we hear from Jason Kupferberg with UBS.

Hi, good morning.

Just wanted to talk about -- I know you guys are aren't going to give '07 guidance on this call, but just to kind of cut to the chase here on some math, you guys are talking about 280 million of annualized cost savings exiting this year.

If we just use that as a baseline number and put aside the 340 plus by second half of '07, understanding that you're hoping to get there, the 280 alone on kind of a flattish revenue base has got to get you somewhere in the neighborhood of 500 bips of year-over-year operating margin expansion, am I missing anything in that calculation?

Thanks for the question, Jason, but I'd take you back to slide 11 in the presentation.

Remember, we've got a number of offsetting factors.

So one, investment in our growth initiatives; two, investment in the global sourcing centers, that I talked about earlier, and the people staffing those centers; three, we're making a big investment in employee development; and last, but extremely important, is tracking the declines in our ClearPath and Core Maintenance business.

We believe we've done an incredible job at keeping them within the market declines, but they have a big impact on our businesses and those are some pretty significant offsetting factors.

Correct me if I'm wrong, haven't you been using the term net to talk about your projected savings for next year?

Net of your reinvestments in the business?

Jason, what we have talked about net investments, those investments do include the first two that Joe mentioned.

The investment in the growth initiatives and the global sourcing.

The last one that Joe mentioned, declines in ClearPath and Core Maintenance is not netted as part of that and that's a secular trend that we have been dealing with for the past couple of years.

Understood.

So all the actions that we are taking are driving us towards the 8 to 10% operating profit excluding retirement expenses in 2008.

We are taking the actions, as we've said on the call, as quickly as we can to create the momentum to improve the run rate and continue to improve that as we go out in '07 and '08.

So we would expect to -- obviously, we've improved as we go through '06, we would expect to continue to improve in '07, but our goal that we have stated is the 2008 target.

Okay, okay.

I think we're on the same page there.

Is there a prospect at some point in time for either management personally or the Company to buy back stock?

What we've shared in the past is that when we look at -- look at going forward, because there still are additional potential divestiture targets, even when we do that, we're looking to reinvest that, whether it be tuck-in acquisitions, further cost reductions, we really haven't talked about getting out of some facilities yet and so on.

And so the answer is, that's the direction that we're taking and right now we are not looking at a buyback.

Okay.

Last question, I know you guys said that U.S.

Federal piece was down year-over-year just because of the funding environment there, et cetera.

If you backed out U.S.

Federal, would the U.S. business have been up year-over-year?

No.

The U.S. business was down slightly year-over-year excluding Federal.

Okay.

Thanks, guys.

Next we'll hear from Ed Caso with Wachovia.

This is Eric [Wolfe] for Ed.

Can you give us an update on the underperforming contract and how much impacted the margins for the quarter, if I missed that?

No, we didn't talk about it, Ed.

If we look at the second BPO that we talked about in the past, we believe we've made good progress on that, we're better quarter over quarter and sequentially, we've made continuous improvement over the last three quarters.

We're not quite break even yet on that, but we've gotten close.

When would you expect to be break even?

Unlike the other contract where we renegotiated and wrote a whole new contract, how we are improving this one is more sweat equity.

And so, you'll see continuous improvement from us here, but I'm not sure you'll ever see us make money on this contract.

All right.

You talked about the federal business being down year-over-year, could you give us a sense of the magnitude from the revenue decline from the TSA contract?

If you back that out, how much the federal business is --

We can't really disclose the amount that the TSA contract has gone down.

The one thing I will point to, Jason, is that -- I'm sorry, Ed -- I apologize, Ed.

As the bridge contract was awarded, there was an element with regard to equipment that was on that contract that was moved to small businesses.

The first contract was an overall $1 billion contract, the second was estimated at 750.

So that gives you kind of the magnitude of the change in the overall base contract, but primarily the change year-over-year was the movement of work to small businesses related to hardware and other equipment acquisitions that we were doing for TSA.

And finally, could you give us an update on the Federal market today and next quarter where you see it?

Yes.

We'd like to believe that this downturn is temporary.

We expect to see -- just based on some of the contracts we just talked about, SBInet for the Department of Homeland Security, FBI CODIS deal, the CDC expansion, there's other deals we didn't cover, within Department of Defense, we won a contract for military health systems with Wipro and you knew from before, Ed, we won Eagle.

You add all those together, we're optimistic about the fourth quarter and in 2007 about Federal.

All right, thanks.

Our next question will come from Julio Quinteros with Goldman Sachs.

Hey, guys, good morning.

I wanted to go through a couple of quick things.

On this subcontractor work that you guys are doing, can you just give us a sense on what percentage of your work is subcontractor today?

And, what is the margin potential when you guys look at the work as a subcontractor to either an offshore or U.S.-based vendor?

I'm not sure I understand your question, why don't you ask it a slightly different way.

What percentage of your revenue is subcontractor work today?

Julio, are you referencing the Wipro contract that we talked about?

Yes.

Exactly, I'm just trying [inaudible] what percentage is subcontractor.

All right.

Okay.

Let me start with Wipro.

In the commercial sector we don't do that much subcontracting work.

This Wipro is actually a new initiative for us.

It's one of the first of a number of deals that we're bidding together.

In all of the ones that we've done so far, we've been the [suband] and the prime.

It's often because the larger part of the deal happens to be application outsourcing.

So we find our two portfolios work very well together.

They don't have intentions to be in some of the infrastructure services business we're in and they're very strong in areas like application outsourcing, as you know.

And we have big hopes for the expansion of that relationship.

But that is something very new for us.

In the Federal space, it's slightly different.

Even in public sector around the world, we don't do a lot of subcontracts.

We're prime more often than not.

In the Federal business, we do sub, but it's probably a small part of our business.

SBInet is the first major one of note over the last few years.

We sub on a lot of things because the same companies we compete against we sometimes partner with.

It isn't that large a portion of our overall Federal business either.

Okay.

And then on the consulting and integration business, if you look at what some of the competitors have reported as far as strength in that business is concerned, can you relate to the declines that you guys are reporting on your SI and consulting business?

That business is slightly up if we exclude Federal.

And as I said a minute ago, we expect in Federal for it to recover as well.

I haven't seen everybody else's numbers yet, but that business is up in a small way for us and we expect it to continue to grow.

And then finally, as you look at the momentum, obviously, you've had some good momentum on the Services side, how will margins trend as you look at Services?

I think they're sort of usual, as usual sort of play by play is that you get the bookings and then as you make your investments, margins tend to come in a little better as you make those investments.

Is that kind of a normal trajectory we should be expecting, or is there something different about these types of services contracts you're signing up?

Meaning, as I look at the next couple of quarters, basically, should I expect limited margin improvements on the services side as you make investments to ramp up new work?

No, Julio.

These contracts, as Joe have gone through, bear the similar profile to the types of systems integration and outsourcing business that we have been doing.

So it will take the similar profile as what we've had from before.

We obviously have the benefit of the cost savings that we have been taking headcounts out to improve the margins over time.

The contracts, in particular the multi-year contracts, as you said, consistent with in the past, have some start-up costs and they ramp-up over time, but we would expect it to of a very similar profile.

The one I would call out is the SBInet, as Joe mentioned, that is a large award, but the start-up of that project is expected to be a slower ramp in the fourth quarter building more momentum as we go into the future.

So that's the only one where I wouldn't say you would see a big jump.

Thank you, guys.

James Kissane with Bear Stearns has a question.

Janet, can you break out the size of your U.S.

Federal Services business in terms of revenue?

We do that on an annual basis.

We're not prepared to do that right now.

We did just want to comment on it this quarter because it did affect the North America trend, which was down 5%, and we did want to talk about it because of the change in direction that it was down low double digits.

And Joe, you've said an operating margin goal for '08.

Do you also have revenue growth goals for the two segments, or an update on those revenue goals?

When we first announced this overall project back in the third quarter of '05, we talked about growing at or above the market in every segment that we participate.

We haven't changed that, but as we look into '07 at the end of this year, we may recalibrate those.

Can you be specific in terms of what revenue growth you need to get to the 8%?

That's a great question.

Because we have been more aggressive in our cost cutting, some of our new assumptions are we may not need to grow as aggressively as our original assumptions, without being specific, just because we believe we're doing an earlier and more aggressive cost reduction job.

Great.

Thanks, Joe.

We have time for one final question and that question and that question will come from James Friedman with SIG.

Hi, thanks, it's Jamie Friedman.

A couple of housekeeping questions.

Could you repeat your orders expectations in '06?

Your expectations for orders growth in '06?

Yes, what we said is we expect the Services business to grow double digit in the fourth quarter.

Okay.

But did you say previously in prior quarters that Services orders would also grow for the year double digits?

I guess what I'm getting at is, I'm trying to anticipate the total '06 in light of the 3Q being very good, the 2Q being a little lumpy.

No, we didn't make that statement for the full year.

Okay.

Let me try another one.

Related to cash flow in slide 23, Janet, what would be the use of funds that would equate to the $71 million -- the use of funds for the restructuring, which was $71 million in Q3, what was that equivalent number in the Q2?

Do you happen to have that?

Did I lose you there?

I apologize.

Can you hear me now, Jamie?

Yes, we can hear you now.

The number was 71 million in the third quarter and 34 million in the second quarter and 6 million in the first quarter of this year.

Got it, very helpful.

The last one is, Joe, you mentioned the employee development costs, how do you meet or where you are in the employee development?

You're really emphasizing the focus on a couple four product lines.

Any update that you could give us as where we are in the education of the employees on those product lines would be helpful.

Thank you.

Yes.

We've made fairly important year-over-year investments in training this year, but we actually expect that training to even increase in 2007, and I don't know if we've given any numbers to any of that, but since we decided to focus on very few areas and wanted to clearly differentiate ourselves by the depth of our expertise, this education investment is a critical one for us and actually you'll see it increase year-over-year into 2007.

Okay, thank you very much.

Thanks.

At this time, we will take an additional question.

That will come from Joseph Vafi with Jefferies & Co.

Hi and thanks for taking the question this morning.

I was wondering if we could talk a little bit more about some of the cost reduction efforts relative to revenue growth moving forward.

Obviously, Joe, you did talk a little bit about employee investments and the like, but as we're scaling down our employee base, I was wondering if you could talk a little bit about service provision in general and getting to revenue growth with a lower headcount?

Thanks.

Joe, I think we've made some comments on that today earlier, but let me just reiterate.

If I understand your question, you're trying to make sure -- how do we calibrate the cost reductions in the headcount that we're doing and making sure that that doesn't impact our expectations for revenue growth.

Where we have been focusing in the headcount reductions is in three main areas.

One, in the delivery resources and moving up our productivity, particularly in systems integration.

Second, in the outsourcing area in continuing to use global sourcing and shifting resources from high-cost areas to low-cost areas.

We don't think that impacts the SLAs or the client performance and wouldn't impact the revenue reductions.

We also have the second area of reduction in the Technology business, those headcount reductions are related to the NEC agreement that Joe mentioned. and we don't believe that will impact us in the Technology business.

And the last area is in the G&A area, and in that area, we are looking to do business more efficiently, more cost effectively and provide quality, back off with service for the workforce and for our clients, but do it in a cost effective fashion.

We have been able to make the headcount reductions that we have done year-to-date and have been able to keep revenue flat year-to-date despite these reductions and the changes in the portfolio, and we have been conscious of making sure we balance those two, but our focus is to get the cost base down as quick as possible.

That's helpful.

Let me just build a little bit on it.

When we took people out of the Systems Integration, we were below what I would call our target chargeability in those countries.

So on a country-be-country basis, we actually did productivity analysis and capacity analysis by every major job code, and we only took out people that would not -- very low chargeability and not affect that business overall.

So, we're getting back to what I will call at least targeted, maybe not benchmark, but targeted chargeability in all those countries.

In our Outsourcing and Infrastructure Services business, it was mostly the area of driving higher levels of productivity via process redesign and it allowed us to take those people out.

We did some benchmarking against all our major competitors in that area as well, and found out where we had productivity gaps.

So in almost all of these areas, Joe, this is getting back to -- and I'm hesitant to say benchmark, but targeted levels of productivity by function.

So you really wouldn't see us losing the capacity per se, you'd just find us getting up to benchmark.

That's helpful, Joe, thanks.

Maybe just one quick follow-up on the orders growth, double digit orders growth, and that's following on last quarter as well, how should we think about the impact of double digit orders growth on revenue growth?

Obviously there is some moving parts to that, which are new business, renewal business and maybe some business that's not renewed.

What gets us to sustainable revenue growth given the metrics that you provide, which is kind of that the order growth versus a book to bill or another metric like that?

As you know, I'll repeat some of the obvious things, but order growth isn't that important in our Technology business.

Right?

I mean we generally write the business, install the business in the current quarter for the most part.

So order growth is most important in our Services business.

And you hit a couple of them.

One is, what's new versus what's renewal.

You might say, well, renewal's not important, but it is if you think about in an annuity business, you really want to keep yourself at kind of 80% of your business in backlog, if you would -- sorry, 90% of your business when you go into the year or go into the quarter.

So renewals end up being very important in maintaining the base.

And then new is the real reason for the growth of the Services business overall.

If you look at our business across the board, across all the major categories, you find that order growth generally manifests itself in growth in our Outsourcing business or in our Federal business.

And so those are two highest order growth businesses, Systems Integration are smaller deal sizes, they'd affect that number in a less significant way, but you essentially hit it.

Renewal holds the base, new grows the base, it's mostly a measure in Outsourcing and Federal where you see very large deal sizes.

We're encouraged by the number of large deals looking forward.

That is 100 million plus deals.

Remember, we, historically, have not been extremely competitive in the megadeals, we don't chase them, we don't make the investment in business development there.

Our sweet spot is in that kind of 100 to maybe 300 million space and we're very encouraged by the number of deals we have going forward in that space.

Very good.

So is double digit order growth enough to get you to generally, in kind of a normalized kind of other inputs that go into to getting to double digit order growth relative to other puts and takes of the business, is that enough to sustain revenue growth in the Services business, do you think?

Yes, the answer is yes, but it had all the puts and takes that you just described is the caveats, right?

Is the order growth renewal, is the order growth new, and so on.

But from a broad-based answer to the question, yes.

Thanks, Joe.

That does conclude our question-and-answer session.

I will now turn the conference back over to Mr. Jack McHale for any closing or additional remarks.

Thank you, everyone, for joining us and if you have any follow-up questions, please give myself or Jim Kerr a call.

Thank you.

That does conclude our conference call.

Thank you for joining us today.