Unisys Corp (UIS) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the Unisys first quarter 2007 results conference call.

Today's call is being recorded.

At this time, for opening remarks and introductions I'd like to turn the call over to Mr.

Jack McHale, Vice President of Investor Relations at Unisys Corporation.

Please go ahead, sir.

Thank you, operator.

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

Earlier this morning Unisys released its first quarter 2007 financial results.

With us this morning to discuss our results are Unisys' President and 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 by the Unisys investor website.

This webcast, including the question-and-answer session, 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 we get to the Q&A session.

Second, you will find on our investor website the earnings release 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 downloading 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 with and without the impact of retirement related expense and restructuring charges.

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

GAAP basis compared with our results excluding the impact of restructuring charges and retirement related expense.

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.

Copies of these SEC reports are available from the SEC and also from the Unisys investor website.

Now let's hear from Joe.

Thanks, Jack.

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

To begin our discussion this morning, please turn to slide 1.

In recent quarters, I have been updating you on the progress of our repositioning program that we announced at the end of 2005.

This is a broad based multiyear program to transform the business model of Unisys and significantly enhance our competitiveness and profitability.

As you know, our financial goal is to achieve an 8 to 10% operating profit margin excluding retirement-related expense by 2008.

We are now about half-way into this three-year plan.

And while we have a great deal more work to do, we remain confident that we can achieve the 2008 financial goals.

We continue to see positive initial results from our efforts in terms of bottom line profitability.

Our year-over-year operating profit improved steadily in the second half of 2006, and that improvement continued in the first quarter of 2007.

We continue to build our pipeline of opportunities and win major landmark contracts in our strategic growth programs such as Open Source and outsourcing.

We also continue to drive our program to enhance productivity and drive down costs in line with our more focused business model.

This morning, I'd like to update you on our repositioning program and highlight key areas of focus in the year ahead.

Our CFO, Janet Haugen, will provide details on our first quarter financial results, but please turn to slide 2 for an overview of the results.

At the top line revenue declined 3% in the quarter.

Services revenue declined slightly, 2%, while technology revenue declined 8% in the quarter driven by double-digit decline in clear path revenue.

Within services we saw continued revenue growth in outsourcing and in infrastructure services.

This growth was more than offset by a 10% revenue decline in systems integration and consulting as well as a continued secular decline in core maintenance.

As I mentioned to you last quarter, we are seeing a short-term impact on our SI and consulting business as a result of the changes we are implementing through our repositioning program.

This area of our services business has experienced the most amount of disruption as we retrained thousands of consultants and delivery personnel in our strategic growth areas and redirect our business development efforts to our top 500 accounts.

We continue to expect the SI consulting business to recover in the second half of 2007.

In the near term, we're working to accelerate the changes, get them behind us, and reinvest in business development so we can stabilize the business and drive growth as soon as possible.

Turning to bottom line results, I'd like to direct your attention to the column at the bottom which shows our operating profit on a non-GAAP basis, excluding restructuring charges and retirement-related expenses.

Retirement-related expenses here represent both worldwide defined benefit, pension expense, and U.S.

401K expense.

As you can see on that non-GAAP basis we reported operating profit of $21 million in the quarter.

This was an improvement of $28 million from the year-ago period.

This is a significant improvement, although not as much as we would have liked due to two major issues.

Lower volume in our systems integration and consulting business and higher temporary contract labor costs.

We believe we'll have both of these issues behind us in the second half of this year.

Slide 3 shows how our overall operating profit margins have progressed in the past five quarters as we've implemented our repositioning program.

This is on a GAAP basis.

To see our operating margin progress on a non-GAAP basis, excluding restructuring charges and retirement related expenses, please turn to slide 4.

As you can see, we've made steady progress in our profit margins through 2006 and we've started the first quarter of 2007 more than 200 basis points ahead of our first quarter 2006 operating profit margin.

Again, given the magnitude of the transformation we're driving, our profit improvement will not go in a straight line.

But our goal is to continue year over year improvement in our operating margin every quarter as we advance through 2007.

And to continue driving toward the 8 to 10% operating margin target excluding retirement related expenses in 2008.

Before we move to other areas of the repositioning program, please turn to slide 5 for an overview of demand trends we're seeing in the business.

We saw an overall double-digit decline in orders for the quarter.

This was disappointing, but as you k=now, our orders can vary significantly from quarter to quarter based on the size and timing of client signings.

We have seen services order growth in four of the last six quarters.

There were several large outsourcing and SI consulting contracts, particularly in the public sector, that we expected to close in the first quarter but which slipped out due to delayed approvals.

The approval cycle can be quite lengthy in the public sector and can often involve sign-offs at multiple levels, including the Federal Government.

One such delayed contract has already closed.

Last week we received an extension to our Los Angeles leader contract under which we support public assistance programs for the L.A.

Department of public Social Service.

This four-year extension is valued at approximately $108 million.

Note also that we did not receive any $100 million plus orders in the first quarter of 2007 unlike the first quarter of 2006 when we booked a large order in our U.K.

check processing business.

We continue to work with a strong pipeline of opportunities within our pipeline and within our business overall we are seeing a shift in the mix of our business.

As you know, we are focusing our resources on a selected number of higher growth markets.

Enterprise security, outsourcing, Open Source solutions, Microsoft solutions, and real-time enterprise servers that make use of virtualization technology.

As we make this shift, our pipeline of opportunities in our strategic areas is growing.

In some areas, quite dramatically.

At the same time, we continue to strategically de-emphasize business opportunities in nonfocused areas.

So the pipeline in those areas is naturally decreasing.

In addition, we continue to grow our pipeline of opportunities among our targeted top 500 large organizations globally.

As you recall we are focusing on these top 500 organizations because of their greater spending potential and level of IT requirements.

We are also focusing on our top 500 clients because these large organizations are making the kind of transformational big-bet investment in the area that we are focused on.

In other words, the kind of investments that point the way to the future of information technology.

In recent quarters, on this call, I have been highlighting the progress we're making in our strategic growth programs.

I've talked already about security and outsourcing, and this morning I'd like to spend a few minutes highlighting our Open Source program.

Please turn to slide 6.

I'm sure many of you are aware of the rapid growth in the market for Open Source software and software tools such as Linux, JBoss, J2EE, and MY SQL.

A growing number of organizations are migrating away from expensive proprietary environments such as UNIX to Open Source based environments such as Linux.

By moving to Open Source organizations can gain greater flexibility in their organizations and also potentially save a great deal of money.

But there's a hidden cost.

In contrast to proprietary software Open Source software comes from many different sources.

The code is constantly changing, different components need to be put together into stacks to work together, unlike proprietary systems there is no one software vendor to integrate and support all parts of the stack.

A little over a year, a we saw this vacuum in the market and created our Open Source program as one of our strategic growth programs.

This made sense for us because Unisys not only has strong technological capabilities in Open Source in multivendor environments but we also have deep knowledge and expertise in vertical industries such as financial services, public sector, and communications.

By drawing together these capabilities we felt Unisys could be a powerful force in applying Open Source technology to solving real-world business problems in specific industries.

Over the past 18 months, we've made significant investments in our Open Source program to drive growth.

We've trained thousands of Open Source experts.

We've created an innovative end-to-end suite of solutions that include consulting, modernization, migration, and support services.

We've developed leading edge solutions in our focus industries using Open Source software, including a next-generation airline reservation system and a next-generation communication messaging solution.

We've also aggressively marketed our Open Source capabilities in the market.

As a result, Unisys is now being recognized as a leader, arguably the leader in this space.

For example, Forrester recently said that Unisys has developed, quote, the right model for Open Source services and that we are, quote, ahead of most competitors in this area and that we are at least 12 months ahead of IBM.

InfoWorld called Unisys, Open Source's biggest services gun.

Because of our capabilities in Open Source and the lead we have in the market, organizations are increasingly turning to Unisys to create enterprise level Open Source environment.

Consider just a few of the Open Source projects we're working on for clients.

For Sun Hung Kai Financial, the largest nonbank financial institution in China we're creating an entirely new securities trading system based on Open Source.

This is a new first quarter 2007 win.

One of Asia's largest airlines, we are -- for them we are creating a next-generation passenger reservation and departure control system based on Open Source technology.

These systems are replacing the airline's legacy system.

For the European Commission we are creating a centralized Internet-based database of Open Source software that can be shared across member states.

Many of you have heard of NVIDIA, the worldwide leader in programmable graphics processor technologies.

By moving from a UNIX environment to a Unisys Linux Open Source solution, NVIDIA is able to develop and bring to market massive memory intensive processor designs more quickly and more cost efficiently.

Also, in mid-April Unisys was selected for a substantial contract with the Federal Reserve Bank of Cleveland, acting on behalf of the 12 reserve banks to transform the client's payments processing operation in an Open Source environment.

Using Open Source software and tools, we will build -- design, build, and help implement a next-generation electronic check and image processing system that will transition the Federal Reserve from its predominantly paper-based environment.

Given the Federal Reserve's role in the national financial system, this is a very exciting project that demonstrates our capabilities in Open Source, payments processing, and financial services.

These are just a few of the brand name organizations that Unisys is helping leverage the power of Open Source, the large enterprise class project.

Analyze size the IT market at about $7 billion today, growing about 20% annually.

As this market develops, our Open Source program at Unisys started with smaller consulting projects in 2006 and we expect to be winning contracts in the tens of millions of dollars in 2007.

I want to give you a sense of what's happening in our business mix at Unisys as we drive our strategic program.

Please turn to slide 7.

Again, our strategic programs are outsourcing enterprise security, Open Source solutions, Microsoft solutions, and real-time virtualized servers.

These growth programs were about half of our overall revenue in 2006.

By 2008 we anticipate these programs will be driving about 70% of our overall revenue.

We estimate that combined revenue from the strategic programs grew 8 to 10% in the first quarter of 2007.

At the same time, of course, we're dealing with declining revenue in some other areas of the business, such as ClearPath and core maintenance as well as de-emphasized accounts, geographies, and portfolio items.

As a result, our overall revenue has been flattish in recent periods.

But as the strategic programs grow to a larger and larger part of the business, we believe this will ultimately drive top-line growth over the long term.

Turning to slide 8, let me now provide an update on our cost reduction program and our divestiture program, since the two programs are closely connected.

Across the Company we continue to drive our plan to systematically and continuously benchmark our processes and reduce costs in line with our more focused business model.

Our cost reduction program is being driven on many fronts and through many different initiatives, by reengineering processes through our Six Sigma Lean program, by selectively outsourcing noncore processes, by employing new systems that allow our people to work smarter and more efficiently, by expanding our use of low-cost resources in our global sourcing centers.

All of these efforts are allowing to us reduce headcount in higher cost locations while increasing our global sourcing capabilities and enhancing service to clients.

In 2006 we announced total headcount actions of approximately 5600 people.

These reductions are being funded by the first quarter 2006 sale of our equity stake in Nihon Unisys limited in Japan.

About a third of these 5600 positions are being backfilled through additional hiring in our offshore locations in India, China, and Eastern Europe.

We have now essentially completed these reductions.

In the meantime, we continue to reengineer processes and drive productivity enhancements.

As we do, we continue to identify opportunities to further reduce our costs, dependent, of course, upon the availability of funding.

As you may have read, during the first quarter, we completed the sale of our global media solutions business.

This transaction generated about $28 million of proceeds.

We are also expecting a tax settlement refund of approximately $57 million in the second quarter.

Therefore, we have decided to take additional cost reduction opportunities that we see in the business.

For example, we see the opportunity to enhance productivity of our field services workforce, which conducts service calls at client locations as part of service engagement.

We employ thousands of field service organizations throughout the world who conduct millions of service calls each year for clients.

Leveraging our Six Sigma Lean resources we have conducted a thorough analysis and benchmarking of how we receive, schedule, and route service calls through our field service operation.

We are now in the process of implementing major process changes in our field service operation.

These include standardizing the call process, employing new call scheduling tools, and making use of leading edge PDA and GPS technology.

Through these enhancements, we see the opportunity to significantly improve daily call productivity among our field engineers while enhancing service to clients who will be able to participate in the scheduling of service calls at times that are convenient to them.

Based on these and other process changes, we're planning two additional cost actions.

First, we will be reducing our headcount by a further 950, primarily in the United States and the U.K.

We took a $33 million pretax charge for this action in the quarter.

Second, we expect to take an additional approximately $35 million charge in the second quarter of 2007 related to facility consolidations and additional workforce reductions, primarily in Continental Europe.

This is the first phase of global facility consolidations resulting from our headcount actions and our continued move to a mobile services delivery workforce.

Given the investments needed to build offshore resources the cost savings from these initiatives do not come through immediately.

But as we work through the transition costs we look to drive net cost improvement.

Slide 9 summarizes the cost actions we're taking and our expected savings.

We plan to make continued investments in 2007 in our strategic growth programs and in global sourcing.

Included in our 2006 and first quarter 2007 restructuring actions we look for net annualized cost savings on a run rate basis of more than 340 million by the second half of 2007, and more than $360 million by the first half of 2008.

We will continue to look for ways to further drive down our cost structure in line with our emerging new model.

Turning to slide 10, to summarize this morning, we continue to make progress in the first quarter of 2007 in driving our repositioning program.

Our focus in 2007 will continue to be on implementation.

We have a lot of work to do this year to continue rolling out the strategic programs, to continue building our order pipeline and close strategic deals, to get our systems integration and consulting business back on track, to continue driving the cost reduction program, and to continue expanding our global sourcing resources.

We are driving tremendous change at all levels of the organization.

And as I mentioned, our progress won't always go in a straight line.

In the first half of this year in particular, we are absorbing transition costs and still working to get our systems integration and consulting business on track, given the changes we're making in that business.

But we are moving in the right direction.

Our profitability is improving, our business mix is shifting toward growing areas of the market.

We are focused on our 2008 financial goals, and we are confident we are on the right track to achieve those goals.

Now I will turn the call over to Janet for a discussion of our first quarter financials.

Janet.

Thank you, Joe, and hello, everyone.

This morning I would like to provide more details on our first quarter 2007 financial results, including cash flow and restructuring cash requirements.

To begin, please turn to slide 11 for an overview of our first quarter results.

At the top line, we reported revenue of $1.35 billion for the first quarter of 2007.

This was down 3% from the year-ago quarter.

Currency had a 3 percentage point positive impact on our revenue in the first quarter.

Based on current rate, we expect currency to have about a similar positive impact on our second quarter 2007 revenue.

Our results in the first quarter of 2007 include several significant items.

First, our results include a pretax gain of $23.7 million related to our previously reported sale of our media solutions business.

Second, our results include a $39.4 million tax benefit related to an income tax audit settlement in the Netherlands.

And third, as part of our continued cost reduction program, we took a pretax restructuring charge of $32.7 million in the quarter to cover planned reductions of approximately 950 employees.

Our results in the year-ago period included three significant items.

A pretax gain of $149.9 million related to the sale of our equities stake in Nihon Unisys Limited.

A pretax restructuring charge of $145.9 million, and a pretax curtailment gain of $45 million related to changes in our U.S.

defined benefit pension plan.

Including these items, we reported first quarter 2007 net income of $3.6 million, or $0.01 per share.

By comparison, in the year-ago quarter, we reported an overall net loss of $27.9 million or $0.08 per share.

Let me begin with a discussion of retirement related expenses.

As we announced in March 2006, we changed our U.S.

employees retirement benefit.

Beginning January 1, 2007, we stopped future benefit accruals into our U.S.

defined benefit pension plan and increased our U.S.

401K plan match.

As a result, our worldwide defined benefit pension expense in 2007 is declining while our U.S.

401K expense is increasing in 2007.

As you know, our 2008 financial goal of an 8 to 10% operating profit margin excludes retirement related expense.

Both worldwide defined benefit pension expense and U.S.

401K expense.

Going forward, our non-GAAP presentation excludes the impact of both the defined benefit pension expense and the U.S.

401K match.

This results in a minor change to the 2006 non-GAAP margins as presented last year to adjust those margins for the 2006 401K expense of $18 million.

We believe this change provides for better comparability between 2006 and 2007.

Slide 12 is a chart and a format that we have used before to show our overall retirement-related expense trend.

This slide breaks out our retirement expense by defined benefit pension expense and U.S.

401K expense.

We have updated these estimates for 2007 and 2008 based on the current assumptions, which you know can change, and as well based on the current level of participation in our U.S.

401K plan.

As you can see, we anticipate retirement-related expense of approximately $90 million in 2007, consisting of $43 million of defined benefit pension expense and $47 million of U.S.

401K plan expense.

In the current quarter, our results included $23.5 million of pretax retirement-related expense.

One year ago, our first quarter included 13.5 million of pretax retirement related expense which included the $45 million pretax curtailment gain related to the change in the U.S.

defined benefit plan.

Please note that in the back of these presentation slides we have provided supplemental slides showing details on retirement-related expense for the first quarter of 2007 and 2006.

One final note, we fund the U.S.

401K match through a contribution of Unisys stock.

Based on our estimate of a $47 million U.S.

401K expense, at our current stock price it would require approximately 5.3 million shares for the full year of 2007.

Obviously, the actual shares issued will change based on participation rates and our stock price at the date of contribution.

Turning now to revenue, please turn to slide 13 for an overview of our first quarter revenue by geography.

Our U.S.

revenue represented 45% of our revenue in the quarter and declined 3% in the first quarter, primarily driven by weakness in the systems integration and consulting business.

Revenue from international regions also declined 3% as growth in Europe and Latin America was offset by revenue declines in Pacific Asia.

International revenue was down 9% in constant currency.

International revenue accounted for 55% of our revenue in the first quarter.

Slide 14 shows our revenue by business segment.

Services revenue declined 2% in the quarter and represented 86% of our first quarter revenue.

Our technology revenue declined 8% and represented 14% of our revenue in the quarter.

For more detail on our services revenue please turn to slide 15.

Within services, we saw single-digit revenue growth in outsourcing and infrastructure services in the quarter.

As Joe mentioned, our systems integration and consulting revenue declined 10% in the quarter, reflecting disruptions in this business resulting from the changes through our repositioning program.

Lastly, we also saw the continued secular decline in our core maintenance revenue.

Turning to slide 16, in our technology business revenue from enterprise servers declined 11% in the quarter and represented 77% of our technology revenue in the quarter.

Within enterprise servers, revenue from ClearPath systems showed a low double-digit decline from a year ago as expected.

The ES-7000 revenue declined about 10% in the quarter.

We are rolling in a new solution program set for the ES-7000 in 2007 as well as a dedicated sales force.

We continue to look for improvement in ES-7000 revenue later in 2007 as we gain traction from these efforts.

Moving to expenses, we continue to drive down operating expenses through our ongoing business improvement plan as we streamline our operations and drive productivity improvement companywide.

Slide 17 shows our operating expenses for each of the quarters in 2006 and the first quarter of 2007 on a GAAP basis.

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

Slide 18 shows our operating expenses over this period, excluding restructuring charges and retirement related expense.

As you can see on this non-GAAP basis, operating expenses declined from 22% of revenue in the first quarter of 2006 to about 20% of revenue in the current quarter.

Now, turning briefly to slide 19, I've shown you this slide before, which represents the key drivers to our achieving our 8 to 10% operating margin goal, excluding retirement-related expenses, by 2008.

As you can see, cost restructuring continues to be the most significant driver in achieving our margin target.

Other key drivers are margin improvement, coming through our expanding global sourcing efforts, through tight management of employee attrition, through the progress we've made in fixing problem projects, and lastly, through incremental revenue growth.

We are focusing on all of these drivers to achieve our 2008 targets.

At the same time, margin improvements in these areas will be somewhat offset by other factors, such as continuing declines in our ClearPath and associated maintenance business, as well as investments in our growth program, in global sourcing, and in expanding employee development and training.

This is a complex multifaceted transformation we are undertaking.

As we work through it we must manage each of these levers in different ways at different times, and different speeds.

At this stage in our transformation effort, we continue to focus on cost reduction.

We are placing a high priority on continuing to benchmark our operations and reengineer processes.

In order to identify additional opportunities to enhance productivity and drive down costs.

As we've told you in the past, cost actions will be funded from our divestiture program and other areas.

In the quarter, we received the proceeds from our sale of our media business, and we are also expecting an approximately $57 million refund in the second quarter related to the settlement of an income tax audit issue in the Netherlands.

These events allow us to take the additional cost reduction actions that Joe described.

We will continuously review and enhance our operations to drive down costs in line with our more focused business model.

Now, please turn to slide 20 for an overview of cash flow in the first quarter 2007.

We used $104 million of cash from operations in the first quarter of 2007.

In the year-ago quarter we generated $27 million of cash flow from operations.

The change in operational cash flow primarily reflected an approximately $74 million year-over-year reduction in the amount of receivables sold through our accounts receivable securitization.

In addition, we used approximately $50 million of cash in the first quarter of 2007 for restructuring payments compared to $6 million in the first quarter of 2006.

Total capital expenditures in the first quarter of 2007 increased slightly to $83 million, reflecting higher expenditures on outsourcing projects as we began new client projects.

After deducting capital expenses, we used $187 million of free cash in the quarter compared to free cash usage of 46 million in the year-ago quarter.

Depreciation and amortization was $99 million in the first quarter of 2007.

And we ended the quarter with a cash balance of $564 million.

Looking ahead, for full year 2007, we continue to anticipate capital expenditures of around $300 million and depreciation and amortization in the 350 to $375 million range.

In terms of a repositioning program, we expect to use approximately $150 million of cash for restructuring actions in 2007 for charges taken through the first quarter of 2007.

In closing, we continue to make progress in our repositioning program in the first quarter of 2007.

We continued to show good improvement in operating profit and operating expenses.

We are focused on continuing to implement the repositioning plan as we drive towards our 2008 financial targets.

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

Well, thank you, Janet, and thank you, Joe.

Operator, we'd be pleased to take some questions now.

Thank you.

(OPERATOR INSTRUCTIONS) We'll go to Julie Santoriello of Morgan Stanley.

Joe, I had a question on the additional savings that you're going to be driving after the announcement of the first quarter, the 950 in extra headcount, and now the facilities consolidation program which is getting underway.

I guess I would have thought that you would have seen a bit more incremental savings on a run rate basis.

I think you've brought the number up from 340 to $360 million.

Why might that number not be bigger given just the new savings that you've announced and what sounds like some more savings to come?

First of all, good morning, Julie.

First things first, we did improve on a non-GAAP basis margins by $28 million.

That said, it was not as much as we would have liked.

The GAAP is primarily in two areas.

As I mentioned before, the first area is a decline in volume in our systems integration and consulting business.

Let me come back to that in a second.

The second is higher temporary contract labor costs.

Let me be a little more specific there.

In our outsourcing and infrastructure services business as we took costs out we felt a need to put in some temporary contract labor to be able to maintain service level agreements and customer satisfaction.

That was done predominantly in the U.K.

and Continental Europe, although on the lesser level around the world.

That's a short-term bridge that you will see improvements on starting in this quarter and continuing to improve in the third quarter.

On the systems integration and consulting business, as we mentioned earlier, that's the business that's going through the greatest change for us as we retrain and refocus thousands of people that are in the consulting ranks around our strategic growth areas.

So there's a number of changes they're going through.

The first one is that issue of portfolio.

The second is accounts.

If you remember, we started with 4,000 accounts.

We're moving to focus on 500.

That causes some disruption.

The last is countries trying to focus on just the top ten countries.

We mentioned in our last call that we expected SI and consulting to be soft in the first quarter.

It was a little softer than we expected.

We expect recovery for the business in the second half of the year.

Back to temporary contract labor, again, we thought it was a prudent necessary bridge which eroded in the short term.

Remember, it's temporary.

Some of those savings you'll see those labor costs start to roll off in Q3 and roll off further -- sorry, in Q2, and roll off further in Q3.

So the answer is there was some improvement, and we wanted to take credit for that.

It didn't meet our expectations, but you'll see it continue to improve every quarter over the course of this year.

Okay.

With this latest round of additional restructuring driven cost savings, should we assume that there's more of that to come as you continue to go through the restructuring process and the Six Sigma Lean process?

Sounds like you're just starting with the facilities consolidation.

Could there be more of that to come over the course of the year?

The answer is yes.

As you saw, we've really said that you're going to see that probably really start to pay off in the first half of 2008.

And over the course of 2007 we will continue to make investments in the area that we've talked about, continue to make investments in global sourcing.

So for example, in the third quarter we open up facilities in yet another Indian city, Hyderabad.

We continue to make investments in the strategic growth areas.

But again, you'll see payoffs for those investments, both top line and bottom line, second half, but the savings predominantly first half of '08.

Thanks.

Just last question on the growth.

A little disappointing on the services side.

You talked about the consulting integration piece and all the change going on there, indications for improvement in the second half.

Given where you're starting the year, should we still expect to see sort of low single-digit revenue growth for 2007 as a whole, and is that -- what is the revenue growth number you think you need to get to, to be on track for the 8 to 10% margins next year?

Yes, the first thing is on revenue overall, as you heard from Janet, outsourcing grew 3%, infrastructure services grew 4, and that's almost half of our business, right.

So that's actually very important.

Again, SI and consulting is softer than we thought.

You will start to see the beginnings of the recovery in this quarter, but primarily in the second half of this year.

And in terms of overall revenue growth we didn't give guidance, but we mentioned we expected the year to be flattish to slightly up, and so I think that answers your question.

Julie this is Janet.

Just one additional comment.

When -- as we refer to that chart we use in explaining the primary drivers and getting to the 8 to 10% goal, as we have talked about before, we are focused on the cost elements of that, repositioning the business, and that plan was not based on anything outside of the market range in growth.

So Joe's comments with regard to the flat to slightly up revenue in 2007 is very consistent with the model that we've talked about where we're planning for lower levels of growth, making sure that we get the cost out ahead of it as the major drivers in getting us to the 8 to 10%.

Great.

Thank you.

We'll go next to Jason Kupferberg of UBS.

Thanks.

Good morning.

Was curious on the operating margin side, Joe or Janet.

I understand you expect continued year-over-year improvements each quarter of 2007, but can you comment on the rate of those year-over-year improvements?

In other words, should the rate accelerate as we go through the year?

Any way you can provide any color or quantification around those expectations for the remaining three quarters of 2007?

Yes.

The answer is yes, but you have to understand our typical cycle over the course of our year.

As you know, we always have a very strong fourth quarter.

Our third quarter is often affected by the European vacation periods and so on.

And so as you look over the course of the year you should expect it to accelerate quarter to quarter to quarter for a couple of different reasons.

Remember, we're still -- there's still a number of people we just got out of restructuring this quarter.

There are some that are outlooked in -- but a small number -- outlooked in the second quarter.

We've just announced this additional 950 people, some of whom we will replace in global sourcing locations.

So the answer is yes.

I won't give you a specific.

But you should expect it to accelerate quarter over quarter over quarter over the course of this year.

Okay.

And just to be clear that we're on the same page, really what I'm asking is the rate of year-over-year improvement.

I understand the seasonality in the business quarter to quarter, 3Q versus 2Q, 4Q versus 3Q, I'm trying to get at 2Q '07 versus 2Q '06, second half '07 versus second half '06.

Does that same answer hold that, yes, that rate of year-over-year improvement to adjust for seasonality should accelerate?

Yes.

Thanks for clarifying that.

And may second question is, just kind of the overall demand environment, obviously some other large tech companies have mentioned some incremental softness in the U.S.

IT spending environment, mostly during the month of March.

Did you guys experience that?

I know you made some comments around the federal space, but any comments more broadly?

When I said public sector I didn't necessarily mean federal.

When we saw orders slip out of the quarter, I'll be a little more specific here, very often our state and local business have pretty complex approval cycles, especially if some of the programs are funded by the Federal Government.

For example, the example we talked about earlier, Los Angeles, the leader program, required approval at the County level, the state level, the federal level, coming back down to the state level and back to the County level.

It's kind of a crazy sign-out process, but that's the way the process works because of how the funding is driven.

We found that also to be true in a deal that closed after the quarter closed in West Virginia for the Medicaid business, which required federal approval and back down to the state level.

So a lot of that, for us, happened to be state and local government, which we shared with you in the past was soft and is starting to recover for us, just as a result of some of the deals I just talked about.

We still see a strong outsourcing market for us, and what's happening is the evolution of the market is playing to our advantage.

This whole trend toward multisourcing, what used to be big mega deals ,which often would bias, frankly, an IBM, just based on the scale of these deals -- these are $1 billion plus deals, are being broken at the end of their contracts into multiple deals that might be distributed outsourcing data center application all separate.

It advantages us because it moves it more into our sweet spot, which is kind of the 50 to maybe $250 million deal size, which is attractive for us.

It also allows us to partner, as you've heard in the past, we've often partnered with Wipro for application outsourcing.

It puts us in a better position to partner.

Even though you've probably seen some things from TPI and others about the softening of the outsourcing business, some of the changes in the business advantage us.

That's not to say it's not a competitive market.

It's a very competitive market.

In the systems integration space other people have started to see growth ahead of us.

Frankly, our challenge is the magnitude of the transformation we're putting our SI business through, and as I said, you'll probably see real improvement in that in the second half based on finally us stabilizing some of the changes we're going through.

Okay.

So just to be clear, on the commercial side of the business, no noticeable drop-off in the month of March across the business, services, hardware, et cetera?

No, not really, outside of the public sector, which was, again, largely state and local, that I described.

Great.

Thanks for the comments.

Thanks.

We'll go next to Ashwin Shirvaikar of Citigroup.

Joe, given that you're trying to restructure your services business at the same time that the market for professional services talent is incredibly tight, do you think you may be sort of losing talent that you don't want to lose?

Is that what continues to hurt revenue growth quarter after quarter after quarter?

Ashwin, I would say, we've put in a program, and we put it in awhile ago where, we very, very carefully monitor our people that are graded at the high end of their band.

So 1 and 2 would be the highest grades could you get, or performance grades you could get.

We've put in retention programs and focused pretty tightly on 1's and 2's across all of our bands, not just our more senior people.

And we've done a pretty good job.

I will be frank.

We're no different than anybody else.

We probably suffer the same voluntary attrition in what I'll call the middle of our bell-shaped curve, in our 3's.

And so we haven't lost a lot of talent we didn't want to lose.

Remember, on the other hand, we're going through pretty aggressive changes.

We've taken a lot of people out.

Remember, these are low chargeable client facing people across our geographies, and you can't do that without some disruption.

We probably have taken out, as a percentage of population, the highest portion in our systems integration business, would therefore cause the highest disruption.

That said, I don't think, with certain rare exceptions, we've lost talent that we've tried hard to hold but we are going through a pretty big change in that group.

I think it's more the change we're going through than the marketplace itself.

So what is your attrition rate?

I think overall it's--?

Ashwin, if you're looking at the overall marketplace, the professional services continues to have low double-digit type of attrition.

Our attrition rates, if you compare last year to this year, are up just a little bit, not even a full percentage point, in the 13% range.

Okay.

Now more in topics just a little bit -- the retirement-related expense, you did put a good chart out there as you have the last couple of quarters, but I just wanted to clarify, are both of those components noncash?

Ashwin, in the defined benefit plan, they run about $70 million in pension, in cash contributions to the plans, relatively consistent in both years, and it's all driven internationally.

So that's relatively consistent.

So when I was talking about where we make the stock contribution, the stock contribution funds the 401K match.

So the defined contribution portion is a match.

Okay.

And the impact of the pension legislation that passed to close the gap, the underfunded gap?

No, if you look at our U.S.

pension plan at March 31, and just the high level estimates that have been done, based upon our ABO at the time, it would show at 3/31, at the current discount rate, shows it's about 106% funded.

So we're not impacted by that legislation and we don't anticipate funding needed to go into the U.S.

plan.

Okay, great, thank you.

We'll go next to Julio Quinteros of Goldman Sachs.

This is actually [Vincent Asai] for Julio.

First of all, on the technology orders, I don't think we have heard comments about -- I think we got the comments about services orders, and just wondering if you can give us some color on the technology order trends this quarter.

Sure.

In the technology business, given the short sell and build cycle revenue is the better indicator for us than orders.

So we do talk about overall orders, and most specifically talk about services orders because they cover multiquarter periods.

In the technology business, the commentary for us, generally orders in revenue equates to general trends, and as we said they were down 8% overall with low double digit decline in the enterprise server group.

Got it.

So as far as orders are concerned, it is down sequentially, or on year-over-year basis?

In the technology business?

Yes.

In the technology business, what we'd like you to focus on is the revenue.

They run generally in the same direction.

As we mentioned, the revenue was down 8%, and that is the best indicator in the technology business.

Obviously sequentially when you're going off a strong fourth quarter in the technology business, consistent with everybody, I know you know that, sequentially it's down, but the revenue at 8% is the best measure for us in the technology business.

Got it.

Okay.

On a related question, as to year 2008 -- 8 to 10% operating target, was just wondering what -- if there's any risk at all to the target if revenue continues to fall off at the current pace, especially on the hardware side, given we know that it's a smaller portion of your business, but just wondering what are expectations on the hardware side as to your operating target in 2008.

Yes.

Part of our long-term plan, first of all the segment of the business that we're in, enterprise servers, is in secular decline.

No different from any of our other competitors.

So the high end of the UNIX business, that's true, the high end of IBMs business and so on.

So for that business, Gartner and others have predicted 6 to 8, maybe 8 to 10%, depending on who you talk to of the secular decline of that market.

And so we plan to be at the actual high end of the range of decline.

As you have seen, in this current quarter we've improved on that, so that's a positive note.

But our long-term planning takes that into account, and even with that in decline, we expect to make that 8 to 10% of margin.

So that's part of our planning process, and so we're still confident.

Got it.

Okay.

And on the offshore or global sourcing front, could you update us on the progress on moving resources to offshore locations, like India, Europe, and how much offshore headcount do you actually currently have versus your target by 2008?

Yes, Julio.

We're now close to about 3,000 people total around the world.

We've just added another 300, a net 200, because we -- some of them were actually replacing some of our partners labor over there.

We've targeted 20% of our overall population.

by the end of 2008 We continue to make real progress, as I mentioned earlier we're opening up yet another site in India in the third quarter.

We have currently about 2500 between ourselves and our contractors in India alone.

Hungary by year end, we've targeted about 250 people, and China, about 200 by year end.

We're essentially on course for that.

Again, that's a -- we've often described this whole global sourcing and economics part of the equation for services company, a part of a race with no finish line.

But we continue to make progress there.

Could you remind us what is the overall target by 2008 again?

It's 20% of our total population.

20%.

Okay.

Great.

Thanks.

Thank you.

We'll take our final question from Eric Boyer of Wachovia.

I wanted to drill a little bit more into the new orders.

Can you talk about the pace of new scope work compared to contrast like extensions on existing work?

Eric, when we look at our overall backlog, we report that on an annual basis, and you can see that that was up December 31, up in the low -- about 3 percentage increase overall.

When we're looking at the order decline in this quarter, we do, as Joe mentioned, had a combination of some very new wins and extensions on our existing contracts.

We don't disclose the delta between the two.

We think that the backlog growth in the services backlog is the best indicator of where that growth has come.

The large deal that Joe mentioned, the L.A.

leader contract, is, in fact, a contract extension.

In a fair amount of our contract extensions we are getting expansion of work.

So there's new scope actually on the extension?

In most of our contracts, you have -- we have expansion of work as we negotiate the outsourcing contract.

Could you give us an update specifically on the federal business?

Yes.

The federal business this past quarter grew mid single-digit.

If we look, we have essentially three segments that are roughly right about equal in size.

We consider Department of Homeland Security its own segment, the others are civilian and Department of Defense.

So we've had good growth in DHS and the civilian segments.

Department of Defense is soft for us, and that's often because of the amount of money that's in support of the war effort.

We actually expect the two other segments, Homeland Security and civilian to gain momentum over the course of the year, so we have a couple of big successful wins in the second half of last year, and some of those contracts are starting to ramp for us in both of those two segments.

And for the foreseeable future, because of the diversion of money for the war effort, we continue to see Department of Defense being soft.

I don't know if I missed it, but could you provide the after-tax amounts for the gain on the immediate sale, the restructuring charge, and the retirement related expense?

Right.

Eric, given our tax situation, those rates obviously vary.

The media gain, which was 23.5 million, only has a very small amount of a tax charge against that.

It's about 0.5 against that.

The restructuring charge, when you look at the financials, we have that broken out on a pretax basis, and we'll add it to the supplemental information so you can understand how that -- how the tax charge against that comes through.

Finally, last quarter you talked about two large mortgage process outsourcing deals in your pipeline.

Just wondering if there's any update there.

Yes.

We didn't talk about it.

We responded to a question on it.

But the answer is, they're still moving along.

Complex deals of their size very often have very long selling cycles, which, although frustrates many people, are in the 18, 24-month selling cycle.

But we the to make progress there.

We have a very strong core competency in intellectual property in the form of software in this area of mortgage processing.

We're one of the leaders in the U.K.

and have been for sometime.

The idea of back office processing being a core competency is changing in the minds of a lot of the CEOs in the U.K.

market.

And so they're coming to the conclusion that, whether it's a pure play outsourcing or a shared processing facility is a very interesting option, and we continue to move that along.

Thank you.

Great.

If we look at this quarter, I think you will recognize why we've continued to reinforce that turnarounds don't go in a straight line.

We're happy with the progress that we've made in terms of the breadth and depth of this restructuring program.

There was some gap in our and your expectations in terms of profit, but quarter over quarter over quarter as we reinforced earlier, you will see continued progress from us, and we are confident on our 2008 8 to 10% operating margin.

So thank you very much for joining our call.

We thank you for your participation.