Unisys Corp (UIS) 2007 Q4 法說會逐字稿

Good day and welcome to the Unisys fourth quarter and full-year 2007 results conference call.

At this time, I would like to turn the conference 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.

A little while ago Unisys released its fourth quarter and full-year 2007 financial results and with us this morning to discuss those results and our repositioning program is our CEO, Joe McGrath, and our CFO, Janet Haugen.

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

First, today's conference call is being webcast via the Unisys investor Web site.

This webcast is being recorded and will be available as a replay on our Web site shortly after the conclusion of the live event.

Second, you can find on our investor Web site the earnings release as well as presentation slides that we'll 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 complimentary to the earnings press release includes some non-GAAP financial measures.

Certain financial comparisons made in this call will be without the impact of retirement expense and cost reduction 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 restructure of cost reduction charges and retirement 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 Web site.

Let me now turn the call over to Joe.

Thanks, Jack.

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

Over the past two years Unisys has been implementing an aggressive multi-year program to rebuild our profitability and our competitive position in the IT market.

This effort paid off in 2007 with significant growth in our profitability and cash flow.

You can see highlights of the quarter for the year on Slide 1.

We reported fourth quarter operating profit of $136 million excluding cost reduction charges and retirement expense.

That was up 29% from year-ago levels and represents an 8.9% operating profit margin, which is our highest quarterly operating margin in four years.

We also generated $247 million in operating cash flow in the quarter, up 48% from the year-ago quarter.

For the full-year of 2008 we reported operating profit of $273 million excluding cost reduction charges and retirement expense.

That's a 91% increase over 2006.

Our operating margin for the full-year of 2007 came in at 4.8% excluding cost reduction charges and retirement expense.

Janet Haugen will provide details of our financial results.

What I'd like to do now is share with you some graphs that highlight just how far we've come financially in the past few years.

I will show you graphs on both a GAAP basis and non-GAAP basis excluding cost reduction charges and retirement-related expenses.

Note that we have included reconciliations as backup slides for your review.

First, costs.

As you know, we have been undergoing a painstaking and ongoing effort to benchmark our operations, re-engineer and streamline processes and reduce our global head count.

Slide 2 shows the progress we made in operating expenses over the 2005 to 2007 time period.

This is on a GAAP basis including cost reduction charges and retirement expense.

Slide 3 shows operating expenses on a non-GAAP basis excluding these items.

As you can see, our SG&A expenses are down $82 million since 2005.

As a percentage of revenue SG&A expenses have declined from 17.7% of revenue in 2005 to 16.6% in 2007.

We've also streamlined our R&D expenditures by refocusing our investments.

In our technology business, we've shifted our R&D investments towards software and services-based offerings, while leveraging the R&D investments of our partner, NEC, for hardware design and development.

As we've moved from custom CMOS chips to standard Intel chips, this has also reduced our need for R&D investments for chip design.

This has enabled us to reduce our overall R&D expenditures while effectively allowing us to get the value of a much larger R&D investment pool through our partners.

Overall, we've reduced R&D expenses by $86 million, or about 36% since 2005.

As a percentage of revenue, R&D is now 2.7% of revenue compared to 4.2% of revenue in 2005.

Moving to Slide 4.

We've also significantly reduced our retirement-related costs.

Coming into 2005, the Company had highly volatile and unpredictable expense levels for our U.S.

defined benefit pension plans.

We made the tough decision to end future accruals into this plan and increase contributions to our U.S.

401(k) plan.

Retirement-related expenses hit a peak of $200 million in 2005 and through the actions we've taken, this expense declined to $82 million in 2007.

We anticipate total retirement-related expense to go to a net zero in 2008 as our U.S.

401(k) retirement expense is offset by income from our pension plan.

We've also transformed our work force and labor costs through this repositioning effort.

In our services business, which is now 86% of our overall revenue, labor costs are the largest cost category.

Coming into the repositioning, our labor costs were too high.

We had too many people in high cost countries and we were behind our competitors in terms of shifting delivery resources to lower cost locations and taking advantage of strong technical resources available in such locations as India.

This was making us uncompetitive in the market.

We had to bring down our work force levels while also changing the mix of our delivery resources.

We had to make this transition with minimal impact on our revenue and our client service delivery levels.

Since this has been the biggest single change we've implemented in the Company over the past two years, it has been a massive effort, implemented quickly and aggressively.

And it hasn't gone perfectly, but we've made tremendous progress.

Slide 5 shows where we've come in this program.

Since the beginning of 2006 we've announced approximately 7400 head count reductions as part of the repositioning effort.

As of the end of 2007, we have completed 6700 of those reductions and reduced our work force about 17% over 2005 levels.

The bulk of the restructuring is now behind us and we go forward today with about 29,900 employees.

At the same time that we've reduced our head count in high cost regions, we have moved aggressively to build out our offshore delivery resources.

We set a goal of having about 6000 resources based primarily in India, China and Eastern Europe by the end of 2008.

We created new global sourcing centers in these countries and have rapidly built out our resources there.

In 2005 we had about 1500 offshore workers, including partner resources in these countries.

From that base, we have built out our offshore workers to about 4200 Unisys and partner resources as of the end of 2007.

We expect to add about 1800 resources in offshore regions in 2008.

That would put us at about our target of 6000 total resources in low cost countries by the end of this year.

To maintain client service delivery levels, some of our countries and practices have had to use temporary contract labor as they transition work from restructured employees.

We are still working through that process, but we are making progress in completing the re-engineering of processes and eliminating the added costs of these contractor resources.

We took out about half of the added contractor costs in the fourth quarter and expect to eliminate the rest by the end of the first quarter.

As a result of all this work, our operating profit margins have improved dramatically over the past two years.

Slide 6 shows our profit progress on a GAAP basis since 2005.

On Slide 7, on a non-GAAP basis excluding cost reduction charges and retirement expense, our operating income grew from $38 million in 2005 to $273 million in 2007, a $235 million improvement.

As a percentage of revenue, we moved from 0.7% operating margin in 2005 to 4.8% operating margin in 2007.

That's an improvement of 410 basis points.

This profit improvement has been driven by progress in our services business which represents today about 86% of our revenue.

Entering the repositioning program, our services business was losing money.

We essentially had to rebuild this business from the ground up, refocusing our strategy, our portfolio, and our delivery structure, and enhancing the profitability of our business process outsourcing operation.

While we still have much work to do, the progress we've made in just two years has been remarkable.

Slide 8 shows operating profit in our services business on a GAAP basis since 2005.

But turn to Slide 9 for a view of services operating profit excluding cost reduction charges and retirement expense.

As you can see, we've moved from a $41 million operating loss in 2005 to $195 million operating profit in 2007, a $236 million improvement.

Over the same period, services operating margins have increased 490 basis points from a negative 0.9 margin in 2005 to 4% for the full-year of 2007.

Another gauge of our profit progress is EBITDA.

Slide 10 shows EBITDA over the 2005 to 2007 timeframe.

This excludes cost reduction charges.

As you can see, our EBITDA has grown from $212 million, or 3.7% of revenue in 2005 to $571 million, or 10.1% of revenue in 2007.

That's a $359 million improvement over a three-year period.

This is significant progress.

We are doing what we set out to do with this turnaround, to transform the profitability of this company and create a foundation for growth.

The progress is real, it's tangible and it's substantial.

I am proud of the tremendous effort and hard work shown by the employees of this company.

Our biggest disappointment is that our progress is not reflected in our stock price.

I would just like to state clearly to all of you that the number one priority of our Board of Directors and management team is to enhance shareholder value and we believe the stock is substantially undervalued.

It is quite frustrating to us and to all Unisys employees who have worked so hard on this transformation effort to see our progress not be rewarded in the stock price.

Janet and I have had conversations with many of you in recent months about the decline of the stock.

In addition, as I'm sure you know, one of our investors, MMI Investments, has requested that the Unisys Board of Directors consider strategic alternatives to enhance shareholder value.

As we announced last week, we have postponed the deadline for director nominations and shareholder proposals in connection with the annual meeting.

The Unisys Board believes this will facilitate a discussion with MMI.

We are not in a position this morning to comment on discussions with MMI, and we will not comment further on this topic on this morning's call.

I would like to reiterate, however, that the Board and the management team have considered and will continue to consider alternatives for enhancing shareholder value and improving the Company's performance.

We are listening.

We hear your concerns and we are taking them into consideration.

Particularly given the volatility of the financial markets, our focus right now is on driving the business, completing the third year of our repositioning and building on the great financial improvement we've made over the past two years.

Our primary objective during this turnaround has been to create a profitable foundation on which to grow this company going forward.

Now that we've made significant progress on building this foundation, we are accelerating our focus on growth as we continue to drive for higher profit margins.

Over the past two years we've been doing a great deal of work to establish our strategic growth programs and rebuild our growth engine.

While our total revenue has been down modestly over the past couple of years, there's an important mix change occurring within our revenue base.

Slide 11 shows our strategic programs.

Our growth businesses, as you know, are enterprise security, outsourcing, open source solutions, Microsoft solutions and real-time infrastructure solutions.

Outsourcing is our biggest strategic program.

In 2007 our outsourcing business grew 6% and is now more than a $2 billion business.

Our other strategic programs, and particularly our enterprise security practice, grew even more in 2007.

Collectively, the strategic growth businesses grew about 10% in 2007.

At the same time, other areas of our portfolio are becoming smaller pieces of the total, either because of secular industry trends or because we are deliberately stepping away from business that is not attractive to us.

ClearPath and the associated core maintenance revenue continue to be critical areas of our portfolio, but they are declining secularly.

We have had a solid year in 2007 in our ClearPath program and we're doing a good job of slowing declines in ClearPath and core maintenance but these proprietary businesses will continue to decline for us and for the industry as a whole as a percentage of the total.

We are also deliberately stepping away from certain businesses that don't meet our growth and margin profiles.

These businesses, including de-emphasized solutions and programs in our systems integration business, low margin project work and infrastructure services, and non-strategic specialized technology revenue in our technology business.

Currently, the declining areas of the business are keeping our overall revenue line from growing, but as our strategic programs continue to grow, we expect that trend to reverse itself.

More importantly, as this begins to happen, we believe there's great operating leverage in our margins as we begin to grow our revenue base on a more efficient streamlined cost structure.

As we move into 2008, we believe there's a number of key drivers that will enable us to accelerate the success and growth of these strategic programs.

You can see these four drivers summarized in Slide 12.

The first driver is a refreshed portfolio.

Over the past two years, we have refocused and enhanced our portfolio of offerings in every one of our businesses, in outsourcing, in systems integration and consulting, in our industry-specific programs and in our technology business.

We've developed new, more relevant solutions based on our strategic programs.

I've discussed some of these new solutions on recent earnings calls.

Our next generation offerings for airline passenger reservations, for electronic payments, for Medicaid claims processing, for communication messaging and others.

These solutions are based on leading edge software development environments such as J2EE, .NET, and open source software and they deliver breakthrough price performance in their market segments.

As we continue to gain traction in selling these solutions, we expect to build on that momentum in the year ahead.

The second key driver in the changes we've made is in our sales and go-to-market approach.

To increase the effectiveness of our sales team, we've focused their efforts on growing our business with our top 500 accounts around the world.

We're seeing good results in this effort as well.

In fact, our top 50 targeted accounts where we've placed a great deal of focus, our revenue was up high single digits in 2007.

The third key driver is related to our focus on large accounts.

We are rolling out a major initiative to drive success in winning large mega deals with our targeted top 500 accounts.

It takes nearly as much sales effort to win a $3 million deal as it takes to win a $30 million or $50 million deal, and the $30 million deal will do more to move the needle for our revenue and margins.

In 2007, we recruited and put in place a highly experienced team of sales leaders to pursue large outsourcing mega deals in the U.K.

and continental Europe.

They are individuals with an average of more than 15 years experience who came from the likes of Accenture, IBM, EDS and Hewlett-Packard.

The mega deal team is responsible for identifying opportunities early in the lifecycle, communicating with the client, building a win strategy, and putting together the right team to win and deliver on the deal.

Before we submit a bid we do an exhaustive process of challenging ourselves and our proposals from our competitors' eyes and making changes to sharpen our competitive edge.

We've already seen good success in the U.K.

and Europe with this mega deal approach.

It was critical, for example, in our winning a very large new outsourcing client with Ciba Specialty Chemicals.

In fact, our outsourcing orders in the U.K.

and Europe grew double-digit in 2007 and 30% in the fourth quarter of 2007, and the number of large deals over $30 million in our pipeline worldwide has grown more than 25% from a year ago.

We are now rolling out a similar mega deal team in the U.S.

and we're looking for good success here as well.

Overall in our strategic programs, we've seen close to 20% growth in our pipeline in 2007.

The strategic areas that we're seeing the most growth and success are in outsourcing and enterprise security.

Slide 13 shows the selected new client logos that we signed in our outsourcing business in 2007.

These include such leading organizations as Ciba, the Idaho Department of Health and Welfare, Diamond Trading Company, Elopak, Elekta and Linklaters.

We have also recently been selected by the state of Maine for a new Medicaid processing contract that we are working to finalize.

Turning to Slide 14.

In the area of enterprise security in 2007 we won major security contracts from the U.S.

Department of Defense and the Canadian Port of Halifax.

We also were awarded the final year of our bridge contract with the Transportation Security Administration for continued support of TSA's airport and transportation security mission.

Earlier this month, Unisys received a task order worth up to $62 million from the U.S.

Customs and Border Protection Organization to design and implement a leading edge solution using RFID technology to help identify travelers at 39 ports of entry along the U.S.

borders.

Unisys is also part of a team of companies led by DGM-Sistemas that was recently awarded an estimated $400 million contract from the government of Angola for a national identification card system.

We are currently working to close our subcontract with the prime contractor.

Turning to Slide 15.

The fourth key driver to building our momentum in 2008 is leadership.

We continued to strengthen our management team to ensure we have the right leadership that we need to drive success and growth in our strategic areas.

Over the past seven months, we have changed the leadership of three of our business units at Unisys.

At the beginning of this year, we moved Randy Hendricks to run our global industry business unit.

As the leader of our outsourcing business in recent years, Randy has grown our outsourcing business to our single largest services business.

With global industries he will now lead the business in which we provide systems integration and consulting services through industry-led practices.

It's a natural fit for Randy.

Since before coming to Unisys in 2001 he was a managing partner at Andersen Consulting where he had a 20-year career in this consulting area.

I am confident that Randy will be instrumental in turning around our systems integration and consulting business and returning it to growth.

We have also brought in Tony Doye from Computer Sciences Corporation to run our global outsourcing and infrastructure services business.

Tony was previously a Group President at CSC, where he held a number of leadership roles in IT services, IT outsourcing, application outsourcing and consulting services.

Over his 30-year career in the IT industry, he has managed global businesses, not just at CSC but also at IBM and British Telecom.

Tony has a long and impressive track record of growth.

He is also spearheading the mega deal initiative that I just discussed.

We're fortunate to have him join our management team and to lead our outsourcing and infrastructure services business.

Randy and Tony compliment Rich Marcello, who as you recall, joined us earlier in 2007 from Hewlett-Packard to manage our systems and technology business.

Over the past seven months, Rich has done exciting and groundbreaking work in creating a new virtualization software and services-based strategy for our technology business.

Rich has rebuilt his entire leadership team from product planning to sales leadership.

These changes are already having an impact on the technology business as seen in our strong fourth quarter results.

As we pushed these four drivers of growth, refreshed portfolio, concentrated sales approach, mega deal initiative and new leadership, we look forward to continued momentum in our financial progress in 2008 and we look for our revenue to begin growing as we move toward the second half of the year.

In the meantime, as Janet will discuss in her remarks, we will continue to streamline operations, reduce costs and enhance the profitability of our businesses and operations.

As we do this, we continue to expect to achieve an 8% to 10% operating profit margin for the second half of 2008.

This would give Unisys a strong financial foundation on which to continue building our business in the years ahead.

So in summary, turn to Slide 16.

As we move into 2008, the final leg of our repositioning program, I believe that Unisys is better positioned than we have been in many years.

Our profitability is at the highest it's been since 2003.

Our margins are steadily improving and expenses continue to come down.

We are on track to have about 6000 resources in low cost countries by the end of 2008, an effort that is making us more competitive.

We are winning new client accounts and we're accelerating our focus on growth.

We are investing in growing our strategic programs in our top 500 accounts and we believe this is the year when these efforts enable us to begin to drive the top line.

As can be expected with a turnaround of this complexity, there have been bumps in the road.

We continue to have issues that we must deal with and we are frustrated as you are that our progress is not being recognized in our stock price.

But we are confident that we are on the right path, that we continue to deliver tangible results, and that as we deliver those results our efforts will be rewarded in terms of shareholder value.

Thank you, again, for joining us this morning.

Now I'll turn the call over to Janet for a more in-depth review of our financials.

Janet?

Thank you, Joe, and hello, everyone.

This morning I will provide more details on our fourth quarter and full-year 2007 financial results including cash flow.

I will also discuss Cap Ex expectations for 2008.

To begin with the fourth quarter financial performance, please turn to Slide 17.

At the top line we reported revenue of $1.54 billion for the fourth quarter of 2007.

This was down 1% from the year-ago quarter.

Currency had a 5 percentage point positive impact on our revenue in the quarter.

Our fourth quarter results include $55 million in net charges related to our ongoing cost reduction program.

The charge includes the costs related to the consolidation of 46 facilities and costs for approximately 220 work force reductions.

These head count reductions are primarily in our technology business in North America.

We expect these actions, the facilities consolidation and the head count reductions, to generate $20 million in savings in 2008 and $40 million in savings on a run rate basis.

Our fourth quarter results also included $11.6 million of pretax retirement-related expense compared with $47.6 million a year ago.

Including the cost reduction charge in the retirement related expense, we reported fourth quarter 2007 operating income of $69.4 million.

This compares with a fourth quarter 2006 operating income of $68.6 million which included a $10 million benefit from a change in estimate on previously recorded restructuring charges.

After tax expense, we reported fourth quarter 2007 net income of $13.8 million, or $0.04 per share.

By comparison in the year-ago quarter, we reported net income of $21.3 million, or $0.06 per share.

We ended 2007 with $6.9 billion of firm services backlog.

This was up 4% from year-end 2006 services backlog.

Approximately 45% of this backlog is anticipated to convert into revenue in 2008.

Going forward, we will provide services backlog information every quarter.

In the back of these presentation slides, we have also provided supplemental slides showing details on cost reduction charges and retirement-related expense for the quarter and the year.

Turning now to revenue, please turn to Slide 18 for an overview of our fourth quarter revenue by geography.

Our U.S.

revenue represented 41% of our revenue and declined 4% in the quarter, driven by a decline in our federal business.

International revenue accounted for 59% of our overall revenue in the fourth quarter and grew 1% in the quarter.

We saw growth in Latin America, partially offset by declines in Europe.

On a constant currency basis international revenue declined 8% in the quarter.

Slide 19 shows our fourth quarter revenue by business segment.

We had a strong quarter in the technology business in the fourth quarter.

Our technology revenue grew 6% and represented 70% of our revenue in the quarter.

Services revenue declined 2% in the quarter and represented 83% of our fourth quarter revenue.

For more details on our services revenue, please turn to Slide 20.

Within services, we saw good growth in our outsourcing business which grew 9% in the quarter.

The growth in outsourcing was more than offset by an 18% decline in infrastructure services revenue, as we continue to see a shift of project-based work to managed services outsourcing contracts and de-emphasis of our non-strategic business.

We expect infrastructure services to continue to decline in the first half of 2008.

Our systems integration and consulting revenue declined 4% in the quarter and core maintenance revenue declined 10%.

Turning to Slide 21.

In our technology business we had a strong quarter in our ClearPath business driven by a number of large client system upgrades.

The ClearPath revenue showed double-digit growth in the quarter driven by strength internationally.

Overall, enterprise server revenue was up 13% in the quarter and represented 88% of our technology revenue this quarter.

Turning now to the full-year, you can see the highlights of 2007 results on Slide 22.

Our revenue in 2007 declined 2%, as we continued to de-emphasize non-strategic areas of our business and focus on enhancing our profitability.

During 2007 we recorded net cost reduction charges of $105 million compared with net cost reduction charges of about $316 million in the full-year of 2006.

Our retirement-related expenses declined to $82 million in 2007 compared to $154 million in 2006, reflecting significantly lower U.S.

pension expense.

Including retirement-related expense and the cost reduction charges, we reported operating income of $86 million in 2007 compared to an operating loss of $327 million in the full-year of 2006.

Other income in 2006 included the $150 million gain on the sale of our NUL shares.

On a net basis after-tax expense, we reported full-year 2007 loss of $79.1 million, or $0.23 per share.

This compares with a full-year 2006 net loss of $278.7 million, or $0.81 per share.

Slide 23 shows our full-year 2007 revenue by geography.

Our U.S.

revenue declined 4% in 2007 and represented 43% of our revenue for the full-year.

Revenue from federal agencies declined 3% for the full-year of 2007.

International revenue was flat in 2007 and accounted for 57% of our full-year revenue.

Within international markets, we saw revenue growth in Latin America and Asia-Pacific regions.

This was offset by a double-digit revenue decline in Japan and a low single-digit decline in Europe.

On a constant currency basis international revenue declined 7% in 2007.

Slide 24 shows our full-year 2007 revenue by business segment.

Services revenue declined 1% in 2007 and represented 86% of total revenue for the year.

Technology revenue declined 4% in 2007 and accounted for 14% of our revenue this year.

Drilling down into our two business segments, Slide 25 shows our full-year 2007 services revenue by component.

Outsourcing revenue grew 6% in 2007 and accounted for 42% of our services revenue for the full-year.

Systems integration and consulting revenue declined 6% and represented 31% of services revenue.

Infrastructure services revenue declined 7% in 2007 and represented 18% of our services revenue.

Finally, core maintenance revenue declined 8% in 2007 and accounted for 9% of our services revenue for the full-year.

Slide 26 breaks down revenue in our technology segment in 2007.

Enterprise server revenue declined 3% in 2007 and accounted for 80% of technology revenue for the full-year.

Within enterprise servers, ClearPath revenue was flat for the full-year of 2007, while ES7000 server revenue showed a double-digit revenue decline.

Now I'll comment on expenses.

As Joe discussed the progress we are making in our ongoing program to reduce our operating expenses by streamlining our operations.

We are making progress in reducing our third party contractor spending.

As we said last quarter, we are seeing about $20 million of extra costs from third party contractors on a quarterly basis in the third quarter of 2007.

In the fourth quarter we reduced that to about $10 million and we expect to get the remaining $10 million out in the first quarter and put this issue behind us.

As well, we are continually benchmarking our operations and identifying opportunities for further cost reductions.

For instance, reflecting our increasingly mobile services work force as well as head count reductions, we continue to consolidate facility space in our operations globally.

As I mentioned earlier, we took actions to close or consolidate space at some 46 facilities around the world.

As a result of this overall program for facilities reductions, we have been able to reduce facilities expense from roughly 4% of revenue in 2005 to 2.6% going forward, even while we have been making investments in our strategic program areas such as new centers of excellence and new outsourcing data centers.

We also continue to look for areas for further cost reductions such as simplifying our geographic management and infrastructure costs, as we did recently in our Latin America operations, and we are extending that approach into continental Europe.

Moving on, please turn to Slide 27 for a view of our services and technology segment margins in the fourth quarter.

As a reminder, Unisys has a longstanding policy to evaluate business segment performance on operating income exclusive of cost reduction charges and unusual and non-recurring items, therefore, these segment results include such items.

On a non-GAAP basis, which excludes retirement-related expenses, services gross margins improved to 20.3% in the fourth quarter, a 90 basis point improvement over the year-ago period.

Services operating margins improved 110 basis points to 5.4% from 4.3% a year ago and technology gross and operating margins also showed substantial improvement in the fourth quarter from year-ago levels.

This reflected the strong mix of ClearPath sales in the quarter.

Slide 28 shows segment margins by business segment for the full-year of 2007.

On a non-GAAP basis excluding retirement-related expense, services gross profit margins improved to 18.7% for the full-year of 2007, up 140 basis points year-over-year.

Services operating profit margin on this basis improved to 4%, 170 basis point improvement from 2006.

In the technology business both gross and operating profit margins improved on a full-year basis over 2006.

These margin improvements reflected a richer mix of ClearPath sales, as well as continued reduction in operating expenses.

Now please turn to Slide 29 for an overview of our cash flow in the fourth quarter of 2007.

We had a good quarter in terms of cash flow.

We generated $247 million of cash from operations in the quarter compared with $167 million in the fourth quarter of 2006.

We used approximately $28 million in cash for restructuring payments compared to $88 million in the fourth quarter of 2006.

For the full-year of 2007 we used $152 million of cash for restructuring payments and we expect to use about $60 million of cash for restructuring in 2008.

Total capital expenditures were $71 million for the fourth quarter and $300 million for the full-year.

As we've discussed previously, Cap Ex increased in 2007 from the 2006 levels due to higher expenditures on new outsourcing projects.

After deducting capital expenditures, we generated $176 million of free cash flow in the fourth quarter of 2007 compared to free cash flow of $109 million in the year-ago quarter.

Depreciation and amortization was $104 million in the fourth quarter of 2007 and $381 million for the full-year.

Looking ahead for the full-year of 2008, we anticipate capital expenditures of around $300 million and depreciation and amortization in the 360 to $380 million range.

Lastly, I would like to comment on the debt refinancing that we completed in December.

We issued $210 million of senior notes to refinance $200 million of 7 7/8% notes that were coming due in April 2008.

As a condition of our revolving credit agreement, these notes needed to be refinanced by December 31.

While we considered a number of alternatives beyond straight debt including equity linked debt, we determined that based upon the stock performance at that time and the capital markets, the most appropriate approach was to use straight debt at the lowest amount that we needed to refinance the debt.

These new notes were priced to yield 12.75%, which reflected the credit markets at that time.

The old notes were redeemed on January 11th of 2008.

Our cash balance of $830 million at December 31, 2007 included the proceeds of this note offering.

We have since redeemed the 7 7/8th notes on January 11, 2008.

This concludes my comments for this morning, and now I'd like to turn the call over to Jack.

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

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

Thank you.

(OPERATOR INSTRUCTIONS) We'll take our first question from Julie Santoriello with Morgan Stanley.

Thanks.

Good morning.

Joe, can you comment a bit on 2008 expectations for revenue growth?

I believe in your comments you sort of alluded to expectations for an improvement toward revenue growth in the second half of '08, but can you give us an idea of what you're looking at for the full-year?

I realize the services backlog was up 4%, which is a good leading indicator, but then coming into 2007 the backlog was actually up but it didn't follow through in revenue for the year, I guess, because short-term projects were declining.

Yes, first let me give you kind of a disclaimer, Julie.

We went back to our Board, as a number of you have asked us, to see if we could give guidance for 2008.

And a number of you on the call have specifically asked us to see if we could work through that since the belief is that, you know, at the two-year point of a three-year transition period, we should be in a position to start to do that.

And so we heard everyone's feedback, we discussed it with our Board and, frankly, the feedback they gave us was at this moment in time, considering the volatile economic environment in a possible recession, it would be the wrong time to begin to give guidance.

Now, we discussed further, could we revisit this at the end of the first quarter and the answer was yes.

That said, what we put in our comments here was soft, and we knew that, but we're really not prepared to go any further than we did.

I will tell you the reason we emphasized so much of the second part of my call on the changes we're making in the systems integration business and its turnaround, because, as you know, that's been somewhat problematic for us, we think we'll have a big impact, positive impact in 2008, starting from leadership through finally having a world-class portfolio across that entire business.

We actually have a simplified structure we put into place in the first of the year, and we believe almost all of our solutions have leading price performance.

So, frankly, that had been a growth drag on us and we believe that's turning and that's extremely important, as you know.

The outsourcing business continued to grow.

You heard those comments, we actually believe that with the addition of mega deal teams in the United States, in addition to what we've already been doing in Europe, that can start to really grow the North America outsourcing business faster as well.

But unfortunately, the soft guidance, I'm reluctant to even say it's guidance, that we gave you in revenue growth is about as far as we can go.

Okay.

You had a very good quarter in the ClearPath.

Congratulations on that, and that carried through nicely to cash flow.

If we run numbers through our model, you know, and then assume that you can hit those expectations for 8% to 10% margins in the second half of the year, it looks like it's shaping up to be a positive free cash flow year for you this year.

Would you be able to agree with that at this point?

Well, I'm going to defer to Janet, who's flipping pages.

Obviously, you know, and consistent with the policy of the guidance question that Joe commented on, we can't give specific guidance.

What I will tell you is consistent with what we have said all along.

This plan to move to the 8% to 10% operating profit in the second half of the year is consistent with a plan to continue to improve the cash performance of the Company, and you're right to recognize the fact that we had strong ClearPath quarter, but I also want to comment that, as you can see in the statement of cash flow, we particularly had good performance across all of our businesses and all of our geographies and improving our DSOs and that dropped through in the AR DSOs and that dropped through to cash flow performance.

So we need to keep that ongoing.

But going into next year with less requirements for restructuring payments, as I mentioned, we anticipate that to be $60 million in 2008.

The continued improvements, which will increase, obviously, the EBITDA line as we go forward, all of those items with a fixed -- with Cap Ex staying at roughly the same level would, obviously, yield for improvements going on that free cash flow number for 2008.

Okay.

Thanks.

If I can just get one more.

I found the slides helpful in terms of the breakout you had for the strategic businesses and how those have grown, so I definitely appreciate that.

And so when we look at it, over half of your business is growing 10%, the other half by default is declining more than 10%.

At what points do we -- what point would you expect the other businesses, the areas where the ones that are either in secular decline or that you are de-emphasizing or exiting, when does that decline begin to slow, stop having such a drag on the total number?

And does that declining piece of business get down to zero ultimately, or does it get down to just a smaller base from where it is today?

Yes, let me divide that segment into two segments.

There's one part that, as you might imagine, ClearPath and core, which is in that top number, as you know, is in secular decline, that's a business that's strategic to us but is not part of that bottom part of the table, and so even though the industry in secular decline, that's the part where we've tried to slow down.

At first we were successful in core maintenance and you've recently seen the success that we're starting to have in the technology business there in ClearPath and so on.

So that part we want to slow down.

Other parts where we believe the margins are unattractive in part of that infrastructure services business, the margins are unattractive, project-based work, believe it or not, there's still some pass-through of things like Cisco hardware and third party hardware.

We're trying to continue to further consciously exit that.

And so think of the two sections as one, we want to slow down, even though we know it's in secular decline, and the other one, we have mixed feelings on how fast we take it out, because, you know, obviously people have looked at our revenue picture and would love to see us at least in a modest increase.

So we're torn a bit there, but we do want to get all of that third party equipment out, small project, low margin work out over time and eventually that piece, Julie, we actually would like to get to zero.

In there there was, if you remember when we talked on previous calls about what I'll call non-strategic SI solutions are in there, non-core development environment works, meaning not J2EE, not dot-com, but older development environments.

So on a theoretical basis, we'd love to get that to zero, but not the other part of it, which is ClearPath and core.

Great.

Got it.

Thank you very much.

Great.

Our next question is from Jason Kupferberg with UBS.

Good morning, guys.

Good morning.

Just given the comments that you guys made about your disappointment in the stock price and the fact that the shares are undervalued in your opinion, you just posted your strongest cash flow quarter in, I think, four years or so.

Why not consider a share buyback program?

Has that been discussed with the Board?

Jason, on the consideration of the stock buyback program as part of Joe's comments, he said that the Board and continues and (inaudible) management continue to evaluate all strategic alternatives.

At this point in time, it's been considered but there are no current plans for a stock buyback.

As we continue to proceed going forward the stock buyback along with other alternatives would continue to be evaluated.

Our thoughts, though, right now are that given that we may potentially be going into a soft economic environment and given that we have kept the capital expenditures at $300 million, I would tell you that right now based upon today's environment right now, it's not something that we would be considering to do in the very near-term.

But as with anything, we will continue to evaluate those alternatives and if the time is right and it's appropriate for where we're at, we would consider it.

Are there any limitations in the new bonds that would prevent you from doing that?

For us there are limitations on that.

One of the things that we are trying to make sure we balance is the -- we are working towards trying to improve the rating agencies.

The current rating agencies currently have us on a negative outlook.

That is a consideration that goes into that.

Those generally have not, stock buybacks with cash on hand for us at our credit rating are generally not favorably viewed by the rating agencies.

So that is the primary consideration that we consider at this point in time.

Okay.

Let me shift to margins for a minute.

So we're sticking with the 8% to 10% target for second half '08.

That's the one piece of guidance you are giving us.

My model suggests you did about 6.9% in the second half of '07 on an apples-to-apples basis.

So to get to the midpoint of the 8% to 10%, it's about a couple hundred basis points still to go.

Can you break down for us what the key moving parts or factors are that'll get you from second half '07 to second half '08?

Sure, Jason.

This is Janet.

I'll take that from a high level.

Obviously as we go into '08, we will have the continued pressure from the declining revenue streams of the ClearPath and the core maintenance.

In addition, as you know, Jason, we don't have -- the royalty we received from NUL ends March 31st effectively of 2008.

So we have that type of headwind coming into the year.

Offsetting that, first at the cost line, we have the continuing benefit from the restructuring actions that we have taken already.

There will be a continued, you know, in 2007, we don't have a full-year impact for those restructuring actions.

That will go forward.

We will also have the benefit of the savings coming from the charges that we announced this quarter.

So the biggest driver for us on a sequential perspective is coming from the restructuring cost savings.

That being said, as Joe mentioned in his comments, as we continue to improve the strategic programs and our cost base is in line, we do expect to get incremental benefit from that growth at higher than our normal rate of margins given that the cost base structure is in place.

Okay.

And last question on top line.

Strategic programs grew 10% in '07.

Is that general range sustainable in '08 given the new sales focus?

Yes, I, I obviously would love to see it increase in '08.

So at a minimum, we believe it's sustainable and longer-term, we believe we can accelerate that growth rate.

Okay.

So sustainable in '08 at the 10%?

Yes.

Thank you.

Our next question is from Susan Chen with Merrill Lynch.

Thank you.

This quarter's very good operating cash flows (inaudible) held by some from the DSO.

Since that you improved DSO about seven to eight days versus last quarter.

My question is, is that one-time improvement by year-end collection or do you see this trend going forward to next year?

If you look historically at our financial statements, typically between the third and the fourth quarter, we see generally in the neighborhood of about three days DSO improvement on a sequential basis.

You saw double that this quarter and we are -- we probably won't be able to hold all of that improvement because it does get the benefit of some of the ClearPath transactions in the quarter, but that three additional days, three days is seasonal, three days is additional above our prior performance, we are going to attempt -- we are going to put emphasis throughout the business to try to retain that three-day improvement as we go throughout 2008.

Thank you.

And also, what should a tax rate -- what tax rate we should look for 2008?

The tax rate in 2008, unfortunately, given the fact that we are in the situation where, given the period of losses that we have, we no longer have a deferred tax asset on our balance sheet.

Our tax rate varies from year to year depending upon the geographic mix of our income.

50% of our entities, we do provide a provision or a benefit for the results.

The others, we do not, just as a result of U.S.

GAAP.

From a structural standpoint, we believe our tax rate is a 34% is still in place if you were normalizing it over the time period.

But unfortunately to give guidance on that tax rate at this point in time going into the year is next to impossible to do because we don't know the countries and the legal entities where all the transactions will take place.

Thank you.

We do have time for one more question.

Our final question comes from Eric Boyer with Wachovia.

Thanks.

You talked about the federal business, I believe having a decline of 3% year-over-year.

If you could just give a little more detail on that business.

Yes, as you'll see in the 10-K, that business is about a $900 million business.

It's declined 3% since 2006.

That decline is largely in the defense segment.

We have three segments that began the year as roughly equal.

One was Homeland Security.

One was defense.

One was civilian.

Homeland Security and civilian had good years, defense was a challenge for us.

Part of that was because the Department of Defense redirected funds toward the war effort and the decline of defense offset the growth of the other two segments, so you can imagine what a challenge it was for us,

And so we believe that the worst is over for us in defense, those other two businesses can continue to increase and I'd like to believe that '08 can be a strong year for us.

Could you just give us an update on the TSA contract, where the rebid status stands on that?

Yes, the expectation is TSA EAGLE is to be rebid in the first half of 2008, but it's uncertain precisely when that will come back out, so that's where we are.

As you know, we're currently on the bridge contract.

And the contract runs through '08?

Yes.

And finally, what percentage of your--

One other thing on that, if you don't mind.

We believe in a very strong position in the re-compete there as well so I think we're doing all the right things.

You know, there's the temptation when you're the incumbent to not work as hard to win business you already have and we've made sure we put a very strong team in place to re-compete that.

I don't know if you went over this, but what percentage of your services backlog is part of your strategic initiative revenue streams?

We do not disclose that.

What we said was that, we disclosed, the numbers that we disclosed was our services backlog and that roughly 45% of that's expected to be filled in the next 12 months.

Given that most of the non-strategic programs are shorter-term based projects, the backlog is disproportionate, strong towards outsourcing, and so it's predominantly, more than a majority it's predominately based in the strategic program offerings.

I thank you.

That does conclude our question-and-answer session.

Mr.

McHale, I'll turn the conference back to you for any additional or closing comments.

Yes, this is actually Joe McGrath.

Thank you for your support through this transition.

As you've heard from us, we share your feeling about our stock being undervalued in the marketplace, and what you really see is look in the next few days, you'll see a commitment from the senior team in support of our confidence.

So watch this space.

Thanks.

This does conclude today's conference call.

Thank you for your participation.

You may disconnect at this time.