Unisys Corp (UIS) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the Unisys fourth quarter and full-year 2008 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.

Good morning, everyone.

And thank you for joining us.

About an hour ago, Unisys released its fourth quarter and full-year 2008 financial results.

And with us this morning to discuss these results are Ed Coleman, our CEO and Janet Haugen our CFO.

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

First today's conference call and the Q7A session are being webcast by the Unisys investor website.

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

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

And I just want to remind you to maybe refresh your browser to make sure you have the most current version of these slides.

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 impacts of retirement expense and cost reduction charges.

In the presentation, we have provided a reconciliation of our reported results on a US GAAP basis, compared with our results excluding the impact of restructuring 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 SEC filings.

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

Now let me turn the call over to Ed.

Thanks, Jack.

Hello, everyone.

Thank you for joining us today.

As we begin our discussion this morning, please turn to slide one.

When I spoke with you in October, shortly after joining Unisys, I shared with you my initial impressions of the Company and our priorities for the business going forward.

Since that time, I've been working with our management team and employees to analyze the business and develop an actionable program for driving improved financial results in getting the Company profitable again.

I told you back in October that I wanted to move thoughtfully but with urgency and a clear sense of purpose.

The deterioration in the global economy since has added urgency to this task.

As you'll see when Janet takes you through the numbers, the economic downturn had a significant impact on our results in the fourth quarter.

While our public sector business held up fairly well we saw an impact on the commercial side of our house especially in our financial services business.

There were some encouraging points of progress in the quarter.

Our US federal revenue grew double digits.

We generated free cash flow for the second consecutive quarter, and our cash balance also grew for the second straight quarter.

But we were clearly disappointed by our revenue and bottom line results.

It is unacceptable to me and to our entire management team that this Company be operating at a net loss.

And we're determined to change that.

Despite what's happened in the broader economy, I'm no less impressed now as to the capabilities and potential of Unisys.

I'm no less optimistic about our future.

But we must move aggressively to get the Company on to a profitable course, and that's what we're doing.

The program that we're pursuing for Unisys is focused on turning around the Company as quickly as possible.

This is not intended to be a complex transformation plan that takes years to work.

The IT industry not to mention the current economic realities do not allow us that luxury.

We're focused on taking actions that optimize profit and cash flow over the short term while positioning the Company for long-term growth opportunities in the IT market.

The goal is to create a Company that is consistently profitable with a strong balance sheet and financial profile.

A Company that is recognized as providing first-rate, differentiated services and solutions in select markets and is able to command a premium margin for doing so.

To drive our turnaround program, we're executing against the four priorities that I outlined for the business in October.

You can see these priorities summarized in slide two.

The priorities are first to concentrate our resources on fewer, high-potential markets with a more focused set of offerings.

Second, to offer clear value propositions that differentiate Unisys in our chosen markets.

Third, to take actions to enhance the cost efficiency of our labor model to drive expansion in our gross margins.

And fourth, to simplify the organization and significantly reduce our expense structure.

We're moving quickly to implement actions against this program.

Over the past couple of months, we've done a great deal of work to identify the core strengths of the Company and focus our resources and investments based on those strengths.

Turning to slide three, as part of our analysis we're looking at every element of the Company's operations from specific business lines to the countries where we operate, against a few simple measures.

Is the business built on the core strength of the Company?

Is the business consistently profitable?

If not, can it be?

If the answer is yes, that this is a core area of the business where we can grow profitably, then we're working to clearly define our value proposition to ensure Unisys is differentiated versus our competition.

To improve our service gross margins, which I see as being 4 to 5 points too low or roughly 200 million to $250 million in gross margin dollars, we're working to address our labor model, how we deliver services to our clients, and the mix of our services.

As you know, we're also being aggressive in attacking the Company's expense structure.

As I mentioned to you in October, the Company has been operating with a complex matrix model that I did not feel was appropriate for a Company of our size.

The matrix of slowing decision making and increasing our expenses.

As we eliminate the matrix and reduce layers of administrative oversight and streamline reporting lines, we're opening up significant opportunities for cost reduction -- especially in the area of SG&A expenses.

We aim to reduce SG&A expense for our service business to about 10% of revenue consistent with benchmarks of IT competitors our size.

This would mean about a $250 million reduction in our SG&A from 2008 levels.

We're evaluating options across the Company to reduce the cost of labor and cut SG&A expenses.

That process will continue as we move through 2009.

To date the initial actions we've taken are expected to reduce our annual cost base by about $225 million, with about $150 million of these cost savings coming from SG&A.

The initial cost reduction actions began in November, and we're already beginning to see the benefit in our operating expenses as Janet will discuss later.

On the people side, it's never easy to make headcounts and benefit cuts in any environment, let alone in today's economy.

But in my conversations with Unisys employees around the world, I'm impressed with the passion with which they're taking on the task of turning around this Company and generating profits and cash.

This is a very talented and determined workforce of 28,000 people.

They're committed to the Company, dedicated to their customers, and they're convinced as I am that with the right focus in and tools they can get this Company moving in a different direction.

Despite the economy and the specific challenges we're facing, I can sense a real optimism and energy in the Unisys people I speak with.

They've faced adversity before, and they're determined to make this Company a winner again.

I'm even seeing a collective sigh of relief as we strip away the matrix model and people are given greater accountability for making decisions and delivering results.

In a few minutes, I'd like to give you some more specifics about areas we'll be focusing on.

But first I'd like to ask Janet Haugen to walk you through the details of our financial results for the quarter and the full year.

Janet?

Thanks, Ed.

Hello, everyone.

As Ed mentioned this was a challenging quarter for Unisys.

The fourth quarter was the strongest of the year especially in the technology business as we benefit from year-end budget spending from our clients.

However, we didn't see the typical seasonal strength this past quarter as clients contained spending in response to weak economic conditions and the tight credit environment.

The fall-up in our revenue volume clearly impacted our margins in the quarter.

However, there were some encouraging points of progress in the quarter.

Our US federal business had a strong quarter with double-digit revenue growth and high single-digit order growth.

Another bright spot was our US state Medicaid business where we continued to grow orders in revenue.

We reduced our operating expenses with actions underway for further reductions.

And finally, we improved our working capital management in this tough macro environment.

We generated $138 million of operating cash flow and $58 million of free cash flow in the quarter.

And we were able to increase our cash balance at the end of the quarter to $544 million.

For the full year of 2008, we generated $255 million of operating cash flow, up 47% from the full year 2007.

This morning I will walk through our results for the quarter and for the year.

I will also update you on our restructuring activities, discuss our capital structure, and pension.

To start our financial review, please turn to slide four for an overview of order trends in the quarter.

Services orders showed double-digit declines as clients delayed decisions on the IP projects.

We saw order declines across most of our industries and geographies with the exception of our US federal government business which, as I mentioned earlier had a strong quarter in terms of both order and revenue growth.

The financial services industry which represents slightly less than 30% of our revenue was particularly weak for us in the quarter.

We closed 2008 with $6.1 billion in services backlog which was down 11% from the backlog, services backlog at December 31, 2007.

However on a constant currency basis, services backlog was down 1% year over year.

Slide five summarizes our results in the fourth quarter.

At the top line we reported revenue of $1.28 billion in the quarter, which was down 17% year over year.

Currency had a 7 percentage point negative impact on our revenue in the quarter.

Based on today's rates, we anticipate an 8% to 10 percentage point negative impact on revenue in the first quarter of 2009.

Our results for the quarter included a net cost reduction charge of $99 million, related to the previously announced workforce reduction, facility consolidation, and asset writedowns related to portfolio exits.

Our results in the year-ago quarter included $55 million of net cost reduction charges.

Our results also included $6.5 million of retirement-related income in the quarter compared to $11.6 million of retirement-related expense in the year-ago quarter.

We've shown here our results on a reported basis as well as on a non-GAAP basis excluding charges and the retirement-related expense.

On a non-GAAP basis, excluding these items, we had $45 million of operating profit in the quarter, down from $136 million in the fourth quarter of 2007.

At the tax line we had a $19.3 million tax benefit in the quarter, versus a tax provision of $31.8 million a year ago.

At the bottom line after taxes we reported a $58 million net loss in the quarter compared with $13.8 million of net income a year ago.

As we have done in previous quarters, at the end of the presentation slide, we have provided supplemental slides showing details of the cost reduction charges and retirement-related expense as well as the reconciliation of GAAP to non-GAAP results.

Moving on to the breakdown of our fourth-quarter revenue.

Slide six shows our fourth-quarter revenue by geography.

Our US revenue declined 9% in the quarter and represented 45% of our revenue in the quarter.

International revenue declined 22%, represented 55% of our revenue in the quarter.

On a constant currency basis, international revenue declined 11%.

Moving on to slide seven, outsourcing, our largest business offering declined 12% in the quarter while systems integration and consulting declined 4%.

We saw double-digit declines in infrastructure services as we continued to de-emphasize lower margin aspects of that business.

Enterprise servers declined 45% in the quarter.

This was against a tough comparison in the fourth quarter of 2007 when we had very strong ClearPath sales.

The year-ago quarter also included $18.8 million of royalty income from NUL that has since ended.

In addition, keep in mind that we just came off an unusually strong third quarter of 2008 when we closed a number of large ClearPath deals that were in our second-half plan.

Core maintenance, which is primarily associated with our ClearPath business continued its secular decline in the quarter and specialized technology declined 5%.

Slide eight summarizes our financial results for the full year of 2008.

At the top line we reported revenue of $5.23 billion in 2008, which was down 7% year over year.

Currency had a 1 percentage point overall impact on our full-year revenue.

Our full-year 2008 results include $3.8 million of retirement-related income compared with $82.4 million of retirement-related expense in 2007.

We took a total of $103 million of net charges in 2008 related to cost reduction actions compared to $105 million of net cost reduction charges in 2007.

Our full year 2007 results also included a pretax gain of $24.7 million on the sale of our media solutions business.

Including these items, we reported a full-year 2008 operating profit of $40.7 million, down from $85.9 million for the full year 2007.

On a non-GAAP basis, excluding these charges in the retirement related expense we had a full year 2008 operating profit of $145 million compared with $272.8 million for the full year 2007.

After taxes, we reported a net loss of $130.1 million for the full year of 2008.

Our full-year 2007 results included a $39.4 million tax benefit related to an income tax settlement.

Including this, we reported a net loss of $79.1 million for 2007.

Now moving on to our full-year 2008 revenue, by geography in slide nine, you can see our US revenue declined 8% in 2008 and represented 43% of our revenue.

International revenue declined 7% in 2008 and represented 57% of revenue for the year.

On a constant currency basis, international revenue declined 9% in 2008.

Slide 10 shows our 2008 revenue by business offering.

Outsourcing declined slightly for the year to just over $2 billion in revenue.

Systems integration and consulting also declined slightly to about $1.49 billion in revenue.

Infrastructure services declined 16%.

The core maintenance declined 13% for the full year in line with recent yearly trends.

Enterprise servers declined 21% in 2008 and within enterprise servers our ClearPath revenue declined double digits in 2008 against a strong year in 2007.

Specialized equipment revenue declined 28% for the full year.

Please note that the declines in both enterprise servers and specialized equipment reflect the loss of $57 million of royalty revenue in 2008 as a result of the ending of our licensing agreement with NUL.

As you may recall, this agreement ended after the first quarter of 2008.

Excluding this NUL revenue in both years, enterprise server revenue was down 17% in 2008 while specialized equipment was down 12%.

Turning to slide 11, within outsourcing, we have two types of offerings.

Information technology outsourcing or ITO and business process outsourcing or BPO.

ITO involves the management of a data center, server and end-user environment.

BPO involves the management of specific business processes such as check and mortgage processing.

The majority of our BPO business is in the financial services industry.

ITO represents about 65% of our overall outsourcing mix.

And as you can see, despite declining in the fourth quarter our ITO revenue was flat for the full year of 2008.

BPO represented about 35% of our outsourcing revenue mix.

BPO was down about 5% for the full year of 2008.

This was driven by a slowdown in the financial services market and reduced transaction volume.

Our BPO revenue was impacted by currency fluctuations in 2008, more than the Company as a whole given that two of our large BPO-processing facilities are based in the United Kingdom.

Slide 12 shows our 2008 revenue by industry.

Our largest industry as a Company is public sector, which includes our US federal government business as well as revenue from other government agencies worldwide.

As you can see, our public sector business overall was relatively stable in 2008.

Our 2008 revenue decline was centered in nonpublic sector industries.

We saw the most significant revenue decline in 2008 in financial services which declined 14%.

Financial services overall represented 29% of our revenue for the year.

Commercial organizations other than financial services firms represented a third of our 2008 revenue and declined 8% in the year.

I'd like to take a couple of minutes to provide an overview of our US federal business given that this business is such a significant portion of our public sector revenue.

Slide 13 shows the mix of our US federal government revenue.

Within our federal systems business, we have three groups -- civilian, Homeland Security, and Department of Defense.

The civilian segment represents our single-largest federal group at about 39% of our overall US federal government revenue.

Revenue from Homeland Security agencies represents about 34% of our overall US federal government revenue.

Revenue from the agencies within the US Department of Defense represents about 27% of our overall federal government revenue.

As you can see in the slide our overall US federal revenue was fairly stable in the $200 million range through the first three quarters of 2008.

Revenue grew 11% in the fourth quarter.

For the full year, our US federal revenue was down about 3% to $862 million, principally due to lower TSA revenue.

We ended 2008 with $494 million of US federal backlog, which was up 18% compared to the prior year end.

Moving to margins.

Slide 14 shows a comparison of our segment margins in 2008 versus 2007.

As in previous periods, we have shown our margins on a GAAP basis as well as on a non-GAAP basis excluding retirement-related expense.

The growth in operating margins in our services business increased in 2008 on a GAAP basis, but declined when excluding retirement-related expense.

The decline was impacted by the lower revenue volume.

In our technology segments, growth in operating margins in 2008 were impacted by lower sales of high-margin enterprise servers as well as the ending of the NUL royalty stream.

As Ed mentioned we are taking aggressive actions to reduce expenses, particularly controllable operating expenses as we work through this challenging business environment.

As you can see in slide 15, we made progress in 2008 in reducing operating expenses.

Excluding cost reduction charges and retirement-related expense, operating expenses came down sequentially every quarter through 2008 as a percentage of revenue.

For the fourth quarter, we reduced operating expenses to 18.6% of revenue.

We can expect to continue this progress in 2009 as we implement our cost reduction actions.

We are exploring a wide range of cost reduction options.

The initial actions that we've announced so far and are taking include reductions in third-party expenses, facility consolidation, and headcount reductions of approximately 1,300 positions worldwide.

We will also be foregoing salary raises in most of our global markets in 2009 and have suspended Company matching contributions to the US 401K program which had been costing us about $50 million annually.

Overall, we expect these initial actions to reduce our annualized cost base by more than $225 million.

Based on the timing of these actions, we expect about 90% of these savings to flow through our P&L in 2009.

Of the 1,300 position reductions that we have announced, about 550 actions were completed in the fourth quarter of 2008, with another approximately 625 reductions planned for the first quarter of 2009.

The remaining reductions should be mostly completed by the end of the first half.

So from a quarterly perspective we should see the benefit of our cost reduction actions increase as we proceed through the year.

From a cash perspective, we expect around 65 million to $68 million of cash restructuring requirements in 2009.

We continue to analyze additional cost reduction actions and plan to updates you as we move through the year.

Please turn to slide 16 for an overview of our cash flow performance in the fourth quarter.

We generated $138 million of cash from operations in the fourth quarter of 2008.

This was down from $247 million of operational cash flow in the fourth quarter of 2007 which was aided by strong sales of our ClearPath systems in that quarter.

Overall for 2008, we generated $255 million of cash flow from operations which was up 47% from 2007 levels.

CapEx for the fourth quarter was $80 million, which was up from a year-ago level related to the startup of two new clients in our US state Medicaid business.

For the full year of 2008, capital expenditures were $294 million, down from $309 million for 2007.

After capital expenditure we generated $58 million of free cash flow in the fourth quarter of 2008, and for the full year of 2008, we used $39 million of free cash, a significant improvement over free cash usage of $136 million in 2007.

Depreciation and amortization was $122 million in the quarter and $418 million for the full year of 2008.

We ended the year with $544 million of cash on hand.

Note that the year-ago cash balance of $830 million included the $210 million refinancing proceeds for debt that was extinguished in January, 2008.

Now I would like to provide an update on pensions.

The decline in the equity and bond markets in the second half of 2008 had a significant impact on our global pension plan assets and funding position at year-end 2008.

Due to changes we made in our US pension plan as well as improved investment returns, our funding positions improved significantly on our -- and our worldwide plans were in an overfunded position in 2006 and 2007.

However, as a result of the significant decline in our worldwide pension assets in 2008, our worldwide pension plans ended the year in an underfunded position.

From a balance sheet perspective, there is an approximately $1.6 billion charge to shareholders' equity at year-end 2008 due to the flip from an overfunded to an underfunded position.

Slide 17 shows our estimate for 2009 for retirement-related expense and cash contribution requirements.

Our retirement-related expense is made up of two elements.

Pension expense or income and US 401K expense.

Due to the factors I just mentioned, worldwide pension expense has come down significantly in recent years and moved to pension income in 2008.

At the same time, US 401Kexpense increased in 2007 and 2008 due to increased Company matching contributions to the US plan.

Looking ahead at 2009, based on financial year-end calculations and discount rates, we now expect about $12 million in pension income in 2009.

We will have no expense related to our 401K plan in 2009 given our suspension of matching contributions.

In terms of cash requirement, we have not made any cash contributions to our US-qualified plan in recent years.

And will not have to make cash contributions to this plan in 2009.

For our worldwide pension plans, we contributed about $78 million of cash in 2008 related to these plans and expect to make about $90 million of cash contributions in 2009.

Turning to slide 18, as we look ahead to 2010, given our current underfunded position, we will most likely need to make a cash contribution to our US-defined benefit pension plan in 2010.

Under the current Pension Protection Act rules, we believe the maximum cash contribution we would have to make in 2010 would be $90 million, which would start in April 1, as quarterly payments of $30 million.

This amount could be less than this if the market has a significant rally in 2009 or if Congress makes legislative changes to the PPA Act as has been discussed in the press.

Moving on to slide 19.

As I mentioned at the outset of my remarks, given the environment and with our debt maturing coming up in early 2010, we are placing a strong focus on cash flow throughout the organization in 2009.

In addition to the usual drivers such as accounts receivable and inventory and working capital management, we are managing all available levers to drive cash and improve our cash structure and balance sheet.

First, we intend to tightly manage capital expenditures as we work through the tough economic environment and business downturn.

Looking ahead for the full year 2009, we anticipate significantly reduced capital expenditures of around 200 million to $250 million.

Depreciation and amortization in the 360 million to $380 million range.

As many of you know, our revolving credit agreement expires in May, 2009.

We did not borrow under this facility in 2008.

It has provided us with backup liquidity.

We have used the letter of credit provision of the revolving credit agreement and have approximately $65 million of letters of credit outstanding as of December 31, 2008.

We expect to cash collateralize those letters of credit on or about March 1, 2009, in accordance with the agreement.

In the event the credit environment remains tight and we are unable to enter into a new revolving credit agreement when the current facility expires in May, 2009, we plan to use the current cash on hand to provide near-term liquidity needs.

In addition, we are continuing to evaluate different options to deal with the 2010 debt including refinancing alternatives, asset sales, and secured financing.

In closing, I want to emphasize that we are focusing on reducing our cost base, reducing expenditures, driving profitability, and managing every aspect of our business to generate cash.

Thank you for your time.

And now I'd like to turn the call back to Ed.

Thanks, Janet.

As we work to improve our financial picture, we must begin with focus.

The Company has great strengths, excellent people, a rich portfolio of solutions, a strong client base.

And our resources and investments have been too diffuse.

We've been trying to do too many things in too many areas where we can't expect to succeed.

We haven't been doing enough of the things that we should be doing in those areas where we can reasonably expect to be successful.

To enhance our margins and make the Company consistently profitable, we need to better concentrate our resources and investments.

We need to focus on what we do best inside the organization -- and size the organization appropriately.

Then as we get ourselves into profitable, fighting shape, we can look to expand from that core base.

Turning to slide 20, the turnaround program we're driving at Unisys is built on the principles of focus, service quality, and cost efficiency.

Unisys will offer a portfolio of IT services, software, and technology that solves critical problems for clients.

We will focus this portfolio in serving fewer, high-potential markets where we can be consistently profitable and can grow.

Within these focused market areas, we will provide high-quality services and solutions that are perceived by our clients as being first class and clearly differentiated from our competitors.

And to ensure we're competitive, we'll deliver those solutions in a cost-efficient manner with a highly skilled and utilized labor force and a streamlined overhead structure.

As I said, it all begins with focus.

As we have analyzed the core strengths of Unisys and matched up those strengths against growing areas of need in the market, we've identified four key areas of strength that we'll be building on.

You can see those four areas outlined in slide 21.

The first area of strength I'd like to call out is security.

While we've talked about opportunities in security with you before, I'd like to provide a few more specifics today.

We've spent a significant amount of time and effort in recent months to better understand the broad security market.

The market we're looking at covers both traditional IT security as well as opportunities in what many in the industry call physical security.

We referred to the combination of the two as converged security.

And our research indicates that it's a diverse market approaching $90 billion, growing at over 15% annually.

Within this broad market, we're focusing on a few very attractive segments in which we have strong capability and credibility.

These segments include identification and credentialing, biometrics, location and perimeter surveillance and security, and risk analysis and threat identification.

We think the market size of our target segments is about $25 billion in 2008 and growing at 19%.

In each of these areas we've been awarded key projects that have allowed us to demonstrate our security capabilities and build our expertise.

These include leading edge projects with the Australian Department of Immigration and Citizenship, the port of Halifax in Canada, the Western Hemisphere Travel Initiative, the FBI CODIS program, Telefonica Spain, Dannon, Starbucks, and a number of banks around the world.

Unisys has successfully made a name for itself as both a highly capable security systems integrator and effective operator of these systems and a provider of managed security services.

We want to strengthen our security portfolio in these spaces and to aggressively pursue new opportunities.

The second area of strength is in providing services and solutions to help clients transform and manage their data centers.

Especially given the current economic environment, clients have a clear need to reduce costs and increase efficiency of these computing environments.

Unisys has great capabilities in the data center.

It's our heritage and a key strength.

We know this space, and we have the products and services to help clients enhanced the utilization of their server environments.

We intend to leverage and build on our ClearPath technology expertise, and what is still a large base of satisfied ClearPath clients to capture future opportunities to streamline and optimize their data centers as well as those of nonClearPath clients.

Building on these strengths, we'll help clients transform and consolidate their data centers and their distributed server environments through emerging real-time infrastructure technologies such as virtualization and process automation.

Last year Unisys rolled out a new portfolio of services and middleware solutions in this space.

We've won a number of new clients and are planning to roll out more solutions in 2009.

While we provide these capabilities to clients in support of their own data centers we're also incorporating our capabilities in the area of consolidation, virtualization, automation and security into our outsourcing services in order to be the Company our clients choose to run those streamlined environments in long-term outsourcing engagements.

We believe the data center transformation market itself is growing at double digits.

And according to Gartner the global data center outsourcing market is $100 billion market and is growing in excess of 5%.

At Unisys we already have over $1 billion in business managing data centers and enterprise computing environments for clients around the globe.

To sharpen our focus on this data center opportunity, in 2009 we are planning a refresh of our date center transformation and outsourcing portfolio that will take advantage of emerging, new technologies.

A third area of strength and focus for us is for services to help our customers manage their end-user, client and constituent environments.

Utilizing our integrated, on-site, remote, self-service and process support capabilities.

While the opportunity for these services is broader than the term desktop outsourcing would imply, according to Gartner, just the desktop outsourcing market itself is a $36 billion market growing at about 6%.

We've been successfully growing our end-user outsourcing service business in recent years.

Unisys today is recognized by Gartner and others as a leader in this space, and we've announced significant wins in both the public sector and commercial arenas.

We've developed a first-class global support infrastructure, complete with process management, logistics, and field services in regions where we operate.

Our opportunity here is to improve the quality and consistency of our services and drive greater cost efficiency in how we deliver those services.

We hope to translate this into what customers perceive to be the best price performance value in the industry.

The fourth area of strength and focus for us is in the market for applications, modernization and outsourcing services.

In our ClearPath install base and in many of our outsourcing and systems integration engagements, our customers continued to rely on legacy applications that are built with previous generation programming languages.

These applications have become increasingly difficult to modify and upgrade to meet new business requirements and to take advantage of some of the newer software innovations such as service-oriented architecture and web services.

Modernizing these legacy applications allows clients to continue to leverage their significant investment in these applications without requiring expensive and risky wholesale replacement.

We believe that the value proposition to clients is compelling.

This, too, is an area where Unisys has a great deal of experience.

We've been helping our clients manage and upgrade their applications for years.

In recent years, we've grown our applications, modernization and outsourcing services into a sizable business for Unisys.

And according to Gartner, the global enterprise applications outsourcing market is a $73 billion market growing at between 8% and 9%.

In addition to its growth characteristics, this is a nice margin business.

And we believe that with the right focus we can further increase the growth of our business by aggressively pursuing applications modernization and outsourcing opportunities that offer our clients an attractive return on their investment.

So to summarize, we intend to build on our strengths in four key areas.

Security, data center transformation and outsourcing, end-user outsourcing and support services, and applications, modernization and outsourcing.

These are attractive, growing market areas where we see the greatest potential for Unisys in terms of margin expansion.

Turning to slide 22, within these targeted market areas, we're working to clarify our value propositions and differentiate Unisys versus our competition.

We will do that by leveraging services and technology expertise from across the organization.

In each of these markets, Unisys is competitive now, but we want to be more than that.

We want to be best in class in terms of the services and solutions we offer.

In addition to describing what we do we need to sharpen who we provide our services to.

Given the competition, the highly fragmented nature of the IT services industry, and our own strengths, you'll see us be more focused in terms of the type of organizations we serve and target.

Building on our strength in serving government institutions worldwide as well as our ability to deliver services around the world to global 2000-sized commercial organizations.

The global 2000 represent a targeting of enterprises for new businesses that includes slightly smaller businesses, yet ones that typically have global requirements.

And on the public sector side which represents close to 40% of our business, we will continue to serve government agencies around the world.

And those countries where we have a significant presence.

The final dimension of focus is where do we compete.

To that end you'll see us in the near term reducing our pursuit of local business in approximately 10 countries.

Although we will continue to provide the necessary service delivery support in those countries to support multinational deals.

Moving to slide 23, as noted earlier, in addition to building on our strengths, we must as a Company become more efficient in our delivery of services.

As I mentioned earlier, I believe we need to enhance our service gross margins by 4 to 5 points or about 200 million to $250 million of gross margin.

Opportunities to achieve this include an improved labor model both on shore and off shore, a shift to greater use of automation and remote support in our outsourcing services, growth of our higher margin application services business, and improvement in how we execute our projects in order to minimize leakage of margin from whether we bid deals to when we deliver against them.

And on expenses, our goal, as I mentioned, is to reduce SG&A expense by $250 million, by operating more efficiently with a leaner management and administrative structure.

While it's noted we've already taken significant action against this goal, we have much more to do.

So in total we need to improve our operating margins by about 450 million to $500 million compared to 2008, we're currently taking specific action on $225 million of cost savings and developing a detailed action to do more.

We expect a combination of these factors -- a tighter strategic focus on attractive market areas, improved value proposition, enhanced gross margins through improved labor model and other improvements, and reductions in SG&A to enhance our margins, profitability, and cash flow.

Moving to slide 24.

While we're moving as quickly as possible on this refocusing process, it won't happen overnight.

And we're doing the work in the midst of a very challenging economic environment.

As we look ahead, we know 2009 will be a difficult year.

We'll be vigilant on costs, and we'll continue to be aggressive in looking for ways to simplify the business and reduce our cost structure.

We'll be placing a great deal of focus on strengthening the balance sheet and generating cash.

Our goal is to get this Company profitable and producing free cash flow in 2009.

While these are unprecedented times in the market, Unisys is a resilient Company with great competencies and assets to work with.

We're committed to turning around our financial picture and making this Company into a leader in our chosen market.

Thanks again for joining us this morning.

I look forward to sharing with you our progress as we go through the year and now Jan and I would be happy to take your questions.

Thank you.

(Operator Instructions) We'll take our first question from Jason Kupferberg with UBS.

Good morning.

I have a question on cash flow and the expectations for 2009.

It sounded there at the end like you do expect positive free cash flow in 2009.

But I wanted to confirm if that is actually the case.

And can you quantify that at all?

I mean, are we talking about slightly positive or any numbers or ranges that you guys are thinking about.

Both including and excluding the restructuring and severance payments that you're expecting for the year?

Jason, let me just go through some of the components again on the cash flow for 2009.

As Ed said, it is our goal to get to free cash flow positive in 2009.

Given this current environment, it is really difficult to exactly predict where that range is going to be.

As I mentioned in my comments, we expect about 65 million to $68 million for restructuring.

And we are significantly reducing our capital expenditures next year.

I gave the range in the 200 million to $250 million range.

So we -- it is our goal to get to free cash flow positive.

It is what we are building and planning and driving the operations to.

I think in this environment, it's a little bit hard to call exactly how much over the line do we get with that free cash flow number.

How much cash do you need to run a business on an annual basis?

What I will say is that the ending cash balance of $544 million is significantly more than what we believe we need to run the business.

The number is substantially lower than that.

We -- depending upon the geographic mix of the operations and the seasonality within any given quarter, that minimum cash number can vary.

But we remain comfortable with the $544 million of cash providing us with the adequate liquidity to get through the environment we see in 2009.

Can you tell us geographically, Janet, where the cash is held?

The geographic concentration of the cash roughly approximates our operations with -- a slightly disproportionate amount in the US because against our requirements for cash, all of our debt is in the US and, therefore, the interest payments on the debt are made in -- in the US.

And as well, corporate center costs are more skewed towards the US than they are on a global basis.

But the cash generally approximates the revenue concentration of the Company.

We do manage our cash on a global basis.

We don't -- we don't try to set up each country as its own standalone.

We do use global cash planning and global cash sweeps to make sure that we have the most efficient use of the cash around the world.

Okay.

And is the Board looking at any strategic alternatives currently?

I didn't really hear mention of that this morning.

Or has the decision been made that you're going at it as a -- the organization as it's currently constituted?

Jason, our focus is on improving the business and making this a consistently and predictably profitable enterprise.

And if we were to do something else, we'd certainly announce that.

Okay.

And timing on the TSA rebid, any update there?

Jason, I'm sorry, that cut off.

Were you asking on the TSA rebid?

Yes.

The timing of the decision there.

I think you guys got a bridge contract, but I'm not certain when that ends.

We submitted the response to the RFP.

I think we're expecting a decision sometime in the second quarter.

And the bridge contract runs through the end of June.

Okay.

And just last question -- if you can't renew the credit facility which I guess you did highlight as a potential outcome here, what's your perception of what the impact on your customer base is going to be as you're out there in the market trying to win new deals, particularly multi-year outsourcing contracts?

Jason, I think we've been, as you mentioned, consistent in our message for the -- for at least the past couple of months and in the last quarter earnings release that given the current quarter, it is -- current credit environment, it is next to impossible to think that we would be able to get the same terms and conditions on the revolver that we had entered into about three years ago.

We continue to discuss with our customers and clients the amount of cash that we have on hand.

And that -- that that revolver was used as a backup source of liquidity and was not used to run the business.

So we -- this is a topic of discussion that we've had since the fourth quarter earnings -- and the third-quarter earnings release in some of our customer calls with our significant customers.

And we've been very consistent with the message that that is a backup source of liquidity.

That we have -- are running with more cash on the balance sheet than the minimum requirement.

And we expect to work through this tough credit environment with continuing to make sure that we are maximizing the cash flow from the operations.

And still -- do point out that we have continued during this time period to make investments in the area of the business.

For example, in the ClearPath operating system or in certain outsourcing assets.

And we -- I participated in a number of phone calls with our customers, and it is a question we have to answer.

But it is a question we feel very good about our position on this.

Would like to the credit markets come back, but the reality is it's not there right now.

Okay.

Thanks.

Our next question will come from [Joseph Vafi] with Jefferies and Company.

Thanks for taking my question.

Question revolves a little bit on the SG&A side.

We're looking at a new round of SG&A efficiencies now.

I was wondering if we could reconcile the new strategy on SG&A versus what we've seen in the past which has been other continued cost rationalization efforts on that level.

What -- what exactly is new here in terms of looking at the cost structure and, what are the potential positives and negatives to the Company and kind of I guess a more aggressive efficiency approach here?

Yes, thank you, Joseph.

Fundamentally I think it gets back to unwinding the matrix management system that we had in place here.

Again, I think that may have been an approach that was relevant and necessary for a much bigger Company.

But for a Company our size, it was just more overhead than was necessary or desirable.

So we had a management system that had multiple dimensions.

We'd manage by business unit, we'd manage by geography.

We'd manage by industry vertical.

In some cases we'd manage by corporate staff.

And what we elected to do was make a clear statement that we're going to manage the business through our business units.

And everyone else is really there in a support role.

And when they moved back from being a -- viewing themselves as a line management role to being really a support role to the business units, there's an awful lot of staff and management and associated processes and workload that just sort of goes away.

So I think that's the fundamental difference.

And is it -- I guess then the follow-up question is on service provision and looking at that matrix structure before.

Do you see -- what challenges do you see moving away from that structure?

I think, you're on a great point.

The intent here again is to hit the overhead hard.

And reduce it.

Not to impact service delivery to our clients.

Which really falls into the -- more the direct cost as opposed to overhead.

So this is really, reducing noncustomer-facing -- noncustomer-effecting overhead expenses.

Okay.

I'm a big believer that the differentiation in the service organization is quality of service as delivered and perceived by the customer.

That's a key metric for us and a key management focus.

Frankly, you find in a lot of cases when you eliminate overhead and -- and internal looking at each other, you can spend more time with customers and actually improve your service delivery.

Okay.

That's helpful.

Then maybe just one other follow-up question -- I do like the idea of really focusing on these four areas and really kind of trying to start growing around these service offerings and in the security area, it seems like security's so kind of intertwined and larger deals.

Is it really -- is it an area that's stand alone enough for a Company of your size to be able to create practice areas and show growth in security rather than security, say, being bundled into larger outsourcing initiatives?

Can it be broken out as a stand alone?

Well, Joseph, the intent here is not necessarily to break the t out as a stand alone.

But to look for ways to take the expertise we have in different elements of security across the entire Company, and bring that together in a way that creates solutions for our clients.

So in some cases, that could be a managed security offering that looks a lot like an outsourcing engagement.

But in other cases, it could be much more of a systems integration around biometrics technology.

So it's a lot of different things.

I agree with you, it can be sort of an amorphous term that means lots of different things to lots of different people but when you bring it all together and leverage it across our entire Company, we think we have a lot of capability there to win some of these large engagements that I mentioned in my comments.

Okay.

Then one final question, if you kind of look at these four areas of focus and if we move down the line here and these do kind of become some of the drivers for growth over the next couple years, would you expect your services portfolio to become less CapEx intensive than it is now if these are the focus areas?

Yes.

I don't really know the answer to that, Joseph.

Janet, do you have a view on that?

From a CapEx standpoint overall, I think the real challenge is going to be how does the outsourcing business evolve overall?

And so I don't -- I can clearly see us not increasing the capital intensity of the business.

Right now the BPO business is amongst our biggest CapEx requirement within the outsourcing business.

And that's not one of the key focus areas as Ed's gone through so I don't expect it to increase, and I do think there isn't an opportunity for that to decrease over time.

We'll just have to see how the markets evolve.

But, as -- following for a while, you know that we do focus on looking at new deals.

We do focus on the cash flow structure of the deal.

So we're not going into this new focus area with the intention of increasing the capital expenditure in the deal structure.

That's helpful.

Thank you very much.

Thanks, Joe.

At this time we'll take our last question from [Sundar Varadarajan] with Deutsche Bank.

Some clarification questions.

Of the $99 million of charges you took this quarter, could you quantify what portion of that was amortization and asset writedowns as opposed to kind of charges for cost reduction expenses that could be paid out in cash?

I saw your D&A was up by about $30 million -- I mean, $25 million or so this quarter.

So was part of that in the $99 million charge?

Yes.

Exactly.

The -- in the charge, there were the three components and approximately $30 million of that charge related to the asset writedowns that went through the amortization line.

Okay.

Great.

As far as your cash performance is concerned, from a seasonal standpoint, you guys always, -- your fourth quarter is the strongest.

And then you see a significant decline in the first quarter.

Do you expect that to kind of pretty much play through in '09 as well, where you have cash outflows in the first half, and then you start building back in the second half?

The cash flow is driven by the seasonality in our technology business.

And we would absolutely expect to see that seasonality as we go into 2009.

So the -- as you saw in our performance in the third quarter, where we were able to improve the cash performance in the third quarter better than we had done historically, particularly in the area of working capital management, we continued to make that progress into the fourth quarter.

And we would intend to do that as we go through each of the quarters of 2009, but you're right.

That the first portion, particularly the first quarter does have a negative pattern of cash usage in it.

Predominantly driven by the technology business, seasonality.

And I know the pension fund, but mention that you have an underfunded status, and you talked about a $1.6 billion I think charge to equities through comprehensive income.

But could you give us a sense for what the underfunded balance is at the end of '08?

Is it equal to that $1.6 billion?

Is it greater or smaller?

Sure.

The number -- the number that I mentioned was $1.6 billion.

And as we go forward in looking at the financial statements, clearly when we file our 10-K, we will give the full expanded information with regard to the plans.

But the US plans are roughly underfunded by about $1.15 billion of that $1.6 billion and the remaining amount in the international plan.

Great.

Thanks.

And finally, the $225 million or so of savings, is it fair to say that 45 million or $50 million of that savings is basically the reduction in the 401K match and the other $175 million would represent real cash savings?

Or is that $225 million excluding the 47 million or $48 million savings of the 401K match?

The $225 million in savings does include the 401K match, so you're correct on that.

I do want to point out that the $225 million of savings obviously does not have anything in there for the effect of freezing salaries as we go into 2009.

So the $225 million is made up of the headcount, the facilities reductions, benefits going forward, the 401K make up the $225 million.

As I said in my comments, we expect the cash requirements for that to be about 65 million to $68 million in 2009.

Then we did mention the additional action that we announced in December that we were freezing salaries as we go forward in those geographic markets where we can.

And the $225 million, how we should look compared to -- is that the fourth-quarter '08 run rate or full 2008 run rate?

What's the base over which we should kind of start factoring in these savings?

Well, we did announce the $225 million of cost reductions in November.

And we started taking action necessary the fourth quarter with regard to those actions, as I mentioned in my comments.

550 of the hedge had gone out in the fourth quarter.

So the cost base that we were looking at was predominantly 2008 except for the small adjustment for the headcount that we were able to take out in the fourth quarter.

And finally, is there any incremental savings that are still yet to be realized from your previous transformation plans, or does the 225 pretty much encompass everything that's going to be realized on an incremental basis?

You're right that there's a small amount that comes forward.

But it's very small and it relates predominantly to the facilities rollout over time.

All right.

Then one final kind of follow-up on the cash which is overseas.

You did say you have a global kind of cash management mechanism.

But are you able to free the cash without any tax leakage or is there any restrictions?

Because typically we've seen a few companies even though they have large cash balances because of tax consequences they really don't have access to all of that cash.

How would you characterize your access to all of that entire $500 million-plus on that balance sheet?

As we have disclosed previously and we will -- and you will see our updated disclosure when we file our K with the financial statements, we do not view the tax situation as a constraint in us moving cash.

We do have certain countries where we have earnings permanently invested.

That's equivalent with the cash balance that we have in those countries.

But it is not a major constraint in us moving cash to where we need it to be.

All right.

Thank you.

Thank you.

At this time I'll turn the conference back over for any additional or closing remarks.

Well, let me thank everyone for joining us on the call today.

And I appreciate your time.

And your questions.

And look forward to talking with you again soon.

Thank you.

And that does conclude today's teleconference.

Thank you all for joining, and have a wonderful day.