Unisys Corp (UIS) 2009 Q3 法說會逐字稿

Good day everyone, and welcome to the Unisys third quarter 2009 results conference call.

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

Niels Christensen, Vice President, Investor Relations.

Please go ahead.

Thank you.

Good morning everyone, and thank you for joining us.

About an hour ago Unisys released its third quarter 2009 financial results.

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

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

First, today's conference call and the Q&A session are being Webcast via the Unisys investor website.

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

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

Finally, I'd like to remind you that all forward-looking statements made during 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 these SEC reports are available from the SEC and from the Unisys investor website.

Now here's Ed.

Thanks, Niels.

Hello everyone.

And thank you for joining us today to discuss our third quarter 2009 financial results.

A year ago we outlined to you a four part turnaround program for Unisys.

The four elements of that plan are to concentrate our resources on fewer markets and offerings, create clear differentiated value propositions, ensure we have a highly utilized cost competitive services labor pool and simplify the organization to significantly reduce expenses.

The objective is to create a consistently and predictably profitable Company that generates free cash flow, and one that delivers exceptional levels of customer service.

While we recognize we have much more work to do, we've made good progress as shown in our third quarter results.

Please turn to slide one of the presentation.

Our profit margins increased significantly in the quarter, as we continue to make progress in streamlining our operations and reducing our cost base.

Our technology business had a good ClearPath quarter, which contributed to a strong profit performance.

Overall, we more than tripled our operating profit over the prior year and reported an operating margin of 10.2% for the quarter.

For the second consecutive quarter, the Company was solidly profitable.

We reported net income of $61 million, which was a $96 million improvement over a $35 million loss a year ago.

Equally important, we generated free cash flow, $46 million in the quarter.

Through nine months, we are now free cash flow positive, and we've improved our free cash flow by more than $130 million over the first nine months of 2008.

At the top line, our revenue declined 12% in the quarter, 7% in constant currency, as we continue to work through a difficult economic environment.

We saw positive signs in our orders.

Our service orders grew substantially in the third quarter, driven by large outsourcing contract renewals, as well as signings with new clients such as Henckel, FEMA, and the City of Santa Clara in California.

We also made progress in strengthening our balance sheet, another important element of our turnaround program.

During the quarter, we completed our debt exchange, which reduced our overall debt and reduced our March 2010 debt maturities to $65 million from $300 million.

Overall, the improvement we're seeing in our financial results is encouraging.

And we've made this progress while working through a difficult economic climate, which is a testament to the hard work, dedication and talent of our employees around the world.

There's much more to do and we're not letting up.

To keep the progress going, we'll continue to execute against our four business priorities I mentioned earlier, which you can see on slide two.

The first two priorities are about laying a foundation for profitable growth, by tightly focusing our resources and by providing differentiated value added solutions to our clients in our four focus areas, which are data center transformation and outsourcing, end user outsourcing and support services, application modernization and security.

I hope you've been seeing some of the innovative services and solutions we've been announcing this year.

In the areas of data center transformation and end user outsourcing, for example we've essentially refreshed our entire portfolio and we've announced innovative new offerings for cloud computing for security, for end user productivity, for converged remote infrastructure management and for our ClearPath family of mainframes.

So a lot of good work is happening to make Unisys a more focused and differentiated Company in the marketplace.

It will take some time for these initiatives to yield results in terms of profitable revenue growth but we're encouraged by the client interest we're seeing in our new portfolio and the relevance of our offerings, challenges being faced in the market.

Most important, we must continue to focus on enhancing customer service and satisfaction which are the ultimate drivers of our profitability and success in the marketplace.

Our second two priorities are about driving cost efficiency and margin improvement, by enhancing our labor model and reducing overhead expenses.

We've made a great deal of progress as you can see in our third quarter profit margins.

Presently, we still have lot of ground to cover to achieve our gross margin and expense reduction goals.

Slide three shows those goals.

In our services business, our goal is to reduce our cost of service delivery by $250 million.

You can see the benefit of our actions to date in our service gross margins which were up over 200 basis points year-over-year in the quarter.

We have at least another $60 million of service delivery cost to get out of the business and that's really just to get us to competitive levels.

To achieve this, it's critical that we expand our use of lower cost service delivery resources, both on shore and off shore, and increase service delivery automation.

As I mentioned in the past, we're behind our competition in the use of lower cost labor.

While part of this is because of the amount of public sector work that we do, we have the capabilities and the opportunities to expand our use of lower cost resources.

Having recently visited our offshore facilities in India, I continue to be impressed with their people and capabilities at our sites there as well as at our other global sourcing centers in China and Hungary and at our lower cost delivery subsidiaries in a number of countries around the world including the United States.

These are first class operations with strong capabilities.

We have initiatives under way across the business to expand the use of these global sourcing capabilities in our service delivery and we'll continue to make this a priority in the months ahead.

In terms of overhead expenses, our goal is to reduce our annualized SG&A expenses by $250 million.

We've made significant progress on this SG&A reduction goal.

To date, we've taken actions to reduce our annualized SG&A expense by about $205 million.

We will continue to be vigilant in exploring opportunities to further streamline and simplify the business and reduce expenses.

Moving to slide four and to wrap up my comments this morning, overall this was a quarter of tangible progress for Unisys in our turnaround program.

We've seen results at the bottom line.

We've reported two consecutive quarters of solid profitability and our margins and cash flow have improved significantly.

We've made a great start but we have a way to go to achieve our goal of consistent and predictable profitability and we're doing this work in what continues to be an uncertain economic environment.

So it's imperative that we remain focused on executing against the four priorities for the business I've outlined in this and in previous calls and that's what we're committed to doing.

Thank you again for joining us this morning.

Now here's Janet to provide some more detail and color.

Thanks, Ed and hello everyone.

This morning I will take you through our financial results for the quarter.

In addition, I will provide a brief update on our pension plans and summarize the results of our debt exchange.

Starting with orders, please turn to slide five for an overview of orders in the quarter.

Our services orders grew substantially over the year ago quarter and also increased sequentially for the second consecutive quarter.

The year-over-year growth including outsourcing contract renewals including a large contract extension at our UK IPSL joint venture, as well as new client outsourcing wins and order increases for federal systems integration projects.

Geographically, year-over-year order increases in the US, Europe and Latin America were partially offset by order declines in Asia-Pacific.

The US order gains were driven by growth in US federal orders.

We closed the third quarter with $6.4 billion in services backlog, which was up about 8% from the services backlog at June 30th.

The increase in services backlog was driven by the outsourcing contract renewals and on a constant currency basis, services backlog was up about 6% from June 30th.

Slide six summarizes our financial results in the quarter.

At the top line, we reported revenue of $1.16 billion, a decline of 12% year-over-year.

Foreign currency had a 5 point negative impact on revenue this quarter.

On a constant currency basis, revenue was down 7%.

Based on today's rates, we anticipate currency to have a 4 to 5 percentage point positive impact on revenue in the fourth quarter of 2009.

Total gross profit dollars increased slightly on lower revenue volume.

Our overall gross profit margin improved by 420 basis points from a year ago, reflecting more cost efficient services delivery, as well as a stronger mix of high end enterprise server sales in our technology business.

Operating expenses declined 26% year-over-year, driven by significant reductions in SG&A expenses and a 4 percentage point benefit from currency.

As was the case in the second quarter, our operating profit more than tripled year-over-year to $118 million.

We reported an operating profit margin of 10.2%, which was up 730 basis points from the year-ago period.

At the tax line, we had a $26.2 million tax provision in the quarter, compared with a tax provision of $45.1 million in the year-ago quarter.

As a reminder, our tax provision continues to be highly variable from quarter-to-quarter, depending on the geographic distribution of our income.

At the bottom line, after taxes, we reported $61.1 million in net income for the third quarter of 2009.

This compares with a net loss of $34.7 million a year ago.

We completed a 1 for 10 reverse stock split and our stock began trading on a post split basis effective this Monday.

As we mentioned in our earnings release, our financial statements reflects the impact of the reverse split on a retroactive basis.

Slide seven shows our third quarter revenue by geography.

Our US revenue declined 3% in the quarter, despite mid single digit growth in our US Federal Government revenue.

Overall, the US represented 47% of our revenue in the quarter.

International revenue declined 18% and represented 53% of our revenue in the quarter.

On a constant currency basis, international revenue declined 11%, reflecting declines in all regions.

Slide eight provides more detail on our third quarter revenue by business offering.

We saw year-over-year revenue declines in all of our services and technology offerings.

On a constant currency basis, enterprise server revenue was up slightly, but declines were in the low to mid single digits in outsourcing and systems integration.

Moving to margins, please turn to slide nine.

Despite lower revenue, we were able to significantly improve margins in both our services and technology businesses, as a result of cost reduction actions and a stronger mix within our technology business.

Services gross margins improved by 210 basis points year-over-year to 19.7%.

Services operating margins increased 460 basis points to 7.7%.

As expected and as we mentioned in our second quarter earnings call, our services gross margins were down about 130 basis points compared to the second quarter of '09, and this reflects the anticipated seasonality.

However, due to significant reductions in expenses, we were able to largely offset the seasonal impact on our services gross margins through lower operating costs.

In our technology business, our gross margins improved by 770 basis points to 55.2% and this reflected a stronger mix of high end enterprise servers.

As a result of the improvement in gross margin, and reduction in operating expenses, we reported a technology operating margin of 21.2%, up from 11% a year ago.

Moving to slide 10, a key contributor to our operating margin progress this quarter and year-to-date has been the work we've done to reduce SG&A expenses by streamlining and simplifying our operations.

As you can see in this slide, we steadily reduced SG&A expenses both on an absolute dollar basis and as a percentage of revenue.

In the third quarter, we reduced SG&A expenses to 14% of revenue.

Overall, year-to-date in 2009 we have reduced our annualized SG&A expenses by about $205 million on a constant currency basis, against our stated target of $250 million of annualized expense savings.

So while we've made good progress, we are not done and we continue to actively explore expense reduction opportunities across the Company.

Now, please turn to slide 11 for an overview of cash flow in the quarter.

Starting with cash from operations, we generated $94 million of cash from operations in the quarter, which was down $20 million from a year ago.

We had a stronger EBITDA in the third quarter of 2009, compared to the third quarter of 2008.

However, cash from operations is down year-over-year because the third quarter benefited from a significant sequential improvement in days sales outstanding and we have continued to maintain improved levels of DSO through the third quarter of 2009.

Capital expenditures declined to $48 million from $78 million a year ago as we continue to closely manage CapEx.

After capital expenditures, we generated $46 million of free cash in the quarter, compared with $36 million a year ago.

Year-to-date operating cash flow has increased to $182 million, compared to $116 million in the first nine months of 2008.

Capital expenditures over the same period have declined to $149 million, compared to $214 million a year ago.

After CapEx for the first nine months of 2009, we have generated $33 million of free cash flow compared to free cash flow usage of $98 million for the first nine months of 2008.

It is about a $130 million improvement in free cash flow year-over-year.

Depreciation and amortization was $82 million in the quarter, down from $98 million last year, reflecting a lower CapEx base and currency translation.

Year-to-date, depreciation is $256 million, down $40 million from the same period of 2008.

For the full year of 2009, we look for capital expenditures in the 200 to $225 million range, compared with $295 million in 2008.

We look for depreciation and amortization in the 325 to $350 million range in 2009, compared with D&A of $418 million in 2008.

We ended the quarter with $474 million of cash on hand.

And in the quarter, we used $55 million of cash for payments to note holders, interest and fees as part of the debt exchange that we completed this quarter.

Turning to the subject of pensions, I'd like to briefly update you on our anticipated cash funding.

We continue to expect cash contributions of about 100 to $105 million to our worldwide defined benefit plans in 2009.

No cash contributions are required in 2009 for our frozen US qualified defined benefit pension plans, and we do not currently anticipate any will be required in 2010.

Funding requirements for this plan are governed by the Pension Protect Act of 2006, or PPA.

This sets the minimum funding requirements.

There are currently modifications to this Act that are currently under legislative review.

Based on market performance to date in 2009, pension plan asset values have increased.

However, declines in interest rate market result in declines in the discount rate used to discount future obligations and as a result, we would expect to increase the present value for pension plan liabilities.

However, under PPA, any contributions to fund any deficit in this US qualified defined benefit plan at December 31st, 2009, would be deferred beyond 2010.

At the end of the year, we will go through our normal review of worldwide pension plan assets and liabilities including asset performance, assumptions for discount rates used in calculating plan liabilities, and I will provide more details about the 2010 expected pension income or expense, as well as funding expectations on our year-end results call.

Moving to slide 12, I'd like to update you on the final results of the debt exchange that we completed during the third quarter and the impact this transaction has had on our balance sheet.

Through the private debt exchange offered, we were able to successfully exchange much of our previously outstanding unsecured senior debt with new secured notes as well as cash and common stock.

The exchange has helped us strengthen our balance sheet and address pending debt maturities in March of 2010 and 2012.

Overall, as you'll see in our September 30th balance sheet, we reduced long-term debt to $911 million.

In the exchange, we used approximately 5.2 million shares of the Company's common stock and that's stated on the post split basis.

Schedule 13 compares our debt maturity schedule before and after the debt exchange.

As you can see, prior to the exchange, we had $300 million of debt maturing in March 2010, and another $400 million of senior notes maturing in 2012.

The debt exchange reduced our 2010 debt maturities to $65 million, and our 2012 debt maturities to $68 million.

We are planning to address the remaining $65 million of March 2010 senior notes from cash generated through improved operations and proceeds from asset sales.

In summary, while we recognize we have more work to do, we are pleased by the cost discipline we continue to show in the quarter, and reducing expenses, increasing our profitability, and generating free cash flow.

Thank you for your time, and now I'd like to turn the call back over to Niels.

Thank you, Janet.

Operator, we're now ready to take questions.

Thank you very much.

(Operator Instructions).

We'll pause one moment as we assemble our roster.

Our first question today will come from Sundar Varadarajan with Citadel Securities.

Yeah, hi, guys.

A few questions.

First, Janet, a housekeeping question for you.

You talked about the 100 to $105 million of cash contribution this year.

How much has been made to date and what do you expect for the fourth quarter there?

Roughly half of it has been made through September 30th and the $50 million roughly expected in the fourth quarter.

Okay.

Seems like this was the best quarter in a long time in the technology business in terms of year-over-year declines, probably in the low single digit levels.

Do you think you reached an inflection point as far as year-over-year comps are concerned?

You did talk about some particular strength in the enterprise server business, especially with the high mix product.

How should we look at this going forward?

Are we going to -- is this kind of the like the base to build our revenue going forward?

Sundar, this is Ed.

I wouldn't characterize it as an inflection point.

I think it was a strong quarter.

ClearPath in particular continues to be an important part of our portfolio, an important part of our customer relationships and the value that we bring to the marketplace.

So we'll continue to market -- develop new versions of ClearPath and market that product as we have in the past.

Some quarters will be better than others.

This happened to be a very good one.

And in terms of margins, clearly that's kind of bumped up with the mix, but given all the costs that you've taken out and assuming a more normalized mix, what should be the kind of right margins to think about in the technology segment?

Sundar, as you know, we don't give guidance so we'll kind of play it quarter by quarter.

But I think you're seeing a commitment on the part of the Company to continue to be more cost effective and efficient organization, coupled with strong technology capabilities.

But also coupled with an improved and better differentiated services portfolio that I think you're beginning to see the results of all that come together, not only on the technology side, but equally important, if not more important, on the services side and the margin improvement that you're seeing there.

Great.

And just moving on to the IPSL contract, of the 8% sequential growth in backlog, what percent was kind of from the IPSL contract?

How much of it was due to that, the order being renewed this quarter?

We issued a press release yesterday on the IPSL contract and in there included the contract value of roughly $500 million, and so our backlog was $3.6 billion.

You can back into that as a percentage of the increase.

So you just -- so $500 million of the increase in the backlog came from the IPSL contract?

That's correct.

And kind of one more question on the IPSL contract.

If I remember right, three years ago or four years ago this was kind of highlighted as one of the problem contracts and you guys had to take a lot of action to either move it to a breakeven status or even make it profitable.

How does this contract renewal impact the profitability of this project?

Are you going to be at or better than breakeven or did this renewal in fact allow you to improve the terms of the contract?

Well, we don't comment on the profitability of any single contract or operation.

You're right to call this out as one of the contracts we mentioned about three years ago.

We have stated over that time period, we continued to move that contract out of the loss position.

It has continued to improve both operationally and with the terms of the contract and we're pleased with the progress that we've made in reducing costs, improving the efficiency of the operations and in terms of the new contract.

Has it improved enough that you would not term it a problem contract anymore?

We're pleased with our relationship with IPSL and the customers that we support through it and we're pleased with the renegotiated contract and the extension.

Thank you very much.

Anything further from our questioner?

Oh, yes.

I didn't know I was still live.

Just one follow-up finally on the CapEx front.

If you -- clearly, you've kind of cut back on CapEx but as you think about moving back into a growth kind of mode, what do you think is the sustainable CapEx?

Do you still think you can run CapEx significantly below D&A or will we see some form of catch-up as we head into 2010?

Sundar, we haven't given any guidance with regard to 2010.

I just will comment that there's -- the goal of this management team is to continue to generate free cash flow as we did this quarter.

We're proud of having done that in the third quarter, and you should expect to see us constrain the capital to make sure that we are generating free cash flow.

All right.

Thank you.

That's all I have.

Thanks, guys.

Thanks, Sundar.

Our next question will come from Eric Boyer with Wachovia.

Just going back to the technology segment and you talked about strong results in ClearPath.

Just wondering, going into Q3, compared to your plan, did you see any pull-through from sales that you were expecting in Q4?

Eric, thanks for the question.

We've always said it's hard in the technology business to call between the third and the fourth quarter.

We generally look at the type of transactions that are in the pipeline for the second half.

And we are pleased with the response the customers have had to the enhancements that we've made to the ClearPath product line, to the commitment to that customer base, and we think that it's a very good quarter but we don't want to comment on what we think is going to happen sequentially from the third to the fourth quarter.

That has to play out as deals close.

Okay.

But looking at what you were forecasting I guess for the second half, was it stronger than kind of the run rate would be if you kind of split it between the two?

I think you can tell from the margins and the revenue and the fact that it was slightly up that it was a very nice quarter for us from a ClearPath perspective.

Okay.

I think on the July call, I think you were saying services profitability shouldn't be as strong as Q2 just because of seasonality.

Was that correct?

Yes, it was.

And you can see that in our gross margins in the services business which are down sequentially from the second to the third quarter.

As I mentioned in my comments, we work very hard to keep the operating expenses down to improve the margins on a year-over-year basis, but we did see the softness as you would expect in the services business and you can see it in the gross margin line.

And then seasonality-wise, you typically see -- Q4 is a little soft as well?

Third quarter is usually the softest quarter in the services business historically for us, because of the amount of vacation time, summertime, both from us and from customers.

Okay.

And then just a question, IPSL deal that you just talked about.

What was the original run rate of that deal?

We have not disclosed that.

It was a -- we are disclosing the contract extension of $500 million but we had not disclosed that previously.

Okay.

So you never gave a contract amount before?

No.

Okay.

And then on the revenue front for services, I think before you used to comment about the performance of the 80% of revenue you consider core.

Could you just provide some color there?

I don't think we've ever commented on the particular performance of that element.

What we've said is that the four areas of strength that we've called out around data center transformation, end user outsourcing, application modernization and security represent about 80% of what we do as a business.

Okay.

And then could you just talk about -- so you won't comment then on the particular performance of that group?

The point of that comment really is to say that's where we're focusing our resources going forward and focusing our investments is in those four areas of strength.

And when I say data center transformation, I'm including in that our technology business.

So that's -- it's really just part of the strategy that we have in place to narrow our focus and concentrate our resources more effectively and kind of give some view as to what we consider to be our go-forward investment strategy.

It's not a segmentation.

Okay.

And then on the TSA contract, I think you guys are protesting that award.

How's that impact your revenue stream on the bridge contract?

The protest is separate activity from the bridge contract.

We are operating and continue to perform for the customer under that bridge contract through February of 2010.

The protest that we and also General Dynamics have protested does not affect our work during the transition time period.

Do you expect that protest to be resolved before February 2010?

We can't comment on that.

That's up to the government process.

Okay.

And then just looking at 2010, I know you don't want to give any guidance around that, really, but are you expecting to give any increased amount of guidance on your Q4 call as far as 2010 is concerned?

I don't believe so.

I think we're going to stay with the position that we've had for quite a while now and honestly, we're focusing on delivering results, letting the results speak for themselves as opposed to getting out in front of ourselves from a guidance standpoint.

Okay.

Thanks.

Thanks, Eric.

Our next question will come from Jeff Harlib with Barclays.

Hi, good morning.

Just on the financial side, can you say what pension income or expense was during the quarter and also if there were any unusual restructuring charges or accrual reversals that impacted the numbers?

On the restructuring charge, let me comment on that first.

There was a minimal amount of additional restructuring charge in the quarter and then as you can also see on the financial statements, we did have in other income expense a loss on the sale of a very small subsidiary.

With regard to pension, we had pension income about $5.2 million, that's relatively consistent, adjusted for currencies as we've seen in the other quarters of this year.

Okay.

And just the additional savings you're looking for in COGS and SG&A, talk a little about the timing of those actions and the remaining cash restructuring costs.

Sure.

We spent roughly $10 million in restructuring costs during the quarter.

We have continued to work on both the cost reduction actions that we have affected through the P&L right now and continue going forward.

We expect it to be de minimus, relatively $10 million of expenditures going forward and the remaining difference between, for example, the 205 of annualized savings that we have in SG&A.

The cost impact and the cash impact of doing those actions we'll announce at a future point in time when we have finalized the plans and have begun executing against those.

And what about on the COGS?

Same thing.

On the cost of goods sold, we mentioned we had $190 million of savings of annualized savings which we've taken actions on.

The actions and the cost of those actions are included in that restructuring estimate that I had given you just a moment ago.

And the same thing, as we work to finalize the plan between the 190 and the 250, as those become finalized and we begin executing on those we will update you on the year end earnings results call on the cost of goods.

This is an ongoing process for us.

I think at the end of the second quarter, we announced that we had taken action on $150 million around cost of service delivery.

And this quarter we're announcing that's now up to 190.

So this is something that we do on an ongoing basis.

We're continuing to stare at that goal of 250 and working our way towards it.

Okay.

Maybe you can talk a little bit about how you're seeing your customer spending patterns, pipeline, you were down about 7% organically overall in 3Q.

Just some pulse on what you're seeing both domestically and internationally from your customers.

Yes, a couple of comments on that.

One, I think as we've said at the last call, we felt that our outsourcing business was being impacted by customer concern about our debt load, particularly the debt that was coming due in March of 2010.

And questions about signing a four or five year contract with that kind of concerns about our debt.

Since the debt exchange was finalized at the end of July, that concern has really gone away and I think you're seeing that in a revitalized outsourcing business and some new wins and a growing pipeline in the outsourcing business.

In our more project-oriented business and transaction related business, I think we're still bouncing along the bottom but it seems like the pipeline for some of our new offerings is healthy and growing, lots of interest there.

So I'm beginning to see some rays of sunshine I think, feeling a bit more optimistic about it.

But it's not a straight path to glory.

There's still a lot of work to do and a lot of concerns, economic concerns on the part of our customers and they still have a tendency to down size and defer projects as opposed to accelerate and increase.

Okay.

That's helpful.

And then the TSA contract that's winding down early 2010, just I think that had been a roughly 2, $250 million of revenue a year.

I know it's probably been phasing down.

But any additional color you can give us on the revenues of that contract?

We haven't -- the contract, you're right, over the time period has winded down, has decreased in revenue year-over-year.

It's been publicly estimated that from the government that it was $200 million in spend last year and as you would expect moving into transition time period, it would decline but we don't want to comment on the exact amount of the revenue for 2009 or the expectations for 2009, we just want to focus on delivering the service there.

We also have been focusing on looking -- improving our pipeline in the federal business so that transitions and contracts happen within the federal marketplace.

We would like to continue to serve TSA but we do recognize that that happens and we have been working over a number of months in improving the pipeline and you've seen that in the win rate and the revenue increase rate in the rest of the federal business so we can position that business to be able to deal with the transition off of this account.

So government business was up in revenues?

Yes, up mid single digits.

You commented on potential asset sales.

Are these non-core asset sales?

Are they properties?

Any additional detail there?

I think we'll announce those as they occur if they're of significant size.

During the course of the quarter, we exited one country, we exited Thailand.

We also exited our financial services business in Italy.

I think in second quarter, we sold a small software business, insurance software business called Maximus.

And there's some other things that we're looking at but wouldn't really describe those or talk about those until there's something that's ready to be announced.

Okay.

Thank you.

Michael Boam with BlueBay has our next question.

Hi, just have a few follow-up questions, if that's okay.

More cash collateral during this quarter.

I just wondered why you see that topping out and maybe you can give an update on any sort of discussions you've had with any lenders regarding a renewal of the revolver.

Sure, let me comment on the cash collateralization.

You did see a little bit additional coming in in this quarter relative to some new contract wins.

We continue to -- that is a use of cash because it does collateralize a letter of credit, as we do with anything else, are very judicious about making sure that is only given to deals that can justify that type of return.

It's hard to forecast where that number is going to be.

It really depends on the type of deals that are in the pipeline and whether they are good deals to justify the collateralization of the cash.

Right now in this quarter we focused on completing the debt exchange and focused on execution and improving our results and increasing our generation of free cash flow on the business and we don't have anything publicly to comment on with regard to our relationships with the banks or the revolver.

Okay.

Just in terms of gross margin in the technology business, I mean, as far as I can tell it's the highest margin you've ever had.

Now, I don't imagine for one minute that's likely to be sustainable.

But should we expect to see the technology gross margin improve over time as part of the restructuring program as well?

In the technology margin, you're right in pointing out that it was a very high quarter for us relatively and that's why we pointed out that in this quarter, in the revenue and the technology business, we had a higher mix of our very high end ClearPath servers.

And so the margin in that line can move 5 to 8 points, just based upon the mix of the high end levels.

The margins in technology business over a longer term, a multi-year window, have continued to go down, given the pricing pressure in the industry and so I -- we're not expecting that the cost actions that we're doing are going to influence that margin.

It is more influenced by the market condition and the mix of products we sell.

Okay.

Finally, if I can, the fourth quarter of last year your margins were substantially lower but I know -- I think you took restructuring charges of around $99 million in the quarter.

Is it possible that you could give me the adjusted gross margins for the fourth quarter of last year?

We do have that posted on our investor website and we would be more than happy to help you direct you there so you can see the historical information.

Okay.

Thanks very much.

And we have time for one more question.

And that final question will come from Tony Venturino with Federated Investors.

All right.

Hello, good morning.

Good morning, Tony.

Just three quick ones, if I could.

Talking about the server business, I know you just said that it was mostly due to mix but could you -- was there any -- was it due to one big buy or was it kind of consistent through the quarter?

Can you give any color on that on how the pace went through the quarter?

When you look at the revenue and you think about the average size of a large high end server, it's not one deal that drives that.

It's multiple deals.

Okay.

And so is this -- would you say that you're focusing more on selling the high end and moving away from the low end or is this just kind of customers wanted to buy the high end this quarter?

I would say we're in the business of selling technology that meets our customer needs and we have some customers that have high end servers and high capacity requirements to support mission critical applications and others that are smaller and this particular quarter it tended to be more on the high end customers had needs for capacity improvements and increases and wanted to take advantage of some of the enhancements that we've made to the ClearPath platform.

To me, the technology story is really part of our strategy, which is to remind everyone that ClearPath is a modern mainframe and it's an open system.

It runs industry standard hardware, state-of-the-art, supports state of the art middleware, supports state-of-the-art development languages, just happens to run operating systems that are known in the industry for being the most secure, reliable and highest performing operating systems in the industry, so we view this as a modern platform and we think that a number of our customers are looking at supporting their mission critical application and saying this is a terrific platform, Unisys is continuing to enhance it and we're going to continue to invest in it.

Okay.

Then moving on to the cost savings, could you maybe give me some color on the permanency of these savings, is this things that are never coming back or as -- maybe as the economy turns around and things pick up these will -- you'll add certain costs back in?

These are savings that we have taken, cost actions that we have taken to take cost out of the business without the intention of them coming back.

And if I can just add to that.

Much of it is based on simplifying our business, simplifying what we do, where we do it and also simplifying our management structure to support it.

So I think there's been a lot of work done to really eliminate what had been an overly complicated matrix management system that drove a lot of costs and that I can assure you is not coming back.

So basically it's getting rid of a lot of redundancies?

That's correct.

And then final topic, Ed, you had talked about this a little bit earlier, talking about the outsourcing business and customers were reluctant to sign on because of the capital structure.

Could you maybe elaborate on that about how that discussion is going with customers today across the business?

And then maybe give an idea of the pattern of attrition rates versus conquest and how that's trending.

I think you can see that trending in backlog, in services backlog is the way I would look at that.

Janet, you were right in the midst of an awful lot of these conversations with customers and you can probably give some color on what it was before the exchange and after.

I think before the exchange the conversations that I participated with were generally with my counterparts at customers and new customers that were thinking about either entering new contracts or extending their existing ones.

And they knew and felt from their own institutions the impact of the constrained credit market and they were concerned about entering into a contract without us having executed against a plan to deal with the 2010 maturities.

So the discussions generally were around -- were CFO to CFO, Treasurer to Treasurer type conversations.

Both sides acknowledging that the capital markets and the credit markets are very difficult and trying to understand where we were going to go and how we were going to deal with the maturities upcoming.

Those conversations continued all the way through the debt exchange, through the completions of the debt exchange.

I'm happy that we have been able to close some of those deals,some of these new customer wins, that Ed mentioned on his call.

Once we completed the exchange, the customers had been very happy with their services offering, the differentiations we bring to the market, the new technology like C rim offerings that we have.

They were just hesitant to sign on the dotted line for a multi-year contract until they saw we made progress.

Once that debt exchange has completed, the conversations have gone from a daily activity to perhaps one or two calls a month.

And Janet, you touched on a really important point there.

In addition to the stronger balance sheet and the impact on those conversations, I don't want to underestimate the work that we've done in improving the portfolio with some really exciting offerings out there that I think put us back at the forefront of the outsourcing industry and where it's headed in support of new support models that clients are looking for in an era of consumerization of IT, greater use of social networking and how that impacts support models across an enterprise.

So very -- a lot of exciting work that I think our customers are recognizing us as a leader for and that, coupled with a stronger balance sheet, I think is re-energizing that business.

One last one if I could.

That kind of dove-tails into what I call the new business model, if you would.

It's the 80% core businesses.

Is it fair to say that the other 20% are going away over time and you're just going to focus on that 80%?

I wouldn't say that.

I'd say the 20% kind of falls into either a maintain mode or it could possibly fall into divestiture situation.

Depending on market conditions and the like.

The 80% is really saying, look, this is how we want to represent ourselves to the marketplace.

This is who and what we are.

This is what we're best at.

And this is where we're going to be putting our new investments in resources to grow the business.

Okay.

All right.

Fair enough.

Thank you very much.

Thank you, Tony.

And we'll you now turn it over to our host for any additional comments.

Well, thank you all very much for participating in the call today.

Obviously, you could tell we're pleased with the performance in Q3 but again, our objective is to create a consistently and predictably profitable Company that generates free cash flow and delivers outstanding customer service.

Indicates we're on the right path and we're making progress but we're not at the end of this journey by any means and we have much more work ahead of us.

I would like to thank everyone for being on the call, for the Unisys employees that are listening in on the call, I'd like to thank you for all your hard work and dedication and look forward to continued effort in Q4 and beyond.

Thank you very much.

And that does conclude our conference call.

Thank you for your participation.