Unisys Corp (UIS) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the Unisys fourth quarter and full year 2009 results conference call.

At this time I'd like to turn the conference over to Mr.

Niels Christensen at Unisys Corporation.

Please go ahead, sir.

Thank you, Operator.

Good morning, everyone, thank you for joining us.

About an hour ago Unisys released its fourth quarter and full year 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 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.

Third, today's presentation which is complementary to the earnings press release includes some non-GAAP financial measures.

Certain financial comparisons made in this call will be with and without the impact of cost reduction charges taken during 2008.

We also make certain comparisons between periods on a constant currency basis for excluding the impact of foreign exchange.

In the presentation we have provided a reconciliation on a US GAAP basis compared with our results excluding the impact of the cost reduction charges and an explanation of the basis for the constant currency calculations.

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 I'd like to hand it over to Ed.

Thanks, Niels.

Hello, everyone.

Thank you for joining us today for our fourth quarter and full-year 2009 earnings call.

As we begin our discussion this morning please turn to slide one for highlights of our results.

We came into 2009 with a clear plan and goal to turn around the business, achieve profitability and generate free cash flow.

The economic environment over the past year made it more critical that we move quickly and with urgency to execute on our business priorities, reduce costs and strengthen our balance sheet.

As you can see in our results our people rose to the challenge.

Despite lower revenue in 2009, as we narrowed our focus and worked through the downturn, we reported three consecutive quarters of significantly improved profitability and cash flow.

For the fourth quarter we delivered an operating profit margin of 10.8%, and net income of $115 million versus a year ago loss.

We also generated $163 million of free cash flow in the quarter, which was up more than $100 million year-over-year.

As Janet will show you when she goes through the results in more detail, our services business doubled its operating profit margin in the fourth quarter despite lower revenue.

And our technology business grew revenue 19% in the fourth quarter, driven by strong sales and ClearPath systems.

We are focused on delivering continued product innovation and value to our ClearPath client base and it was good to see this result in the quarter.

For the full-year of 2009, we reported an operating profit margin of 7.5%, and net income of $189 million compared to a year ago loss of $130 million.

Equally important, we generated $196 million of free cash flow in 2009, a $236 million year-over-year improvement.

And our cash balance at year-end 2009 improved by more than $100 million.

Our services business more than doubled its operating margin in 2009 to 6.2%, which was a significant improvement but below our target of an 8% to 10% services operating margin.

Consistently reaching this target remains an important goal for our Company.

And our technology business, ClearPath revenue was basically flat in 2009 and remained a major contributor to our profitability for the year.

At the top line, while we would like to see our revenue growing, our primary focus over the past 12 to 15 months has been on enhancing our profitability and cash flow and making sure we're targeting the right opportunities in the right markets, and not just chasing growth for growth's sake.

But despite the economic turmoil our outsourcing business, which is our largest services offering, has had two consecutive quarters of strong order growth.

As a result of the work we've done, we feel we're in a much better position today than 12 months ago to compete and pursue growth opportunities in our targeted market areas.

So we're pleased with our results for the fourth quarter and for 2009 overall, but we recognize that it is only a start.

We have a lot more work to do both at the bottom line and the top line, and we'll need to do that work in what continues to be a challenging and extremely competitive business environment.

In 2010, we'll continue to focus on executing on our stated business priorities.

If you have been following our earlier calls, you know that we have four priorities in our turnaround program.

Those priorities, which you can see on slide two, are to concentrate our resources on fewer markets and offerings, create clear differentiated value propositions in our chosen markets, drive gross margin improvement through a highly utilized cost competitive services labor pool, and simplify the organization to significantly reduce expenses.

We made good progress across these priority areas over the past year, and I'd like to briefly note some of the major accomplishments.

In the area of concentrating our resources, we focused our resources around four large growing markets where Unisys has core strength.

Those four growth markets are security, data center transformation, including our server business, end user outsourcing and applications modernization.

We're also narrowing our focus by divesting selected operations that fall outside of our focus areas.

During 2009, we made a number of smaller divestitures, some involving specific country operations where we lack the scale to compete cost effectively.

Earlier this week we also completed the sale of our check and cash automation equipment and related US maintenance business to a private equity firm.

And we're currently in the process of closing the sale of our US health information management business to Molina Healthcare for approximately $135 million in cash.

In the second area of increasing our differentiation, we did a lot of good work over the past year to strengthen our portfolio of differentiated offerings across the four focus areas I just mentioned.

In security, for instance, we announced our secure cloud solutions and continued to enhance our biometric based security solutions.

In data center and end user outsourcing we announced improvement remote infrastructure management offerings and an enhanced set of end user productivity services.

In our server business we introduced new features and price performance for our ClearPath family including enhancements that broaden our capability to modernize many legacy applications running on ClearPath.

Recognizing the critical importance of service quality we also continued to expand ISO and idle certifications we've earned for our services portfolio and global service locations, to help ensure our clients receive a consistently high level of service from Unisys around the world.

We believe the scope of our global certifications is among the strongest in the industry and we'll continue this focus on service excellence in 2010.

Our refresh portfolio is helping us win major new service contracts across our areas of strength.

Major wins in 2009 included business with such organizations as Unilever, Henkel, the European Union, TravelSky, US Department of Agriculture, FEMA, Commonwealth of Pennsylvania and the city of Santa Clara California.

We have a lot of work yet to do in terms of sharpening our market focus and differentiation, but with the work we've done to date we're in a stronger position to pursue opportunities for profitable growth in our chosen market areas.

In the area of improving the cost efficiency of our service delivery, as you may recall our stated goal has been to lower our annualized cost of service delivery by $250 million.

Against that goal to date we've taken actions to reduce cost of delivery by about $220 million.

We saw benefits from this effort throughout 2009 and in our fourth quarter services gross margins which were up 130 basis points year-over-year.

A lot more work is needed to deliver our services more cost efficiently.

For instance, in the area of low cost labor, we've been able to increase our use of lower cost labor to about 20% of our work force at year end 2009 from about 16% when I joined the Company in the fourth quarter in 2008.

But we're competing with IT service firms that have 35% to 40% of their workforce in low-cost labor pools.

Some of those competitors don't have the level of federal and public sector business that we do, but to be competitive we must continue to grow our use of lower-cost labor as a percentage of total labor and this will continue to get a lot of focus in the year ahead.

Finally in terms of reducing overhead we've made a great deal of progress in simplifying our operations and reducing SG&A expenses over the past year, as you can see in our operating margins.

Our stated goal has been to reduce our annualized SG&A expenses by about $250 million.

We have achieved about $240 million of those savings to date.

At the same time, however, as the economic environment has continued to pressure our revenue, it's critical that we continue to find ways to reduce overhead expenses and operate more cost effectively.

Turning to slide three, as we look ahead to 2010, our priorities, as I said earlier, remain the same.

Our goal is to become a consistently and predictably profitable company that generates free cash flow and delivers outstanding customer service and profitable growth in our targeted markets.

To get there we must continue to focus.

We must continue to strengthen our offerings and differentiations to drive profitable growth in our chosen markets.

We must continue to enhance the cost efficiency of our labor model, simplify our operations and reduce overhead.

We must continue strengthening our balance sheet and reducing debt.

We're expecting another tough year ahead , particularly in the first half as we work through an uncertain spending environment.

So we're keeping up our sense of urgency and are focused on execution.

Thank you, again, for joining us this morning.

Now here is Janet to take you through our results in

Thanks, Ed, and hello, everyone.

We closed out 2009 with a strong fourth quarter that demonstrated our continued discipline in enhancing our cost efficiency and optimizing cash at all levels of the Company.

As Ed mentioned, we made good initial progress in strengthening our balance sheet and capital structure and we are focusing on continuing that progress in 2010.

This morning I will provide more details on our fourth quarter and full-year 2009 financial results.

I will also update you on our capital structure and pension funding expectations for 2010.

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

Global economic conditions and competitive pressures remain challenging in the fourth quarter, although we did see some positive indicators.

While services orders declined in mid-single-digits year-over-year, we saw growth in outsourcing orders for the second consecutive quarter.

Outsourcing order growth was more than offset by double-digit declines in orders for shorter-term systems integration and consulting projects.

In term of geographic trends, we saw double-digit order growth in our US commercial business.

Orders for our US federal government business declined largely due to reductions from our TSA and GSA same contracts.

Internationally we saw order declines on a constant currency basis across all of our overseas markets in Europe, Latin America and Asia-Pacific.

We closed $2009 with $6.5 billion in services backlog, up 1% sequentially since September 30th, 2009.

And up 7% from December 31st, 2008.

The increase was principally due to currency movements.

Slide five highlights our financial results in the fourth quarter.

At the top line we reported revenue of $1.21 billion in the quarter, which was down 5% year-over-year.

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

Based on today's rates, we anticipate a 6 to 7 percentage point positive impact on revenue in the first quarter of 2010.

We reported operating income of $130.2 million in the quarter compared to a year ago operating loss.

And our operating profit margin percentage improved 10.8% versus an operating loss of 3.7% a year ago.

Our results for the fourth quarter of 2008 included net cost reduction charges of $99 million, related to workforce reduction, facility consolidations, and asset write-downs related to portfolio exits.

Excluding these charges, our operating profit in the fourth quarter of 2009 increased by $79 million and our operating margin percentage was 680 basis points higher.

At the tax line we had a $16.8 million tax benefit in the quarter, compared with a $19.3 million tax benefit in the year ago quarter.

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

At the bottom line, after taxes, we reported $114.5 million in net income in the quarter, which was $172.5 million improvement from the year ago $58 million net loss.

Moving on to fourth quarter revenue, slide six shows our fourth quarter revenue by geography.

Our US revenue declined 14% in the quarter and represented 41% of our revenue this quarter.

Within the US we saw revenue declines in both our federal government and commercial businesses.

International revenue grew 1% in the quarter.

On a constant currency basis international revenue declined to 8%, with slight declines in Europe and double-digit declines in our other international markets.

Slide seven shows more detail on our fourth quarter revenue.

Outsourcing revenue, our largest business, declined 4% in the quarter, driven by double-digit declines in business process outsourcing revenue.

System integration and consulting revenue declined 14%.

Enterprise server revenue grew 29% in the quarter as we benefited from seasonally strong ClearPath sales which were up significantly over the year ago period.

Infrastructure services core maintenance and specialized technology revenue all declined by double-digits in the quarter.

Moving to slide eight, which summarizes our financial results for the full year of 2009, at the top line we reported revenue of $4.6 billion in 2009, which was down 12% from 2008.

On a constant-currency basis, 2009 revenue was down 8%.

Our gross profit was up slightly year-over-year on lower revenue.

And as a percentage of revenue, our gross profit margin improved 320 basis points in 2009 versus 2008.

Operating expenses including SG&A expenses and R&D expenses declined 27% year-over-year.

After operating expenses we reported operating profit of $346 million, or 7.5% of revenue, compared with an operating profit of $40.7 million or slightly less than 1% of revenue in 2008.

Our full-year 2008 results included a total of $103.1 million of net charges related to cost reduction action.

Excluding those charges our full-year 2009 operating profit improved by more than $200 million and our operating profit margin percentage increased by 480 basis points.

After taxes we reported net income of $189 million compared with a net loss of $130 million in 2008.

Now I'll briefly cover some details on our full-year 2009 revenue.

Slide nine shows our full-year revenue by geography.

Our US revenue declined 6% in 2009 and represented 46% of our revenue for the year.

International revenue declined 17%, 10% in constant-currency, and represented 54% of our revenue in 2009.

Slide ten shows 2009 revenue by business offering.

As you can see, all of our business offerings were affected by the challenging economic conditions last year, as well as the impact of our decision to deemphasize those areas of the business that are outside our areas of strength.

In addition, we continue to face secular decline in certain businesses and declining volumes in some of our BPOs.

Outsourcing revenue declined 10% in 2009 to $1.8 billion in revenue.

BPO revenue declined by double-digits in the year while ITO revenue declined by low single digits.

Systems integration and consulting declined 9% to slightly under $1.4 billion in revenue.

And infrastructure services revenue declined 23% as we continue to de-emphasize the low margin aspects of that business.

In the technology business, our full-year revenue was down 11%, despite the 19% technology revenue growth in the fourth quarter.

Enterprise servers declined 9% in 2009 and within enterprise servers our ClearPath declined low single-digits for the full year of 2009.

Maintenance declined 17% for the full year and specialized equipment revenue declined 15%.

Slide 11 provides some additional details on our outsourcing business.

Within outsourcing we have two types of offerings -- information technology outsourcing or ITO, and business process outsourcing, or BPO.

ITO involves the management of the 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.

IPO represents approximately 70% of our overall outsourcing mix in 2009, up five points from the level in 2008.

Although ITO revenue declined during 2009, revenue in the fourth quarter of 2009 was flat on a year-over-year basis, and up slightly on a constant-currency basis.

BPO represents 30% of our outsourcing revenue mix in 2009, which is down five points from 2008.

The decline in BPO revenue was driven by the slow-down in the financial services market and reduced transaction volume.

Our BPO revenue is impacted more significantly by currency fluctuations in 2009 than the Company as a whole since our two largest BPO processing utilities are based in the United Kingdom.

Slide 12 shows our 2009 revenue by industry.

The Company's largest industry is the public sector, which includes our US federal government business, as well as revenue from other government agencies worldwide.

In 2009, our public sector business represented 45% of our revenue and grew 4% to $2.1 billion.

This growth was driven by our US federal government business which I'll discuss in a moment, as well as strong technology sales into other public sector clients.

Our other industries declined in 2009 primarily reflecting weak commercial business environment.

Our financial services industry represented 24% of revenue and saw the most significant decline at 25%.

While our other commercial businesses declined 19%.

Slide 13 provides more detail on the performance of our federal government business in 2009.

Our federal systems business serves three primary sectors of the US federal government.

Civilian, Homeland Security, and Department of Defense.

Civilian agencies represent our largest single revenue base within the US federal government accounting for about 42% of our overall US federal government revenue.

Revenue from Homeland Security agencies represents about 32% of our overall US federal government revenue.

And revenue from agencies within the US Department of Defense represent about 26% of our overall federal government revenue.

As you can see in the slide, our overall US federal revenue grew 8% in 2009, to $927 million.

From a quarterly perspective, revenue was fairly stable during the first two quarters of 2009, but declined in the third quarter, largely due to reduction in TSA revenue.

Year-over-decline in US federal revenue during the fourth quarter was primarily attributable to reduced revenue on the TSA and GSA same contracts.

In late September 2009 GSA awarded the recompete of the technology infrastructure contract that Unisys had been performing to a competitor.

Unisys protested the award at the Government Accountability Office or GAO.

On January 21st, 2009, the GAO ruled in our favor and recommended that TSA redo the competition.

We continued to support and operate the TSA's technology infrastructure and will work with the agency as it responds to the GAO's recommendations.

We ended 2009 with about $429 million of US federal services backlog which was down 13% compared to the prior year-end.

Now turning to margin, slide 14 shows a comparison of our segment margins in the fourth quarter and for the full-year of 2009, compared to prior periods.

Despite lower services revenue for the fourth quarter and the full year, we were able to significantly improve services growth and operating profit margins based on the actions we've taken to enhance the cost efficiency of services delivery and reduced SG&A expenses.

Margins in our technology business can vary substantially from quarter to quarter depending upon specific deal closures.

As you can see, driven by strong fourth quarter ClearPath sales, as well as progress in reducing costs, we reported substantial increases in our technology growth and operating margins in the quarter and for the full year.

Slide 15 shows the progress we've made in 2009 in reducing selling, general and administrative costs.

We reduced SG&A expenses by $268 million or 28%, compared to 2008 levels.

About 4 percentage points of this reduction was due to foreign currency fluctuations.

Our 2008 SG&A expenses included approximately $49 million in cost reduction charges.

Excluding the impacted currency fluctuations and the 2008 cost reduction charges, 2009 SG&A expenses were reduced by about 20% on a year-over-year basis.

Looking ahead, we continue to look for cost reduction opportunities and we'll continue to exercise tight controls over expenses given the uncertain business environment.

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

Driven by our significantly higher profit performance in the quarter, we generated $215 million of cash from operations in the fourth quarter of 2009, up from $138 million a year ago.

Overall for 2009, we generated $397 million of cash flow from operations, which was up 56% from $255 million in 2008.

As part of our ongoing focus on the cash requirements of our business model, capital expenditures were $52 million in the fourth quarter of 2009, down from $80 million a year ago.

For the full-year of 2009, capital expenditures were $201 million, down from $295 million in 2008.

After capital expenditures we generated $163 million of free cash flow in the fourth quarter and $196 million of free cash flow for the full year of 2009.

This compares to free cash flow of $58 million in the fourth quarter of 2008, and free cash usage of $40 million for the full year of 2008.

We will continue on tightly focusing on our capital expenditures in the year ahead, and for the full year of 2010 we anticipate capital expenditures of $200 million to $225 million.

Depreciation and amortization was $97 million in the quarter, and $353 million for the full year of 2009.

For 2010 we expect D&A of around $300 million.

Cash on hand increased by $104 million year-over-year and we ended 2009 with $648 million of cash on hand.

Additionally, our $648 million of cash on hand at year-end 2009 excludes $87 million of cash used to collateralize letters of credit during the year.

This cash collateral is reflected in other long-term assets on the balance sheet.

On December 31st, 2009, the Company had sold $100 million of receivables under our US trade accounts receivable facility, compared to $140 million of sold receivables at year-end 2008.

Based on a new accounting rule we will adopt on January 1st, 2010, our US accounts receivable facility will no longer meet the requirements to be treated as a sale of receivables, but will rather be accounted for as a secured borrowing.

This accounting change will impact our operational cash flow comparisons in the first quarter of 2010, and going forward, based upon the level of receivables sold.

There will be no P&L impact from this change.

Turning to slide 17 I'd like to give a brief update on our progress of strengthening our balance sheet and capital structure.

As you know, in 2009 we completed the debt exchange process which enabled us to address the pending debt maturities we had in March 2010, and reduce our overall debt.

With respect to the remaining $65 million of notes maturing in March 2010, we have prefunded the payments of these notes earlier this week.

As part of our turnaround and renewed focus, we also continue to explore potential selected divestitures to focus the business on the areas of strength that Ed mentioned.

As Ed mentioned , we closed a number of small divestitures in 2009 and earlier this week we closed the sale of our check and cash automation equipment and related US maintenance business.

We are also in the process of completing the sale of our health information management business for $135 million in cash.

The HIM business represented about $110 million of revenue in 2009 and has about 900 employees.

We expect this transaction to close in the first half of 2010.

We expect to use proceeds from these pending divestitures to help strengthen our capital structure.

Turning to slide 18, I'd now like to provide an update on our worldwide pension plan, funding position and expected cash funding levels.

Driven by the strong recovery in the financial markets in 2009, the assets in our US pension plan, which is the largest of our worldwide pension plan, returned to approximately 26% last year.

However, as a result of swings in the interest rate environment, the discount rates used to calculate liabilities for our US pension plan has declined to 6.11%, down from 6.75%.

The lower discount rate has increased our pension plan liabilities at year-end 2009.

Taking into account the increase in both pension assets and pension liabilities, we ended 2009 in an underfunded position in our US plans on a GAAP basis of approximately [$1 billion] compared with an underfunded position of about $1.2 million at year-end 2008.

From a cash funding perspective, we were not required to make cash contributions into our US qualified defined benefit pension plan in 2009.

We contributed $94 million in cash to our international pension plan in 2009.

For 2010 there is no contribution required for our US qualified defined benefit pension plan and we anticipate contributing about $115 million dollars of cash primarily to our international pension plan.

Based on current legislation and our underfunded position at year-end 2009, we expect to be required to make cash contributions of up to $30 million to our US qualified defined benefit pension plan in 2011.

This estimate could change depending upon asset returns in 2010, and/or legislative changes being considered in Washington.

In terms of the P&L for pensions, based on year-end 2009 calculations and discount rates, we expect approximately zero in pension expense in 2010, compared with pension income of about $24 million in 2009.

Lastly, a comment on our Venezuelan operations.

As you may know, effective January 11th, 2010, the Venezuelan government devalued its currency by 50%.

As a result we expect to record a foreign exchange loss in the first quarter of 2010 in other income expense.

Based on the current exchange rate, the pretax loss associated with this devaluation is expected to be approximately $20 million.

In closing, we had a strong fourth quarter and a year of significantly improved profitability in 2009.

However, we have more to do to accomplish the objectives of our turnaround program, and the global business environment remains uncertain.

This makes it critical that we continue our tight cost discipline and emphasis on cash, and we will maintain that focus in the year ahead.

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

Thanks very much, Janet.

Operator, we'd like to open the call up to questions from the analysts at this time, if we could.

(Operator Instructions) And we'll first hear from Joseph Vafi from Jefferies.

Hi, everyone, good morning and congratulations on the strong margins and cash flow.

I thought maybe we could start and talk a little bit about some of the ClearPath strength that we saw here in, I guess it really wasn't announced but full second half of the year, maybe a little more color on where you saw the pockets of strength there.

And, secondly, what you see as an outlook for that business.

I know we've always looked at that business as being a secular decliner, but has that at all changed, or were we just seeing a little bit of a strong budget flush here in Q4?

Thanks, Joe.

The ClearPath business has been in secular decline for us and we're happy with the progress that's been made in improving client satisfaction and in making the investment to support and innovate the ClearPath client base, as Ed mentioned.

We do think that consistent with the mainframe environment and industry trends we will continue to see declines in that business, although our focus will remain on customer satisfaction and innovation to keep that client base as profitable to us as we can.

And I think we want to be careful that we don't create a self-fulfilling prophecy by talking about decline.

ClearPath continues to be a platform that supports close to 1,800 customers worldwide.

In many cases it is running mission-critical applications for those customers.

I think we've done an excellent job of making sure that we maintain ClearPath as being a modern mainframe, an open mainframe, a mainframe that continues to meet our client requirements by opening it up.

It runs state of the art industry-standard hardware, supports state of the art middleware, supports state of the art modern development languages.

And we continue to innovate around ClearPath to make sure customers can take advantage of those modern technologies within the ClearPath environment.

And it becomes an opportunity for us, one, to continue to provide mission-critical support to key customers around the world, but also to help those customers modernize their application to take advantage of the new innovations in ClearPath.

So I don't want to presume declines in ClearPath because I think it is a very strong platform, it's an open platform, and more and more it is a modern platform to meet our customer needs.

Okay, thanks.

And then secondly talking about some of the divestitures, first on the equipment divestiture.

I know we didn't get a lot of color there.

Is there a number you would like to throw out in terms of modeling there, in terms of the size of that business and where it stacked up on the March contribution?

And then, secondly, on the claims processing divestiture, it seemed like it was a relatively profitable business.

Is that something we should take into account when we think about your longer-term operating margin goals and services, or is this a piece of business that we shouldn't really think about affecting those goals?

Joe, first on the check and cash automation equipment business and the related maintenance, as we said in our press release last night, we are not going to disclose the terms of that.

But what I would say is that the revenue from that is not material to Unisys as a whole, and that business contribution has been relatively breakeven for us.

With regard to the HIM business, we did disclose the revenue base for that.

As we said previously, that has been a profitable business for us.

Though we don't believe by divesting that business that will change our goal or our objective for the services operating business, and it doesn't change the trajectory we've been on in improving the services operating margins.

Okay.

That's helpful.

And then finally I know, Janet, you talked about CapEx guidance being flat for 2010, or more or less at the low end of the guidance.

If we look at CapEx versus 2008, are we seeing less capital intensity in your business as you change your service offerings?

Is it just tighter control on CapEx?

Shall we be thinking about a fundamental change in the business here or just more focus?

And maybe a little bit of fine-tuning on where the service offerings are going?

It's the latter, Joe.

We've definitely been focused on looking at the cash requirements and the business model, making sure we're as efficient as possible.

We also have looked at the amount of capital that's deployed internally, and looking for opportunities to be more cash efficient in how we spend it.

So I think what you've seen is, as you referred to at the end of your comment, a change for us in the model.

Very good.

Thanks a lot, Janet.

Next we'll hear from Eric Boyer from Wells Fargo.

Hello, good morning.

Ed, I think you said you've taken out about $220 million of the $250 million you targeted as far as expenses in the cost of services line, and then $240 million of the $250 million for SG&A, if I have that correct.

Should we expect you to achieve the remainder of that target in 2010?

And could you quantify any additional expense reductions that you've identified and that you think you'll be able to make progress on in 2010?

Sure, to the first part of your question, Eric, the answer is yes.

I think we'll get to those initial targets in 2010.

I think we ended 2009 pretty close to making a lot of progress in both areas.

So we'll get there in 2010.

But we'll have to go beyond that.

And the real purpose of setting those targets was recognition that we needed to improve about five points in our gross margins in our services business, and we need to improve about five points in reducing our SG&A as a percent of revenue.

And as the revenues come down, certainly those improvements we've made to date have been a big contributor to improved profitability and cash flow.

But we still haven't hit the gross margin percentage and the SG&A percentage goals that we need to get to, to really be a competitive in the marketplace or more competitive in the marketplace and get to that 8% to 10% operating margin that we want to get to in the services business.

And then back to the ClearPath sales,two quarters really strong growth there, should we think about the typical seasonality entering 2010, or is there something else going on just as far as a backup in demand there?

I think you ought to assume normal seasonality where ClearPath has been typically a stronger second half performer in the year than in the first half.

Any comments on Oracle's recent announcement that they're entering the market and what that may say about the market going forward?

Well, it may say that Oracle thinks it's a good market, too.

I keep coming back to the fact that we have two of the finest best-known high-availability systems in the industry supporting governments and financial services and airline companies around the world, in mission-critical applications.

So, it is not a bad business to be in, and we've got a great solution there.

Janet, I think you wanted to add something on the seasonality question.

Eric, the other thing to keep in mind, in the first half of 2009 we were going through the debt exchange program, and as we saw across all of our portfolio, customers did hesitate a little bit until we got finished with that.

So I just wanted to comment that perhaps we saw a little bit more seasonality skewed to the second half of the year, this year, in technology.

And then lastly on seasonality, in the technology business it's really easier for us to look at first half versus second half, and I would also ask you to take a look at that when you're looking at modeling going forward.

All right.

Thanks that's helpful.

And then could you give us a sense of the overall revenue that you may be targeting to divest?

No.

Really can't, Eric.

I understand the question, but, we're taking it from the standpoint of saying what are the four areas of strength that we believe we have real differentiated value to bring to the marketplace.

And then those things that fall outside of that really fall into a kind of maintain mode.

Or if market opportunities arise, for a good divestiture, we will take advantage of that.

But we're not starting out with a targeted divestment of X amount of revenue.

Okay.

And then on the 2010, any more color on expectations?

I know you gave FX impact for Q1, but are you just expecting the same type of 2009 performance, or maybe a slight improvement due to the economy?

I think as we go into 2010, both Ed and I commented that we think we're going to be seeing a continued difficult environment, particularly in the first half of 2010.

We haven't given any guidance beyond what you mentioned for 2010 other than our commitment to move the Company towards consistent and predictable profitability and cash flow generation.

All righty, thanks a lot.

Next we'll hear from Tony Venturino from Federated Investors.

Good morning, thanks for taking my call.

Just a couple of quick questions, quick followups.

In the past you had talked about your long-term goals.

Are those still in place?

I think you said the 8% to 10%, is there any change to that?

No, that's what we want to get the services business to.

Okay.

And do you have a time frame for that?

Do you expect to solidly be there within 2010?

I want to be careful we don't fall into giving guidance when we're not giving guidance at this point.

But we want to keep making progress against it.

We doubled the operating margins in that business in 2009, which we thought was good progress.

We have more to do.

But we also, as a part of this, I think need to start demonstrating that we can deliver profitable growth at the top line in the areas, in the markets, that we're targeting.

So we're going to continue to work that operating margin goal from the bottom, in terms of managing costs, managing expenses aggressively.

But the flip side of it is that we need to start driving some top line growth, as well.

Okay.

And then you talked about the 20% of the workforce that is in low-cost centers.

You mentioned you have 35% to 40% for competitors.

Do you expect to be at that level or are you targeting to be at that level, 35% to 40%?

We recognize we have to work towards that level in order to get our costs of service delivery down to the point where we can improve our gross margins and services by 4 or 5 points, versus where we were a year ago.

So we're somewhat constrained by the amount of public sector work we do, which is in excess, I think it was 45% was what Janet just showed.

Public sector accounts are, in many cases, reluctant to allow service delivery to be performed in offshore locations.

So it provides a little bit of a constraint for us there.

But it's a recognition that that's where the industry is at and we have to be getting there and moving towards that aggressively in order to have a competitive cost structure.

Do public sector customers realize that there may be additional costs if they don't offshore?

Can you get a premium from them for that service?

They understand if we were to use offshore resource.

It's not like we are hiding something from them.

So you have that open discussion with the client before you decide how you're going to deliver the service.

And in some cases they certainly recognize that it could be less expensive for them if they utilized offshore resources but for a variety of reasons, in many cases, they decide that's not what they want to do.

Okay.

And then what would be involved to move to that?

Is it more customers reluctance or is it the investment of the time to get the assets up and running and trained?

How long would that take to get the 20% level now to a 40% level?

It depends on lots of different factors.

It is the ability to move work, customers being willing to allow you to move existing work, and it's also tied very closely to winning new deals where you implement, where you bid the work, bid the project, bid the outsourcing engagement, with that as your service delivery model, and you transition and implement.

So it is tied very closely to winning new work.

Okay.

And then, Janet, when you were talking about the seasonality, you talked about customers holding off last year.

Just curious about the conversations you're having with customers now, how it has changed since first half of last year when the capital structure was an issue.

Can you comment on that?

Yes, I think the good news is that the conversations with the customers right now are about the areas of strength, the innovation, the changes and enhancements we've made to the portfolio.

The conversations don't start with a discussion about our capital structure which was the case in the first half of 2009.

So you're not seeing customers reluctant to move forward.

Not at this time.

We've had very good response from our customer base, and reaction to the improvements that we've made in our capital structure.

They have focused on the fact that with the combination of the debt exchange and as we go through the repaying the $65 million that's coming due, has also reduced the amount of receivables in the securitization.

So they see against a capital structure that we had before a $240 million reduction in our overall outstanding debt.

At the same time we're increasing cash balance, we're increasing profitability, we're moving towards a goal of predictable and consistent profitability and cash flow.

At the same time they don't see us compromising in the areas of innovation because I think in 2009 what we're hearing from the customers is very strong response to the innovation that has come out across our areas of strength.

And what was the balance on the AR facility, did you say that earlier?

I think I missed that.

The AR facility at December 31, 2009, was $100 million, and that compared to $140 million at year-end last year, 2008.

Just a last questions.

Regarding cash flow for 2010, do you expect your taxes to change materially from 2009?

No, we expect it to be, from our tax position overall, we do have the benefit of net operating losses and credits that shelters some of our profits as we continue to return to profitability.

So we would expect our cash payments to be relatively the same as what we experienced in 2009.

And how about working capital, should working capital change materially?

We haven't given any guidance with regard to full-year of 2010.

What I can tell you is that, as evidenced by our results in the quarter, we've continued to improve our DSOs by one day, and in the fourth quarter, compared to a year ago.

And you'll continue to see that focus on working capital across the Company and demonstrated in our results.

So the working capital will be a function of where the revenue ends up in the seasonality for the full year.

You won't see us going back in metrics.

Great, appreciate it.

Thank you very much.

Next we'll hear from John Moore, KDP Investment Advisors.

Hi, good morning, guys.

The first one, just with the increasing services backlog.

Do you think that that should translate into outsourcing revenue growth in 2010, or with some of these things going on, like the TSA, as well as, to a lesser degree the HIM sale, whether that will be a drag on the revenue performance?

John, you're right, that both the sale of the HIM business and the potential changes in the TSA contract will affect our outsourcing number.

And so that is a negative factor.

What we have as an offset is two quarters of growth in the outsourcing orders, and the question is, does that compensate for that, and what rate do we sign orders in the first half of the year.

Okay.

And then on the HIM sale, at this point what's the status for regulatory and state approvals and what more do you need there?

I don't really want to comment on the specific elements of it, just to say that we are continuing to go through that process and our expectations, as we said in the release, and said earlier on the call, is that it closes in the first half of the year.

Okay.

And then just a nit, what were the cash taxes for '09?

I'm sorry, I didn't hear you.

What were the cash taxes paid in '09?

Roughly $58 million.

Great, thank you.

And that does conclude our question-and-answer session.

I'll turn the conference back over to our presenters for any closing comments.

Thank you, everyone, for joining today.

This is Janet Haugen.

I wanted to make sure that one of the comments I made came through clearly.

And that's with regard to my comment on the underfunded position of our US pension plan.

We ended 2009 in an underfunded position on our US pension plan of approximately $1 billion, which is a decline compared with our underfunded position of $1.2 billion at year-end 2008.

Janet, thanks very much for the clarification.

Let me just also thank everyone for joining us on the call today and for participating.

For all of the Unisys's colleagues around the world who are listening in on this call, I would like to thank you very much for all of your hard work in 2009 and for the progress that we've shown.

We still have a lot to do in 2010 and beyond.

But thank you, again, very much.

Have a great day.

That does conclude today's teleconference.

Thank you