Unisys Corp (UIS) 2010 Q3 法說會逐字稿

Good day, and welcome to the Unisys third quarter 2010 results conference call.

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

Niels Christensen, Vice President of Investor Relations at Unisys Corporation.

Please go ahead, sir.

Thank you, operator.

Good morning, everyone, and thank you for joining us.

Earlier today, Unisys released its third quarter 2010 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 on our investor website.

The presentation slides will be available later today.

These materials will be available for viewing as well as downloading and printing.

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

These have been provided in an effort to give investors additional information.

The non-GAAP measures have been reconciled to the related GAAP measures, and we have provided the reconciliation charts at the end of the presentation.

Finally, I would 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 website.

And now I'll turn the call over to Ed.

Great.

Thanks, Niels, hello everyone.

Thank you for joining us today to discuss our third quarter 2010 financial results.

The third quarter was another profitable quarter for Unisys.

One where we met a significant milestone.

Achieving an 8% operating margin in our services business, putting us in our targeted range of an 8% to 10% services operating margin.

Reaching this margin threshold is the result of, first, the continued reshaping of our services business to focus on IT outsourcing and systems integration services, while de-emphasizing our BPO and infrastructure services.

Second, the continued shifting of our service delivery model to take advantage of lower cost labor pools, which now account for 27% of our employees.

Third, our implementation of a consistent high-quality, idle-base global delivery model, where we believe that we're the first global player to achieve ISO 20000 certification in all of its major operations centers around the globe.

And, fourth, an intense focus on services operational management.

While services revenue was down in the quarter, services backlog remained flat with the year-ago period, and we continue to see sequential increases in services operating profit.

Driven by improved gross margins in our IT outsourcing and systems integration services, and continued effective cost management.

On the technology front, both revenue and operating profit were down in the quarter.

But I should note, that this comes after three strong quarters of year-over-year growth.

On a year too date basis, technology revenue is up slightly and operating profit margin is up more than 14 percentage points.

We also had another strong quarter of cash generation, with free cash flow of $81 million, up from $46 million a year ago.

And our adjusted net debt declined to $138 million, from $555 million a year ago, a reduction of $417 million.

While the quarter showed important progress in key areas, we recognize that we have much to do for Unisys to fully realize its potential.

Most notably, we must take advantage of our more competitive cost structure, by returning the company to top-line growth, even as we continue reshaping the business to focus on our key areas of strength.

Our objective is to be a company known as a leading provider of mission-critical IT solutions in our areas of strength, with a differentiating portfolio, and a reputation for providing consistently high levels of client service and satisfaction.

Our full business priority that I spoke into in previous calls hasn't changed.

Our first business priority continues to be focusing our resources and portfolio on a narrower set of offerings that leverages our strength as a company.

We continue to make progress in this area.

In the third quarter, we divested our insurance processing operations in the UK, which followed earlier divestitures this year of our health information management business, and our US check reader and sorter equipment business.

Our second business priority is to offer clearly differentiated value propositions in our chosen markets.

Our offerings are centered on four critical areas of our clients operations--security, data center transformation and outsourcing, including our server business, in-user outsourcing, and application modernization.

These areas are where we're focusing for growth over the next few years, because their markets where Unisys has the capabilities and expertise to win business and grow profitably.

Security is an integral part of our client's infrastructure.

Our security offerings are designed to secure people, assets, systems and data for governments and businesses, with no room for error.

We integrate physical and digital security technologies.

Our security solutions protect borders, airports, data centers, financial information and classified data.

In the third quarter, we received a major contract award for the US Land Border Integration initiative, representing an expansion of our work with the Customs and Border Patrol to secure the US borders.

Also in the quarter, the USDA awarded us a contract to build a virtual agricultural security operations center, that allows the USDA to track security incidents across its 29 agencies.

In data center transformation and outsourcing, we enable our clients to update their operations to meet the ever-increasing demands for increased IT efficiency.

We help optimize infrastructure through virtualization techniques, and we build and deploy secure scalable, reliable computing platforms.

In the third quarter, we won a key contract to partner with Colt Technology Services in the UK, to deliver cloud-based services to its customers in Europe.

We also received an extension of our IT end-user services contract for the City of Minneapolis, under which we'll be delivering cloud-based e-mail and other expanded services for city employees.

And last week, we announced innovative new offerings that significantly increase the performance and cost efficiency of data centers powered by our ClearPath family of mainframe servers.

The new offerings include secure partitioning for SPAR, a Unisys developed virtualization technology from ClearPath systems, based on Intel processors.

The SPAR capability brings enterprise class virtualization to clients data centers, and enabling ClearPath users to make more efficient use of special purpose processors called specialty engines, to modernize their applications and streamline resource management.

Our third area of strength is providing in-user outsourcing and support.

Our services provide anywhere/anytime support for our clients and users, with a one-call global model that increases user satisfaction while driving down support costs.

With the rapid increase of knowledge workers and their fundamental dependency on laptops and mobile devices of all shapes and sizes, providing service to end-users, takes on the level of importance rising to mission critical.

Our services, tools and methods are designed to support the global enterprise 24 by 7.

During the quarter, we won significant contract extensions, including the City of Minneapolis contract mentioned earlier, as well as ProServe.

And we continued successful rollouts of other major client projects.

Within the fourth area of strength, we use our engineering experience to help our clients modernize their applications.

This may involve rewriting applications using state-of-the-art development languages and application development environments, creating new features and functions, or integrating various applications to achieve the desired business outcome.

We deliver industry-specific systems for governments in the financial transportation and telecommunication sectors.

For instance, we recently announced significant new applications, modernization work with the USDA, to modernize and integrate the agency's despaired systems, and transition to a service-oriented architecture environment.

To deliver these services, we'll be drawing on our new applications modernization center of excellence, established in St.

Louis, Missouri.

Overall, we have done good work over the past two years to refocus and refresh our portfolio of services and solutions.

This work positions us well, to capitalize on disruptive trends that are reshaping the IT industry, such as cloud, mobile and social computing, smart computing, and appliance offerings.

Our last two business priorities are about driving cost efficiencies across the business, and I'm pleased by the continued progress we're making in those areas.

In terms of enhancing the efficiency of our services labor model, we continued to increase our use of lower-cost labor pools during the quarter.

Offshore and lower-cost onshore resources now account for 27% of our overall employee head count, up from 25% at the end of the second quarter, and 20% at the start of the year.

And finally in the last business priority of simplifying our business and reducing our overhead, we continue to make good progress in this area as well, as operating expenses declined 13% year-over-year in the quarter.

As a result of our work over the past two years, we've shifted our portfolio, more toward our areas of strength and our focus growth markets.

Comparing our portfolio mix in 2008 to our mix today, about 75% of our revenue today comes from the areas of IT outsourcing, systems integration and consulting, and technology.

This compares to about 66% in 2008.

This work has helped reshape our profitability.

Our trailing 12-month profitability, while down somewhat from the second quarter of 2010, is up by $235 million, compared to the third quarter of 2009.

As we look ahead, our full business priorities that I just discussed will continue to be our road map.

By focusing on these four priorities, we have returned the company to profitable performance and cash generation, and significantly strengthened the balance sheet.

And in this most recent quarter, we reached the 8% operating margin target in our services business.

Having recently completed our strategic planning cycle, I would like to take a moment to describe our longer-term goals for the business.

Over the next three years, we want to build on the stronger foundation we had built over the last two.

Our three-year goals for Unisys are, to grow the business in our areas of strength, to consistently deliver an 8% to 10% services operating margin, to continue to strengthen the balance sheet to a 75% reduction in debt by the end of 2013, and to significantly improve our annual pretax profit to $350 million in 2013, assuming no change in pension encumbered expense.

We believe that if we achieve these goals, it will put Unisys in a strong competitive position with solid financial underpinnings.

Thank you, again, for joining us this morning.

Now here's Janet to take you through our third quarter results in more detail, and then we'll be happy to take your questions.

Thanks, Ed.

And hello, everyone.

Our results this quarter showed our continued progress improving our services operating margins, improving our free cash flow, and strengthening our balance sheet.

We made this progress despite lower overall revenue, including lower high-margin ClearPath revenue.

This morning, I will provide more details on our financial results, including expenses, margin trends and cash flows.

Before commenting on our continuing operations, I want to discuss our divested Unisys insurance Services Limited business, UISL, in the UK.

As previously disclosed, we sold this business in the quarter.

We recognized a pretax gain of $4.5 million on the transaction.

The company's financial statements have been retroactively restated to report the UISL business as a discontinued operation.

As a result, UISL operating results, as well as the gain on the sale are reported in one line, income from discontinued operations on the income statement.

Along with the results of our health information management or HIM, this continued operation, which was sold in the second quarter of 2010.

Additionally, UISL assets and liabilities are reported as assets or liabilities of discontinued operations, on the December 31, 2009 balance sheet.

We closed the quarter with $5.8 billion in services backlog, which is a similar level as a year ago.

September 30, 2010, backlog was up from June 30, 2010, backlog of $5.5 billion, principally due to the impact of translating the backlog at different quarter-end currency rates.

Approximately $800 million of the September 30, 2010 services backlog, is anticipated to be converted into fourth quarter 2010 services revenue.

We typically have between 87% to 93% of our quarterly services revenue in our opening backlogs.

The balance of our services revenue in a quarter, comes from sell and bill business during the quarter.

Excluding the $500 million third quarter 2009 BPO contract extension in our IPSO joint venture in the UK, our services orders showed low-single digit declines in the quarter.

This decline primarily reflected a double-digit decline in systems integration and consulting orders, infrastructure services and core maintenance orders, which was more than offset by double-digit growth in information technology outsourcing, ITO orders.

The third quarter represents the second consecutive quarter of sequential double-digit order growth in our ITO business.

The declining orders for core maintenance, reflected the impact of the sale of our check reader and sorter equipment business, and the on going secular decline.

Geographically, total US orders increased by double digits in the quarter, with growth in both our US federal and commercial businesses.

Subtle international orders were down double digits in the quarter.

Substantially all of this decline was in the UK, which had the large 2009 BPO win and IPSO that I mentioned earlier.

Moving on to slide 7, which shows a comparison of our financial results in the quarter.

At the top-line, we reported revenue of $961 million.

This was down 13% year-over-year.

Approximately two percentage points of the decline is attributable to the divested businesses.

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

Based on today's rates, we anticipate no currency impact on the revenue comparison when comparing fourth quarter 2010 revenue to fourth quarter 2009.

Our technology business saw revenue declines of 31%, as sales of our ClearPath servers were down versus the prior year.

This decline follows three good quarters of ClearPath growth.

Year-to-date, technology revenue was up 2%.

Services revenue declined 10% in the quarter, despite growth in ITO revenue.

Approximately two percentage points of the decline resulted from businesses we have divested over the past year.

On lower technology revenue, we reported a third quarter gross profit margin of 24.7%, down from 26.9% in the year-ago quarter.

We continue to make progress in reducing costs and enhancing the efficiency of the business.

Operating expenses, which include SG&A and R&D, declined 13% in the quarter.

Our overall operating profit margin was 7.9%, down from 10.1% a year ago, due to the impact of lower ClearPath revenue.

Our services operating margin of 8% improved by 50 basis points year-over-year, and was within the targeted long-term operating margin range for our services business.

We had a $28 million tax provision in the quarter, compared to $28 million in the third quarter of 2009.

Included in our third quarter 2010 tax provision is a $4 million charge related to a change in UK tax rates.

And, as we said previously, our tax provision can vary significantly from quarter-to-quarter, depending on the geographic distribution of our income.

After taxes, we reported net income from continuing operations of $22 million in the third quarter, down 58% from the net income, of $52 million in the third quarter of 2009.

Including the gain on the sale of UISL, we reported third quarter 2010 net income of $28 million, or $0.65 per diluted share, compared with net income of $61 million, or $1.48 per diluted share in the third quarter of 2009.

Fully diluted shares for the third quarter of 2010 were $43.3 million, compared to $41.4 million in the third quarter of 2009.

Moving to slide 8, outlining some of our key profitability metrics over the past several quarters.

Aggregate gross margins decreased year-over-year, due to lower ClearPath revenue.

Services gross margin as a percent of revenue, increased from 19.9% a year ago, to 20.6%, due to an improved revenue mix and improved cost efficiencies in our services labor model.

Operating margins continue to benefit from the impact of our cost-reduction actions on SG&A and R&D expenditures.

Operating expenses were reduced by $25 million from the year-ago quarter, and remained stable as a percentage of sales at 17%.

EBITDA was 14% of revenue for the third quarter of 2010.

Moving to our third quarter revenue and margins by portfolio, on slide 9, you can see that services revenue declined 10% year-over-year, 8% excluding the impacted divested businesses.

Margins as a percent of revenue, increased year-over-year in our services business on lower services revenue.

Services gross margins improved to 20.6% from 19.9% a year ago.

And services operating margins also improved to 8%, from 7.5% a year ago.

Services margins improved sequentially for the second consecutive quarter.

Within our outsourcing revenue, ITO revenue was up slightly in the quarter.

Outside of our US federal business, ITO revenue grew 4%, and we're also encouraged to see overall ITO revenue grew 4% sequentially, after growing 5% sequentially in the second quarter.

This integration and consulting revenue was declined 11% in the quarter.

Infrastructure services revenue declined 13% in the quarter.

Approximately five percentage points of that decline, resulting from the sale of our check reader and sorter equipment business earlier this year.

Core maintenance revenue declined 32% in the quarter, approximately 12 percentage points of that decline, was the impact of the divested businesses.

And BPO revenue declined 25% in the quarter.

Last quarter, we indicated that we typically have between 9% and 13% of our quarterly services revenue, coming from sell and bill business in the quarter.

In the third quarter, after adjusting for the UISL divestiture, 93% of our services revenue was in backlog at the beginning of the quarter.

Our services sell and bill revenue was lower than prior quarters, due to lower volume of federal services and low margin infrastructure services revenue.

Moving on to technology on slide 10, technology revenue decreased 31%.

This included a one percentage point impact related to divestitures made in the past year.

Lower ClearPath sales drove the reduction and technology margins in the quarter.

We reported a technology gross margin of 47.6%, down from 55.2% a year ago.

Our technology operating margin declined to 7.9%, compared with 21.2% in the third quarter of 2009.

It's worth noting, that despite the lower reported revenue and margins for technology business in the third quarter, for the year-to-date, our technology revenue is 2% above prior-year levels.

And the technology profit is $80 million, or 488% higher than the first nine months of 2009, and our operating profit margin is 14.6 percentage points higher than at the same point last year.

Slide 11 shows our third quarter revenue by geography and industry.

Within North America, our US revenue in the quarter was $438 million, a decline of 15%.

About four percentage points of this decline results from divestitures.

The rest of the decline was driven by lower revenue, outside of our US federal business.

Our US federal business was up slightly compared to the year-ago quarter, and improved by 5% sequentially.

International revenue was down 12% in the quarter on a constant-currency basis.

International revenue was down 10%, as a revenue growth in Latin America was offset by declines elsewhere.

From an industry view, our public sector, which includes our US federal government business, remained our largest single vertical, with 47% of our revenue in the quarter coming from the sector.

Our commercial sector, at 32% of our revenue, is at a consistent percentage of our revenue as the prior year, and our financial sector, which declined year-over-year, continues to struggle with the challenges, our clients, and our base within that industry.

Turning to slide 12, as Ed mentioned, our revenue mix is shifting as we focus on our areas of strength, and deliver solutions in those areas, by leveraging our capabilities in systems integration and consulting, IT outsourcing and technology.

And this slide demonstrates that shift over the past number of quarters.

Moving to cash flow, we generated $127 million of cash from operations in the quarter, up from $94 million in the year-ago quarter.

We continue to manage our business without utilizing our accounts receivable securitization facility during the third quarter.

In contrast, utilization under this facility was $118 million at September 30,2009.

Capital expenditures declined to $46 million, from $48 million in the year ago quarter.

Looking ahead, we continue to anticipate capital expenditures of $200 million to $225 million for the full year of 2010.

After capital expenditures, we generated $81 million of free cash in the third quarter, compared with free cash flow of $46 million in the year of ago period.

Depreciation and amortization was $61 million in the quarter.

For the full year of 2010, we expect D&A of around $240 million.

As you may recall from my discussions last quarter, under the terms of certain of our debt indentures, proceeds from the HIM sale we closed in April 2010, are restricted to be used for certain capital expenditures, acquisitions of certain assets and repayment of certain debt obligations.

During the third quarter, we used approximately $90 million of the proceeds for purposes allowed under the indentures.

The remaining $11 million is restricted, and is included in prepaid expense and other current assets on the company's September 30 balance sheet.

We ended the quarter with $689 million of cash on hand, up from $497 million at June 30, 2010.

As we have said previously, one of our primary goals, is strengthening our balance sheet per reduced net debt.

The graphic on slide 13 demonstrates the progress we have made towards that goal since December 31, 2008.

We have reduced our long-term debt and the utilization of our AR securitization facility, by a combined $364 million, from $1.2 billion at December 31, 2008, to $838 million at September 30, 2010.

Consequently, our adjusted net debt positions, or the amount by which our debt obligations exceed or cash and restricted cash balance, associated with the HIM sale proceeds, has declined by $520 million since December 31, 2008, to approximately $138 million at September 30, 2010.

As I'd noted earlier, $417 million of this reduction occurred during the past 12 months.

This has significantly improved the operating flexibility of the company.

We will continue to reduce debt where possible, and maintain our efforts to strengthen the balance sheet.

On to pensions, for 2010, we have not changed our expectation for $115 million of cash pension funding requirements.

We have made $61 million of contributions in the first nine months of 2010.

Beginning on January 1, 2011, we will re-enstate the Company's US 401K matching contribution, but at a lower rate than when we suspended these contributions on January 1, 2009.

As before, we expect to fund the match in Unisys common stock.

We estimate that our matching contributions will be approximately $14 million during 2011.

In closing, we continue to make progress during the quarter in reducing expenses, getting our services operating margins within our long-term targeted range, and strengthening the balance sheet.

Our progress in these areas was recognized from external perspective by S&P, Moody's and Fitch during the third quarter.

We are pleased with the improved ratings these agencies have awarded us, but know we have still a lot of work ahead of us.

As we move through the final quarter of 2010, and look forward into 2011, we will remain focused on those areas, while working to drive profitable revenue growth in our areas of strength.

Thank you for your time, and now I would like to turn the call back over to Ed.

Thank you, very much.

Operator, we'd like to open the call up to questions at this point, if we may?

Thank you.

(Operator Instructions)

We'll go first to Joseph Vafi of Jefferies and Company.

Hi, good morning, thanks for taking my question.

First question, on services, operating margin, a nice lift there.

I was wondering if we could get more color as to what percentage of that lift, and maybe especially on the growth line, was due to efficiencies and how much due to mix change?

And what do you expect on mix change relative to that margin moving forward?

Hi, Joe.

When we're looking at the services operating margins improvement, we believe most of that change is driven by the operating efficiencies.

We, within services, have some declining revenue within the core maintenance, which is at a higher margin rate than the rest of the services business.

So, you have that offsetting growth in that decline and that revenue at higher margin dollars not being replaced, almost at a 2-for-1 type of rate with the rest of the new serves portfolio.

So, as we deal through that reduction, our operating efficiencies and focus on quality service are the main driver for the improvements in the margin.

And I think these efficiencies come from the greater use of lower cost labor, and it's also a lot of this is operational execution.

Services business is about doing a thousand things right every day and I think we're just getting better and better at execution of those thousand things and so it's all the things we talked about, Joe.

It's the consistent delivery on a global basis, a better utilization of lower-cost labor pools, more automation in the service delivery, and probably being more selective in the opportunities that we pursue.

Okay.

That's fair and then second kind of quarter here of growth and IT outsourcing, which is nice to see.

Maybe a little bit more color there to on the types of organizations, maybe verticals, where some of your new service offerings are finding -- where you're seeing strengthened in those new lines of business?

From a vertical standpoint, I don't think you can point to any one vertical that is key to it.

I think the way of looking at it in terms of where we've been most successful is where we have been able to work with clients that are interested in integrating the full scope of end-user support.

So instead of looking at a deal that's strictly for field engineering support or strictly for help desk support or strictly network management, where clients are looking to consolidate that full scope of support for the end-user across those boundaries appears to be where we're making the most progress and having the most success as our offerings are really designed to do just that.

To help the client move the service delivery from an on-site service delivery to an off-site help desk to self-service.

Okay and then just a final question, Janet, thanks for the color here on how much of the services backlog may convert here in Q4.

I was just kind of looking for maybe some extra color here on the hardware side of the business.

By looking at the US decline versus international, I'd probably make a bet that a lot of the ClearPath business was US-based in the second, or in the third quarter.

I'm sorry in the first couple of quarters of the year and that might have dropped off.

Would you expect to see kind of a normal seasonal uplift in Q4 in the hardware business?

I think as we said in the call last quarter and will continue now, we do think -- you have to look at the technology business on an annual basis.

Our first goal, as Ed mentioned, was to stop the decline.

We had a very strong first-half of the year.

Actually, three strong quarters of growth in that ClearPath business.

We -- the geographic makeup of the customer base is consistent with our overall geography, and as we look forward to closing out the quarter strong, but we do recognize that we have had a very strong three quarters in the end of 2009 and the first half of 2010.

All right.

Thanks very much.

Our next question comes from Jeff Harlib of Barclays Capital.

Hi, good morning.

Just following up on technology business, can you talk about why the business has been so strong during typically not seasonally-strong periods that had to do with product refresh?

What's been going with the revenue trends in the business?

Yes, I think a number of different things.

I'm hoping I get your question right.

You're breaking up a little bit, but in terms of what are all the different factors coming in to play in the technology business is the way I heard the question.

Yes.

A number of things have been going on over the last year, year and a half.

There is certainly elements of strong performance in the last half of 2009 and early 2010 that are related to a refresh cycle.

But I think it's also related to our recommitment to the ClearPath technology as a platform and reassuring our clients that we are embracing that technology and continuing to invest in it to deliver greater capability, now and into the future.

I think as we've addressed our debt situation, customers that were concerned about us from a viability standpoint and perhaps reluctant to invest in our technology as a result of that, we have seen a retracing of those thought processes and they now are re-embracing our technology.

So, there is all of those things that are factors into the overall flow of the technology business.

As Janet said, what we're focused on is making sure that we don't continue this assumed, quote, secular decline in the technology business.

We think our platforms continue to be the most innovative open mainframe platforms in the industry, and we're seeing, I think, over the last 12 months, very good uptake in our clients embracing those enhancements.

It continues to be a difficult business, though, to forecast on a quarter-by-quarter basis because so much of it's dependent on individual customers' decisions and by sell and bill transactions during the quarter.

Okay.

That's helpful and just in services, can you talk a little bit about systems integration was somewhat soft, down 11% and just more generally about how you can reduce some of these year-over-year revenue declines in services?

On systems integration in particular, it seems to be project-oriented and those are discretionary projects in some cases where, in a difficult economic climate, clients can defer or downscale the size of those projects.

But more importantly, we're also focusing on profitability in that part of our business.

I think we're being more selective in what we pursue and making sure that we can deliver the solutions that we're proposing in a profitable way.

The services business in total, I think, we're moving more to an annuity-based business, as you can see the relative strength of our IT outsourcing business, and in terms of overall revenue growth as a part of your question on services side, I think we're following a fairly logical progression as we improve the Company.

First, get the cost structure right, the second to improve the balance sheet and third is to make sure we have a portfolio of offerings in the market in the areas that are of interest to clients and that builds a strong foundation on which to start focusing on revenue growth.

So, we're certainly aware of the challenge and we're committed.

Okay, and just on your generating pretty good free cash flow, you have almost $700 million in cash on the balance sheet, what about the use of that liquidity?

You have three bond issues that are not cullable now, what is your thinking on how to deleverage the company?

As Ed mentioned in his comments, our goal over the next three years is to reduce the debt by 75%.

All of our debt instruments that we have outstanding, either mature or are cullable during that time period, and we will continue to look for the appropriate transactions that provide us with the long-term capital improvement that we're working towards that strengthen the balance sheet and help position the Company of from a financial strength standpoint and better competitive situation.

Okay.

But I don't want to speculate on what transaction it may or may not be.

We have a portfolio debt, as I said, that has either maturity or cull provisions happening in that entire three-year window.

Okay, and you're still focused on debt reduction as opposed to other uses of cash?

Yes, we are and that is one of the objectives that Ed outlined.

Okay.

Thank you.

Our next question comes from John Moore of KDP Investment Advisors.

Hi, good morning.

Morning.

Just on the technology business is based on what orders and such for the quarter, it's hard to predict on a quarterly basis.

Is this sort of a restoration of the business?

Is that something that could be getting back on track as soon as this quarter is at, say more of into 2011 expectations?

Well, again, as we said, we believe that we've made some significant improvements in the technology business over the last 18, 24 months.

As Janet mentioned, it seems to be more of a business that you think of in annual terms as opposed to in quarterly terms because there is so much sell and bill activity that occurs within a quarter, so much depending on individual customer transactions within that quarter.

It makes it a difficult when we forecast on a quarterly basis.

But we're pleased with the strength that we saw in the back half of 2009 and in early in 2010, as we mentioned on a year-to-date basis, the technology business is up year-over-year.

But again, it's difficult to forecast on a quarterly basis, coming off of a strong first half this year and also compared to a very strong fourth quarter of 2009.

Okay.

And then for BPO services, should we expect some sort of stabilization there as the outlook in your view, stabilizing for the top-line in that particular business?

Just a comment in the BPO area, the largest BPO operation that we have is in the UK, our IPSL joint venture, which processes checks, and as you would expect, that would continue to decline over time.

It is not an area of focus for us as Ed's motioned and I have mentioned in our comments both this quarter and in prior quarters.

Okay.

But I want to add to it.

When we say we're not focusing on it, what we mean is we're not investing for future growth in that part of the business.

We have a number of engagements that are business process outsourcing oriented that we're quite happy with.

Okay.

Then on the TSA, how should we think about that going forward?

As that transitions.

We're under contract with the TSA through the end of November.

As I mentioned on the call last quarter, we're running at about $10 million of revenue a month on that contract and we expect our obligations with TSA to end on November 30.

And the last one is housekeeping.

On restricted versus unrestricted cash, what -- how much of the cash balance is restricted?

None of the cash balance is restricted.

The restricted cash fits in prepaid and other current assets.

Great.

Thank you very much.

We'll take a followup from Joseph Vafi of Jefferies & Co.

Hi, thanks for the followup.

If SG&A continues to get leverage there.

How should we think about that moving forward and has there been any pullback or dial-back on dead-end proposal spend that may be driving lower SG&A?

The second part of your question, the answer is no.

There has been no deliberate dial back and proposal spend.

On how to think about going forward, I'd just reflect back that late 2008, we set ourselves a goal of reducing our overhead by $250 million, and we delivered that by the end of the first half of this year.

We have not set a discrete further goal beyond that, but I think we have an organization that, on a continuous basis, is looking for further opportunities to become more efficient and more effective, and I think you see that in the continued reduction of SG&A in Q3 of this year.

And we'll keep at it.

Okay.

And then just going back to the IT outsourcing business that is starting to grow here.

Can you give us an idea of the length of the average contracts in that business so we can start getting an idea of the visibility and recurring revenue that you have in that line of business?

It's a good question, Joe.

I would estimate probably in the three- to five-year range.

Okay.

Probably closer to the three than to the five.

Okay, great.

Thank you very much.

Thank you.

We'll go next to Bill Smith of William Smith and Company.

Hello Ed.

Could you comment on the announcement yesterday regarding your relationship with Apple and how you see that developing going forward?

Thanks, Bill, for the question.

Yes, I read the article yesterday and I would say I think the article suggests that there's more there than there is.

We signed a systems integration agreement with Apple where it provides us the opportunity to be a systems integrator working with Apple in the marketplace.

There is no dollar value associated with that contract.

We're pleased to have it.

We're please to have the opportunity to work with Apple.

We think they offer some -- obviously, some solutions in the marketplace that are quite hot now, and we are working with them on some live opportunities.

But there's really nothing there at this point from a revenue standpoint that you should be reading into that.

Okay and then could you comment on the Colt Technology announcement and what those opportunities are with Colt and Unisys as it relates to Europe and where they're involved?

Yes, well as we put in our press release along with Colt, we're helping Colt stand up a cloud solution where they can take a set of offerings to their clients in Europe that will be branded under their name.

We're helping them create the cloud solutions that they'll be taking to the market for their customers.

Okay.

Thank you.

We'll go next to Frank Jarman of Goldman Sachs.

Thanks.

Thanks for taking my question.

I guess to follow up on the balance sheet, given your comments about a goal of paying down 75% of your debt by 2013.

Can you provide some more details around how you plan to go about that?

It sounds like you're primarily focused on culls and natural maturities, but specifically, I wanted to sort of push you on, given sort of the low returns on cash today, as well as your relatively high carry cost of debt, does it make sense to actually try and proactively tender for some bonds at this point and issue at a relatively lower coupon?

Thanks.

What I said in my comments is that our goal to reduce debt by 75% over the next three years, that was in our unexisting debt instruments, they all are mature or cull within 2012 so that gives us flexibility.

We obviously have a significant cash balance and both which will absolutely come into play as we decide how to reduce that 75% debt over time, but I'm not going to comment on any specific plan until we announce what we're intending to do.

Okay.

Thanks and then as I do think about the balance sheet, how much cash do you typically think you need to operate with on a go-forward basis and how much should I consider as excess cash on the balance sheet right now?

We have not commented on that.

All I will say is that we have run with substantially less cash than we have right now, and we do have more than sufficient cash on hand to run operations.

Great and then I guess the last question I had was on the CapEx plan, you updated us on the 2010 expectations for $200 million to $225 million, you can provide me with any color for CapEx needs in 2011, as well as pension funding needs for 2011?

Thanks.

We have not provided guidance on either one of those items for 2011 for either the CapEx or for pensions.

So, I think what I want to point you back to is the rate in which we have been funding, which rate of capital expenditures we have had in 2010, as well as the funding in 2011 and prior quarters.

We have commented that in the US pension plan, we're not currently funding that plan, but as a result of the asset positions and the change in legislation, we do think that we will begin funding into that plan starting in 2012.

Great.

Thanks.

That's all I had.

Appreciate it.

Thanks, Frank.

At this time, we have no further questions in queue.

I would like to turn the conference back over to the Chairman, Ed Coleman, for closing remarks.

Thank you, everyone, for joining us on the call today.

For all of the Unisys employees that are listening to this call, I also want to thank you for all of your hard work and the contributions that you're making and we'll talk again soon.

Thank you very much.

That does conclude today's conference, ladies and gentlemen.

We appreciate everyone's participation today.