Unisys Corp (UIS) 2010 Q4 法說會逐字稿

Good day, and welcome to the Unisys fourth quarter and full year 2010 results conference.

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

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

Please go ahead.

Thank you, operator.

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

Earlier today, Unisys released its fourth quarter and full year 2010 financial results.With us this afternoon to discuss our results are Ed Coleman, our CEO, and Janet Haugen, our CFO.

Before we begin, I want to cover 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 afternoon 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 include 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 reconciliation charts at the end of the presentation.

Finally, I would like to remind you all that forward-looking statements made during this conference call are subject to various risks and uncertainties that should 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 would like to turn the call over to Ed.

Thanks, Niels.

Hello everyone.

We appreciate you joining us today.

Please turn to slide one, which summarizes a number of the highlights from 2010 that I'll be referencing in my comments.

Before Janet takes us through the numbers for the fourth quarter and full year, I would like to make some observations about where we are, who we are, and where we're going.

It's an exciting time to be at Unisys.

We made continued progress against our priorities in 2010 and entered 2011 in what we believe is a strong, competitive position.

First, having divested a number of non-core businesses, we have a sharpened focus with outstanding solutions for our clients in the areas of security, data center transformation, and outsourcing, end user outsourcing, and application modernization.

These solutions are enabling us to win exciting new engagements that help our clients deal with the disruptive trends associated with cloud computing, cybersecurity, mobile computing, social computing, smart computing, and IT appliance offerings.

For instance, in cloud computing, we're the prime contractor, partnering with Google to build a new cloud-based email and collaboration system for the General Services Administration, a first of its kind cloud implementation in the US federal government.

We've also recently announced contracts to build advanced cloud-based solutions for the city of Minneapolis, Cole Communications and the University of Salford in the UK.

Second, we've invested in building world class IT outsourcing systems integration and technology, skills, infrastructure, and products to enhance our services and solutions that are delivered around the globe.

Slide two highlights our global service delivery network, which includes more than 30 centers and over 17,000 service and delivery professionals.

Our delivery model is based on IDL service standards, and we believe we're the first global player to achieve ISO 20000 certification in all of its operational centers.

As a result, we can provide consistent levels of service and support to our clients regardless of where they're located around the world.

This commitment has resulted in improved client satisfaction, new customers, and a growing reputation for service excellence.

In our technology business, we significantly enhanced our flagship ClearPath platform to expand the market for what we believe is the most reliable and secure Open Enterprise Server on the market.

Recent innovations include secure partitioning for the Intel Xeon platform and integrated support for Apple iPhones.

Third, at the same time we've made these investments, we grew our 2010 operating profit by 14% and improved our operating margin to 9.3%, and for the second consecutive quarter, we achieved the services operating margin within our targeted 8% to 10% range.

We also increased pre-tax income from continuing operations to $223 million for the full year on lower revenue.

We've also continued to strengthen our balance sheet.

Slide three shows the improvement we've made over the past two years.

As you can see, we've reduced debt while steadily increasing our cash position to $828 million at year end 2010.

In the past 12 months, we've reduced our net debt by $368 million and we achieved a milestone by ending 2010 with more cash than debt.

All this adds up to a Company that we believe is establishing a leadership position in many important and growing areas of the IT industry, as we strive to meet the strategic financial objectives that I outlined last quarter.

Those objectives which you can see in slide four, over the next three years, are to increase our annual pre-tax profit to $350 million in 2013, assuming no change in pension income or expense from 2010.

Second, to reduce our remaining debt by 75% by the end of 2013.

And third, consistently achieve an 8% to 10% services operating margin.

To do that, we're focused on growing our IT outsourcing and systems integration services at market rates, adjusted for the fact that we no longer have the TSA revenue in 2011, while maintaining flat technology revenue over the three-year period.

I'm pleased that we made headway against these revenue growth targets in 2010.

We grew our non-US federal IT outsourcing business by 6% and our technology revenue was flat as we grew sales of our ClearPath servers by 5% but we have a great deal more work to do.

We recognize that we must not only sustain the progress we've made in IT outsourcing technology, but also grow our systems integration business.

In 2011, we'll be focused on extending the success we've seen in IT outsourcing and technology into our systems integration business.

Driving that, we see key growth opportunities for Unisys in the years ahead, based on the six disruptive trends I referred to earlier, and the capabilities and portfolio that we bring to market.

As we drive toward our stated three-year goals, we will also continue to closely manage expenses and work to further improve the cost efficiency of our delivery model.

To that end, in 2010, we increased our use of lower cost labor resources to 29% of our employee base at year end, up from 20% at the beginning of the year.

As we look at the market, we believe we have the right skills, infrastructure, and strengthened portfolio to meet growing market requirements for today's disruptive technologies.

We have a strong client base and are known for service excellence and quality.

And because of the work we've done, we have an improved cost structure and balance sheet that enables us to compete more effectively.

I look forward to reporting on our progress over the year ahead.

I would like to thank you again for joining us today.

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

Thanks, Ed, and hello everyone.

We closed out 2010 with strong fourth quarter margin and cash flow performance, demonstrating our continued discipline and enhancing our cost competitiveness and optimizing cash across the Company.

We saw some encouraging improvements in the top line as our non-US federal ITO revenue rose by about 6% for the year, and our technology revenue was stable for the full year, with our ClearPath revenue growing 5%.

We also saw continued progress in our efforts to strengthen our balance sheet and capital structure and we are focused on extending that progress in 2011.

This afternoon, I will provide more details on our fourth quarter results, as well as our full year 2010 financial results.

I will also update you on our capital and pension funding expectations for 2011.

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

We closed 2010 with $5.8 billion in services backlog, which was flat sequentially from September 30, and down 1% from December 31, 2009.

Currency had no impact on the year-over-year comparison.

Approximately $725 million of the December 31, 2010 services backlog is anticipated to convert into first quarter 2011 services revenue.

Over the past eight quarters, we typically have between 87% to 93% of our quarterly services revenue in opening backlog.

The balance of our services revenue comes from sell and build business during the quarter.

Fourth quarter services orders declined 17% year-over-year.

This decline was primarily attributable to lower ITO orders, after two consecutive quarters of sequential double-digit ITO orders growth.

We had orders growth in business process outsourcing and infrastructure services, due primarily to the renewal of contracts with several large customers.

In terms of geographic trends, we saw good services order growth in our Asia-Pacific and European regions during the fourth quarter.

Orders in Latin America and North America, including our US federal business, were down.

Internationally, on a constant currency basis, our services orders were up 5% with order growth in both Europe and Asia-Pacific.

Slide six highlights our financial results in the fourth quarter.

At the top line, we reported total revenue of $1.04 billion in the quarter, which was down 10% year-over-year.

2 percentage points of the decline was attributable to divested businesses, and currency also had a 2 percentage point negative impact on our revenue in the quarter.

Based on today's rates, we anticipate currency to have about a 1 percentage point to 2 percentage point positive impact on revenue in the first quarter of 2011.

We reported operating income of $134.6 million in the quarter, which is about flat with a year ago quarter's operating income of $134.1 million.

Improved gross profit margin and continued reductions in operating expenses resulted in an improved operating profit margin of 12.9% on lower revenue, up from 11.6% a year ago.

Pre-tax income from continuing operations increased to $103.2 million from $98 million in the year-ago quarter.

At the tax line, we had a $6.1 million tax provision in the quarter compared with a $12.6 million tax benefit in the year-ago quarter.

As I have said previously, 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 $99.2 million in net income in the quarter, down $15.3 million from $114.5 million in the year-ago quarter, primarily due to the swing in taxes.

Slide seven outlines some of our key profitability metrics over the past several quarters.

Gross margins decreased year-over-year due to lower revenue.

However, despite lower revenue in the quarter, the percentage of revenue and gross margin increased from 29.4% to 29.8% due to improved cost efficiency.

Operating expenses declined $29 million from the year-ago quarter and was 17% of revenue.

And operating margins continued to benefit from the impact of our cost reduction efforts.

EBITDA was 18% of revenue for the fourth quarter of 2010.

Additional evidence of our improved profitability over the past 12 months can be seen on slide eight, where our trailing 12-month operating income for 2010 increased by 14% from a year ago, and now represents 9.3% of our trailing 12-month revenue versus 7.5% for 2009.

Moving to our fourth quarter revenue and margins by portfolio, on slide nine, you can see as we reshape our revenue profile to a more profitable business, services revenue declined 11% year-over-year.

2 percentage points of this change was attributable to the impact of divested businesses and 2 percentage points related to currency changes.

Services gross profit margin as a percentage of revenue increased year-over-year and for the third consecutive quarter.

Services gross margin improved to 21.9% from 19.4% in the fourth quarter of 2009.

For the second consecutive quarter, services operating margin was 8% and was within our targeted services operating margin range of 8% to 10%.

And services operating margin also improved by 80 basis points year-over-year.

Across our services portfolio, we saw declines in year-over-year revenue primarily reflecting lower demand for project-based services and the continued reshaping of our services portfolio into one that we believe will be more differentiated and more profitable.

Against this challenging revenue picture, a particular bright spot was our ITO revenue outside of our US federal business.

It continued to grow, increasing by about 4% year-over-year.

Moving on to technology on slide ten, technology revenue decreased 4%.

3 percentage points of the 4 percentage point decline related to divestitures made during the past 12 months.

We reported a technology gross margin of 56.6%, down from 61% a year ago, driven by lower ClearPath sales.

However, our technology operating margin only declined by 1 percentage point to 30.5% compared with 31.5% in the fourth quarter of 2009, because of cost reductions in year-over-year operating expenses.

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

Our North America revenue represented 41% of our revenue in the quarter and declined 12% in the quarter.

Divested operations were 4 percentage points of the decline.

Within North America, our revenue from the US federal government represented 19% of total Unisys revenue in the fourth quarter and declined 9% year-over-year due to the ending of our TSA contract in November, as well as the impact of the US federal budget timing.

International revenue declined 9% in the quarter due to lower revenue in our European and Asia-Pacific regions.

On a constant currency basis, international revenue declined 6%.

From an industry perspective, public sector remained our largest single industry.

Revenue from commercial industry customers represented 32% of our fourth quarter 2010 revenue, while financial sector was 24%.

Turning to slide 12, you can see the changes in our revenue mix, as we reshape our business for improved profitability and cash flow generation.

As we leverage our capabilities in systems integration, IT outsourcing, and technology, we expect the shift to continue over time.

Slide 13 summarizes our financial results for the full year 2010.

At the top line, we reported revenue of $4.02 billion in 2010, which was down 8% from 2009.

2 percentage points of this decline are attributable to divested businesses and currency had a 1 percentage point positive impact on revenue in 2010 when compared to 2009.

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

However, as a percentage of revenue, our gross profit margin improved 130 basis points in 2010 compared to 2009.

Operating expenses declined 11% year-over-year.

After expenses, we reported an operating profit of $375.7 million, or 9.3% of revenue compared with operating profit of $330 million, or 7.5% of revenue in 2009.

This was an increase of 180 basis points.

We reported pre-tax income from continuing operations of $222.9 million compared with $218.2 million in the fourth quarter of 2009.

After taxes, we reported net income from continuing operations of $158.9 million compared with $172 million in 2009.

The year-over-year reduction in net income from continuing operations was attributable to the change in taxes.

Now I'll briefly cover details on our full year 2010 revenue and margins by portfolio.

Slide 14 shows that our 2010 services revenue declined by 10% from 2009.

Despite the lower revenue -- reflecting reduced demand for project-based work, and continued reshaping of our services portfolio, margins increased as a percentage of revenue.

Services gross margin improved to 20.1% from 19.2% in 2009.

Our services operating margin is 6.7%, improved by 50 basis points from the prior year.

Within outsourcing, ITO revenue was flat for the year.

ITO revenue from the federal government was down for the year due to the reduced revenue on the TSA contract.

Outside of the US federal government, ITO revenue rose by 6% year-over-year.

Systems integration and consulting revenue declined 10% year-over-year.

Business process outsourcing revenue declined 18% in 2010.

Infrastructure services revenue declined 16% in 2010, with approximately 4 percentage points of this decline resulting from the sale of our check reader and sorter equipment business.

Core maintenance revenue declined 25% year-over-year and approximately 12 percentage points of the decline was the impact of divested businesses.

As shown on slide 15, technology revenue was flat for the year, but up 4% excluding the impact of divestitures made during the past 12 months, and ClearPath sales increased 5% in 2010.

The higher ClearPath sales contributed to an increase in technology gross margins for the full year.

We reported a technology gross margin of 55.1%, up from 49.6% a year ago.

On higher gross margins and significant reductions in year-over-year operating expense, our 2010 operating margins improved by 920 basis points to 21.6%, from 12.4% in 2009.

Slide 16 outlines our revenue profile by geography and industry.

North America revenue, including our US federal government business, represented 44% of our revenue for the year and declined 13% in 2010.

Divested operations were 4 percentage points of the decline.

International revenue declined 4%, 6% in constant currency, and represented 56% of total revenue in 2010.

Our Latin American region grew 7% year-over-year, while Asia-Pacific revenue was flat, and we saw a 9% decrease in revenue in Europe.

Looking at revenue by our customers' industry, our largest industry remained the public sector, which includes our US federal government business, as well as revenue from other government agencies worldwide, represented 45% of 2010 revenue, with our US federal business representing 21% of total Unisys revenue.

Overall, public sector revenue fell 8%, while US federal revenue declined 9%.

Our commercial customers represented 33% of our 2010 revenue and declined 4% for the year.

Our financial services customers represented 22% of our 2010 revenue and declined 15%.

Slide 17 provides more detail on the performance of our federal government business in 2010.

Our federal systems business, there's three primary sectors of the US federal government -- Civilian, Homeland Security, and Department of Defense.

Civilian represents our largest single revenue base within the US federal government and accounted for about 40% of our overall US federal government revenue.

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

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

As you can see in this slide, our overall US federal revenue declined 9% in 2010 to $842 million.

From a quarterly perspective, we had seen some improvement in revenue during the first three quarters of 2010, but the fourth quarter revenue declined sequentially due largely to the end of the TSA contract effective November 30, as well as some impact from the US federal government budget situation.

We ended 2010 with about $396 million of US federal services backlog, which was down 8% compared to the prior year end.

The ending of our TSA contract was the primary reason for this decline.

Please turn to slide 18 for an overview of our cash flow performance in the quarter and the full year.

We generated $187 million of cash from operations in the fourth quarter of 2010 compared to $215 million a year ago.

As part of our ongoing focus to reduce the cash requirements of our business model, capital expenditures were $41 million in the fourth quarter of 2010, down from $52 million a year ago.

We generated $146 million of free cash flow in the fourth quarter.

And this compares to free cash flow of $163 million in the fourth quarter of 2009.

Overall, for 2010, we generated $337 million of cash flow from operations which included the impact of $100 million reduction in the usage of our US accounts receivable securitization facility to zero during 2010.

This compares to $397 million in cash flow from operations during 2009, which also included a reduction in the usage of our US securitization facility from the prior year-end levels, a reduction of $41 million.

For the full year 2010, capital expenditures of $203 million were essentially flat versus 2009.

For the full year 2011, we anticipate capital expenditures in the range of $200 million to $225 million.

Including the impact of the reduction in the use of the accounts receivable securitization facility, free cash flow was $134 million for the full year of 2010 compared to free cash flow of $196 million for the full year of 2009.

Depreciation and amortization was $61 million in the quarter and $251 million for the full year of 2010.

For the year 2011, we expect depreciation and amortization of around $200 million.

Cash increased by $181 million year-over-year.

We ended 2010 with a cash balance of $828 million, which exceeds our year-end debt balance of $824 million.

Turning to slide 19 for an update on our balance sheet and capital structure, we repaid $65 million of debt maturities in March 2010.

We also called $14 million of debt in the fourth quarter and made selective debt repurchases during the second and the fourth quarters.

These actions enabled us to reduce debt by $88 million during 2010.

As I mentioned in my comments about cash flow, we did not utilize our US accounts receivable securitization facility in 2010, in contrast to 2009 when we ended the year with $100 million receivables sold under this facility.

Consistent with the longer term strategic objectives that we have outlined, we plan to reduce debt by 75%, or approximately $625 million by the end of 2013.

Turning to slide 20, I would like to provide an update on our worldwide pension plan, funded position, and expected cash funding levels.

Driven by the recovery in financial markets in 2010, the assets in our US pension plan, which is our largest plan around the world returned approximately 14.69% last year.

The obligations under this plan are present valued at a discount rate defined by US GAAP.

The December 31, 2010 discount rate was 5.68%.

This rate is lower than the December 31, 2009 discount rate of 6.11% reflective of the changes in interest rates from last year end.

The lower discount rate has increased the present value of our US pension plan liabilities at year end 2010.

Taking into account the increase in both pension assets and pension liabilities, we ended 2010 with an underfunded position in our US plans of approximately $963 million, which is approximately the same as year-end 2009.

A change of 25 basis points in the US discount rate causes an approximate $113 million change in the pension obligation, so all things being the same and given that the US pension plan is frozen, it would take about a 2% to 2.25% increase in the discount rate to result in a fully funded pension plan at December 31, 2010 under US GAAP.

From a cash funding perspective, we were not required to make cash contributions to our US qualified defined benefit pension plan in 2010.

For 2011, there is no cash contribution required for this plan.

Based on current legislation and regulation, and our underfunded position at year-end 2010, we expect to be required to make contributions of approximately $100 million to this plan in 2012.

This estimate could change based on the actual asset returns and discount rates in 2011, and/or legislative or regulatory changes.

For our international plans, we contributed $82 million of cash in 2010.

In 2011, we anticipate contributing approximately $115 million of cash to our international pension plan.

The underfunded position of our international plans at December 31, 2010 improved by approximately $150 million from the prior year end.

In terms of US GAAP pension expense, we expect approximately $36 million in pension expense in 2011 compared with pension income of about $3 million in 2010.

As we announced on our last earnings call, effective January 1, 2011, we reinstated the Company's US 401(k) matching contribution, but at a lower rate than when we suspended these contributions on January 1, 2009.

We are funding the match in Unisys common stock and we estimate that our matching contributions will be approximately $14 million during 2011.

In closing, we made progress during the quarter and the full year, in stabilizing our technology revenue, driving market levels of growth in our non-US federal ITO business, reducing expenses to get our cost structure more competitive, getting our services operating margins within our targeted range, generating significant free cash flow, and achieving zero net debt.

As we move through 2011, we will remain focused on extending our success, as we continue to make progress towards our longer term financial goals that Ed discussed earlier.

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

Thanks, Janet.

Operator, we would like to open the call up to questions, if we may.

(Operator Instructions) Joseph Vafi with Jefferies.

Congratulations on the progress on the business.

As we look into 2011, two quarters here of services margin at 8%, is it too early to start talking about having that be a sustainable bogey here for this year and providing some guidance that, that is indeed sustainable here for 2011?

Joe, thanks for joining us here today.

I know you were travelling and caught in the weather apparently.

Appreciate you joining us today.As we've said in our long-term goals, getting the services business to deliver a consistent 8% to 10% operating profit is our long-term goal over the next couple of years.

We are particularly proud of the fact that we've gotten there the last two quarters.

We think that's strong momentum for us and we don't want to go backwards, but we need to deliver it quarter by quarter and we'll continue to focus on it throughout 2011.

Okay, and then just one other question on the ClearPath business.

It's been very strong.

If you could provide some color as to where that demand is coming from to give us a better sense of the sustainability of that business here in 2011?

Yes, thanks, Joe.

As we've said in the past, it's a difficult business to predict on a quarter by quarter basis.

We think it's important to look at on an annual basis as those transactions can move from quarter to quarter.

But we've been very pleased with the way our ClearPath customers have embraced our recommitment to the platform, number one, embracing the technology innovations that we're bringing to it and the openness that we're bringing to that platform.

In addition to that, I think our stronger financial performance has improved their confidence, not only in the platform, but in the Company.

We are also looking at additional ways to bring ClearPath technology to market, so not only the way we've done it in the past.

But we're seeing new customers coming to the ClearPath technology via our cloud offerings, and we also are looking hard at our ability to create some IT appliance solutions based on the ClearPath technology.

We think it's coming from our traditional customers, as well as in some cases from new customers.

Okay.

And we fully intend to meet our targets of keeping that flat, if not growing.

Okay, great.

And then just one question on the government (technical difficulty)

Joe, you broke up on that one.

Could you repeat that question?

(technical difficulty)

Joe, I'm sorry.

We weren't able to make it out.

I think we may have dropped you, or lost you.

Eric Boyer from Wells Fargo.

Just on that last question with the profitability on the tech segment with the strong server results, so keeping that flat year-over-year, would you expect a similar amount of overall profitability for 2011 within the technology segment?

We have not given specific guidance for 2011.

We have said our goal is to keep the technology revenue flat.

The major component in that is our ClearPath operating system and product family, and given that the expenses in that business are generally fixed over the course of the year, we would hope that, that would bode for continued profitability in that business at this level.

But we're not at the point where we want to commit to driving at that level of profitability.

I think it has the potential to do it but we're not there yet in having that all underpinned.

Okay, and then on the services operating margin, you usually see a pretty large sequential drop in your operating margin from Q4 -- Q1 from Q4.

So when you talk about the [goal] I think services margins consistently in the 8% to 10% range, what are some of the things you're doing to take the seasonality out of that drop from Q4 to Q1, given the fact the system integration and consulting work tends to be softer there, and that's some higher margin business?

Yes, Eric, I think one of the key points there is the growth in the IT outsourcing business, which seems -- tends to be a less seasonal business and more of an annuity stream across the four quarters of the year.

And so we're particularly pleased to see the growth in IT outsourcing outside the US federal business is 6% this year.

We won 22 new logo clients in 2010, which is an increase for us, and we feel like we have strong momentum in that business.

And that's an excellent way to begin to deseasonalize that business, the overall services business.

Okay, great.

Looks like the system integration consulting was a bit soft again.

Most of your competitors have indicated that demand's picked up within that area.

So when would you expect to see a pick-up in that work, or are you seeing the demand out there and you're just not bidding for the work while you revamp the offerings?

Just trying to understand the disconnect there.

Yes, I think we've been working hard over the last several quarters to get our portfolio right and the differentiation in our offerings right in that part of the marketplace.

And I think we've done a lot of very good work there.

So we anticipate the primary demand for the systems integration services to be coming from those trends that I mentioned earlier in the discussion, particularly around consumerization of the IT application and modernization associated with increased mobility and the use of social networking, the movement to cloud, helping clients build out private clouds, as well as helping the clients modernize and enhance the applications that they have from Unisys that are running within their ClearPath environments.

So we think there's a lot of strong portfolio there.

It's really up to us to execute it at this point.

So you see the demand for that.

It's just a matter of going out and getting it at whatever point.

Yes, I think it is.

I really think it is.

Okay.

And Janet, any one-time items to think about in terms of your free cash flow for 2011?

I'm sorry.

You broke up in the end.

Did you say any one-time items in 2011?

Yes, that you're anticipating for the free cash flow?

We have not announced any actions that would have a one-time item in 2011, that would affect 2011 pre-tax profit or in free cash flow.

Okay.

Thanks a lot.

Eric, I did give the indications for the pension contributions that would be up year-over-year from the $82 million we spent this year up to the $115 million.

We're going to spend less restructuring as it rolls out in 2011 compared to 2010, but beyond that, there are no other unusual items that we've announced at this point in time.

Okay, thanks.

John Moore with KDP.

The other technology revenues, what -- at this point, what are some of the main growth areas, or growth drivers for that business?

Hi, John.

Some of the areas that caused that growth in that are attached storage, like EMC products, where we're doing accommodations for some of our technology customers, and perhaps some third party product or licenses related to their operating environment.

Okay, and then for year-end 2011, is there a goal again for moving ahead on -- getting the low cost labor percentage up, or what would you say about that?

Yes, we haven't set a specific target for that.

Over the last couple years, we've gone from 16% of our employee base, meeting lower cost labor pools up to now 29%.

We've said pretty consistently that we think within our industry, the typical range of our competition is in the 35% to 40% of their employee base, and we continue to move towards that, both looking at positions that can be shifted to take advantage of those labor pools.

But primarily the big driver for that and the increase in that is new IT outsourcing wins, where we're implementing the service delivery model that's taking full advantage of those offshore and lower cost onshore capabilities.

And we'll continue to do that.

Okay, great.

And then this last one, housekeeping, the debt that was called in the quarter, which debt was that?

John, we called the $14 million of the -- let me see, of the 8.25% notes, John, that were due October 15, but they had a call date in 2010.

Okay, great.

Yes, we called all $14.2 million that was outstanding of the 8.25% -- 8.5%, rather.

We did take a charge of about $700,000 in other income expense for that.

Jeff Harlib with Barclays Capital.

Can you talk about your new business pipelines with transformation in terms of bidding on a lot more new types of business and how that looks entering 2011.

Jeff, you're breaking up a bit there so I'm not sure I got it right but I think it's -- if I got the sense of it right it's about new business pipeline and what opportunities that we've seen that we're pursuing.

If that's the correct question, we're seeing some excellent opportunities and strong pipeline again in our IT outsourcing business, and in the areas of application modernization, we're seeing strong interest and demand drivers coming from the clients' desires to add support for mobile devices, social networking in this whole -- adopt this whole consumerization of IT and the way it affects the application suite that the customers have, is a big driver of the pipeline.

Security, particularly in identity and credentialing solutions is an important demand that we see, and clients' interest in transforming their data centers, which essentially means building out private clouds for our customers is also an area of important interest.

Back on this consumerization piece and the drivers there, one of the things I might recommend that you look at is if you went to www.blog.Unisys.com, there's an entire site that's set up there with a lot of very good content about what's going on with the consumerization of IT and how it's affecting not only the IT outsourcing business, but also it's affecting the way our CIOs are thinking about the application management that they have to be responsible for.

Okay.

That's helpful.

Can you talk about what you see in the public sector, ex US government?

Are you being affected domestically and overseas by budgetary pressures?

How do you see that part of your business?

Yes, I think the question with the US federal government right now is just really the timing of budget resolutions and is it going to be full year budgets laid out, or is it going to be an ongoing set of continuing resolutions, as well as what the level of the budget will be.

There's a fair amount of uncertainty and unknown now.

Right, and how about outside federal, the rest of your public business?

Janet, do you want to comment on that?

Outside of the US federal government, in North America we're seeing particular interest in the ITO area, where the states are looking at the cost efficiency of their operations to look for opportunities to close gaps in their -- the budget challenges that they have.

When you go out broader, we're seeing the impact of the fixed disruptive trends that Ed had mentioned earlier, whether it's in trying to understand the impact of a broader set of appliances, equipment, and the consumerization of IT, and what that does for the federal infrastructure but also the ITO cost efficiency type of activity, and lastly, security, [ID] and credentialing across the board.

Okay, and just your three-year plan, does that assume overall some revenue stabilization or are you still factoring in some erosion from TSA, as well as some other services business?

So our three-year goal that Ed went through, say that we want to see our systems integration and our ITO business grow at the rate of the market.

We know that in 2011 we're going to have to adjust for the fact that we have our largest contract rolling off.

That contract did end, as you mentioned, in November of this year.

And then keeping the technology flat, but we do expect not to continue to see declines on the right-hand side of the chart that we talk about in the business process outsourcing infrastructure services in the core maintenance area.

Okay, and just also on free cash flow, just cash taxes, do you have a rough, approximate number on that, and also use of your free cash flow, would you -- in addition to improving liquidity and longer term debt reduction, might you potentially fund your US pension plan given there are no requirements?

Sure.

Our cash income taxes for the full year 2010 were $53 million, and that compares to about $58 million in 2009.

I said previously that we expect the cash taxes would be in the $50 million to $60 million range, at least in the near term.

With regard to the use of free cash flow, I've stated what our expectations are in the US, for the US frozen defined benefit plan.

We do not plan to fund into that plan in 2011, but expect a $100 million required contribution in 2012, unless returns, discount rates or legislation changes.

Okay.

So the rest of the cash would go to supplement liquidity and debt reduction over -- when the bonds are callable, is that -- ?

Consistent with our goal over that three-year time period to reduce our debt by 75% or the $625 million that I mentioned, all of our bonds either mature or are callable during that three-year window.

Okay, thank you.

We'll hear next from Tim Hasara from Kennedy Capital.

Yes, couple clarifications.

On your depreciation and amortization number of $200 million you gave for 2011, if I can compare that to the statement of cash flows, would that be the three items of depreciation and amortization of properties, outsourcing the assets and marketable software?

Yes, it would.

Okay, those three.

Okay.

And have you changed your expected rate of return on your asset plan for 2011?

No, we have not.

Coming off of the last two years where the returns have been in excess of the expected rate of return of 8.75%, we do not anticipate changing it in 2011.

Okay, and I guess just back to the depreciation and amortization again, I added those numbers up for 2010, and I come up with $248 million, and that would compare to $200 million for 2011, is that accurate?

I probably rounded it, when you take the decimals out, it actually comes to $251 million.

But that compares to $200 million for 2011?

That is correct.

That's what I said.

One other question, last year in your 10-K that you filed, you said you were going to fund $115 million in your non-US plans, you ended up only funding $82 million.

Is there a chance that you only -- you fund less than what you're stating for 2011 in cash to your non-US plans?

You're correct that our expectation for 2010 was $115 million in pension funding.

We only spent -- only funded $82 million in 2010.

We do have a little bit of a carry-over of items that weren't resolved or settled in 2010 that we thought we would pay, and that's carrying into the 2011 expectation of $115 million.

Okay, okay.

Thank you.

And we'll take our next question from Vlad Shteynberg with Realm Partners.

First of all, when you were talking about 2013 pre-tax goal, does that include $36 million of pension expense, or does that assume the $3 million of pension income?

Our comments said that, that was assuming that pension income or expense stays consistent with 2010, which is $3 million of income.

Okay.

The other questions I had, on technology segment, how do we think about -- given the lumpiness in the business, how do we think about incremental and decremental margins in the segment?

What's the cost structure in terms of what's the fixed costs to manufacturer, the servers versus commissions?

How do we think about that decremental or incremental margins, because they seem to be very inconsistent.

When you look at our technology business, the largest component of our technology business is our ClearPath product family.

Within that, about 75% of that revenue comes from software.

It is not predominantly from equipment, and so as a result, most of those costs are relatively fixed for an annual basis, because you capitalize the -- it's an element of what we capitalize from a software standpoint and that amortizes in over the course of the year.

So you're saying it's 100% -- should be 100% incremental or decremental margins from --

No, no, I did not say 100% incremental.

I did say there's a vast -- if you look at that cost base and you look at the cost base, how it's occurred during the course of 2010, we do have some seasonality because we pay commissions and bonuses based on higher revenue levels, but the vast majority of those costs are fixed.

Okay.

In terms of the lumpiness, would you attribute last quarter's, or Q4's strong performance to -- would you call Q3 a bit of weakness?

Did you see some sales float into Q4?

Trying to get a sense for what's Q1 shaping up as in terms of, did a large order come in at the end of Q4 that will [eke] into Q1, or was it more of Q3 sales floating into Q4?

Our goal that we have said last quarter and again this quarter is to first get the technology business flat and so we're particularly pleased with where we ended up for 2010.

And from a historic standpoint, we've had multiple years where that number has declined, so this is a significant point for us this year to have flat technology revenue.

And we've said that, that's our goal going forward.

There will always be lumpiness and seasonal buying patterns by a customer.

Historically, if you had looked at us, you'll see that there's -- it's easier to call the first half and second half type of revenue mix and underspend, being able to figure out what's going to close in the third versus the fourth quarter.

We have been focused on keeping that technology revenue flat for a full year, which is what we have accomplished this year.

We would expect to have a seasonal pattern next year, but obviously our goal is to try to smooth that out, but we're not going to do it at the loss of some -- losing it on price with a customer.

We're going to let those deals fall the quarter they happen when we can get the most optimal price.

And the key point here is we feel like we've reinvigorated that part of our business and you see that and, as Janet says, in holding technology flat in 2010 and actually growing the ClearPath revenue by 5% for the year.

So we tend to look at it on an annual basis.

That was well done.

What -- seasonal patterns, what exactly are they?

Did you say the key, the second half is typically stronger?

The second half has historically been stronger as both the federal government, governments, and commercial customers spends towards the end of the year, and if you go back to 2009, we were in the middle of a debt exchange in the first half of the year.

That did cause some delay in customer buying patterns that made the second half of 2009 stronger than what it would have been on an ongoing basis.

But as we are trying to smooth out the pattern, but it will -- we still expect it to have a seasonal pattern, stronger second half than first half.

Okay, and then just on the services, if I can ask a couple more.

So you mentioned that the US government was down 9%, the non-US government, non-public services in the US is up 6%.

So that's close to cancelling each other out, but yet your ITO was down 6%.

So is the rest of the weakness coming from other public sectors, is it the state?

Where is that weakness coming from?

Okay.

So let me clarify.

The US federal government revenues that I talked about is the revenue across all of our portfolios, services, and technology from the US federal government.

And when I spoke about ITO, I did say for the full year, within outsourcing, our ITO revenue was flat for the full year.

ITO revenue outside of the US federal government was up 6%, and ITO revenue from the federal government is down for the year due to the reduced revenue on the TSA contract.

You can also see that graphically depicted on our slide.

Okay.

What was the services orders year-over-year, the total services orders decline year-over-year in Q4?

I commented on the decline in total overall services orders down 17%.

17%.

Okay, thank you.

Thank you Vlad.

And that is all the time we have for our question and answer session.

I would like to turn the call back over to Ed Coleman for closing remarks.

Well, thank you, operator.

Thank you all for attending the call today, and we look forward to our next call, when we report our Q1 results for 2011.

Have a good evening.

Once again, ladies and gentlemen, this does conclude today's conference call.

We thank you all for your participation.