Unisys Corp (UIS) 2012 Q1 法說會逐字稿

Good day, and welcome to the Unisys first-quarter 2012 results conference call.

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

Niels Christiansen, Vice-President of Investor Relations at Unisys Corporation.

Please go ahead, sir.

Thank you, operator.

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

Earlier today, Unisys released its first-quarter 2012 financial results.

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

Before we begin, I wanted 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 includes 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 provided reconciliation charts at the end of the presentation.

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 turn the call over to Ed.

Thanks, Niels.

Hello, everyone, and thank you for joining us today to discuss our first-quarter 2012 financial results.

We reported increased profits on higher revenue for the first quarter.

Janet will go through the numbers in detail, but please see Page 4 of the presentation for highlights.

We reported diluted earnings per share of $0.30, compared to a diluted net loss of $0.95 in the first quarter of 2011.

Excluding debt reduction charges and pension expense in both years, our non-GAAP earnings per share increased to $0.97 from a non-GAAP loss of $0.04 a year ago.

Revenue grew 2% year-over-year overall and 3% in our services business.

This was the second quarter in the past three that we've grown our top line.

We've done this despite continued weakness in our US federal business where conditions remain challenging.

Margins improved in our services business, although we still have work to do to get to our goal of a consistent 8% to 10% operating profit margin.

Our Technology business delivered strong margins in the quarter on 5% lower revenue as we benefited from a richer mix of enterprise software.

We also continued to make progress in reducing debt during the quarter, retiring an additional $66 million of high coupon notes.

Since September 2010, we have cut our outstanding debt by more than $540 million, or nearly two-thirds, and we are now 87% of the way toward our year-end 2013 debt reduction goal.

These actions have reduced our annualized interest expense by $69 million.

Moving to page 5, from a demand perspective, we're encouraged by the interest we saw from customers for our enhanced services and solutions portfolio.

Services orders grew double-digits for the second straight quarter, driven by major signings by both new and existing clients.

We saw particular order strength for our end-user and data-center outsourcing solutions.

To drive profitable growth, we continue to enhance our portfolio and delivery capabilities to help organizations address major disruptive trends occurring in the marketplace.

These trends, such as mobility, cloud computing, and social computing are changing the way people work, play, and go about their lives.

New technologies have freed people from the constraints of time and geography and enabled them to access and share information in a 24 by 7, always on, connected global economy.

For companies and government agencies, however, these trends create significant challenges.

For example, how to support and manage mobile end users who are increasingly using their own devices in the workplace.

How to secure critical data from sophisticated hackers and cyber thieves.

How to manage, store, and use all of the information being created to better know and serve customers.

And how to manage all these new demands and requirements while also reducing costs.

All of these trends create growth opportunities that we believe Unisys, with our systems integration expertise, our securities skills, our outsourcing capabilities, our mission-critical technology, is well positioned to capitalize on.

As we look to the market, we see an opportunity for Unisys to differentiate ourselves as the Company that provides services and solutions to help organizations operate more safely and securely and in an ever-more connected world.

We deliver these solutions through project-based systems integration engagements, or through an outsource managed services environment.

We also provide the technology that supports secure mission-critical environments.

In the area of IT outsourcing, for example, during the first quarter, we closed significant new business with the American Red Cross to provide end-user and data-center managed services to make sure their 20,000 workers are well supported and connected in order to achieve their critical mission.

In systems integration during the quarter, Unisys was selected to lead a consortium to design and build a sophisticated end-to-end security environment for the new international ITER experimental fusion facility being constructed in France.

Our solution will span perimeter and surveillance security, identity and access management, and command and control systems.

In China, TravelSky, the leading provider of IT solutions, solutions to the country's air travel and tourism industry, is using Unisys Secure Private Cloud Solution to provide a secure, connected environment to handle transaction loads driven by the country's growing aviation sector.

In India, we're proud that our client, the Delhi International Airport was recently judged the world's most improved airport and the number one airport in the country by the prestigious Skytrax World Airport Awards.

The award cited significantly enhanced passenger service since the opening of the airport's terminal 3 a couple of years ago.

Unisys served as master systems integrator for that project, integrating systems from 12 different companies to create a secure, connected experience for air travelers.

In the US Federal government, we're helping agencies such as the General Services Administration, the Department of Energy, NOAA, the USDA, and Customs and Border Protection, use new tools such as the cloud and mobile technology to collaborate and deliver services securely and more efficiently.

We continue to enhance our portfolio with innovative new services and solutions that help our clients make use of these new technologies to grow, reduce costs, and improve service to their customers and constituents.

Please look for a number of new solutions coming from us in the second quarter and for the remainder of the year.

Now our Technology business.

Clients rely on our ClearPath family for its security, performance, scalability and reliability that runs some of the world's most demanding mission-critical environments.

We're rolling out an exciting long-term vision for our ClearPath platform that builds on these strengths while opening up the family to new uses and markets.

To sell our enhanced portfolio to the market, we continue to refresh our sales team and increase our sales effectiveness.

We're also exploring new sales channels to broaden the available market for our portfolio of services and solutions.

As we enhance our portfolio and sales and delivery resources, we are focused on continuously improving client satisfaction and service delivery.

And as I've said in the past, I firmly believe that the only long-term differentiation in a services and solutions business is the quality of those services and solutions as perceived by the customer.

We're committed to providing consistently high levels of service and client satisfaction, and there's no better reflection of success in this regard than getting new and repeat work from existing clients, such as we saw during the first quarter with major contract extensions and renewals with clients such as the Internal Revenue Service, the National Statistics Office in the Philippines, and Bancolombia in Latin America.

Before closing, let me comment briefly on the most challenging part of our business right now, which continues to be our US Federal Government business.

Our US Federal revenue declined 20% in the quarter.

As I said in the past, we think this will continue to be a challenging business for us in 2012, as we adjust to structural changes occurring in the budget environment in Washington.

However, we believe the work we're doing on our portfolio positions Unisys to capitalize on these changes over the long-term by helping agencies innovate while reducing costs.

We're confident that we're taking the right steps and are focused on improving results in this part of our business.

In summary, despite challenges in the federal business, this was an improved first quarter and a good start to the year for Unisys.

But we have more work to do.

I'm pleased with our results and the progress we're making towards our financial and strategic goals.

We're focused on continuing this progress in the quarters ahead.

So please stay tuned, as we continue to strengthen the competitive and financial profile of Unisys.

Thanks again, for joining us today.

Now here is 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.

Turn to page 7 for highlights of our financial results in the first quarter.

At the top line, we reported total revenue of $928.4 million in the quarter, which was up 2% year-over-year.

Currency had no appreciable impact on our revenue in the quarter.

Based on today's rates, we anticipate currency to have about a 3 to 4 percentage point negative impact on revenue comparisons in the second quarter of 2012.

We reported an operating profit of $64.4 million in the quarter, which was $22.5 million, or 54% higher than the year-ago's operating profit of $41.9 million.

A year-over-year increase of 150 basis points in our gross margin and lower operating expenses resulted in an operating profit margin of 6.9%, up from 4.6% a year ago.

The significant debt reductions we made last year were evident in the $16.6 million decrease in interest expense from $25.9 million in the first quarter of 2011 to $9.3 million in the first quarter of 2012.

Other expense for the first quarter of 2012 was $13.2 million, which included a $7.2 million charge related to the March debt reduction, and $7 million of negative foreign currency impact.

In the first quarter of 2011, other expense was $23.8 million, which included a $31.8 million charge related to debt reduction and a $7.6 million favorable foreign currency impact.

For the first quarter of 2012, our US GAAP pension expense increased $16.7 million to $25.7 million versus $9 million in the first quarter of 2011.

Within the income statement, pension expenses allocated to the cost of revenue, SG&A, and R&D on the same basis of the salaries of active employees.

Pension expense is not included in the Services or Technology segment results.

We expect approximately $103 million of pension expense in 2012, compared to a pension expense of about $34 million in 2011.

For the first-quarter 2012, we had pretax income of $41.9 million, compared to a loss of $7.8 million in the first quarter of 2011.

Before pension expense and debt reduction charges, our pretax income more than doubled to $74.8 million versus $33 million of pretax income last year.

At the tax line, we had a $22 million tax provision in the quarter on $42 million in pretax income, compared with a $28 million tax provision on a pretax loss of $8 million 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.

We reported net income of $13.4 million in the quarter, versus a net loss of $40.8 million in the year-ago quarter.

Excluding the impact of debt reduction charges and pension expense, Unisys generated adjusted EBITDA of $123.4 million for the quarter, versus $108.7 million in the first quarter of 2011.

Our diluted earnings per common share improved to $0.30 per share from a loss of $0.95 per share in the year-ago quarter.

The diluted EPS calculation reflected in the average share count of 44.1 million shares for the first quarter of 2012, and 42.8 million for the first quarter of 2011.

Excluding the impact of the debt reduction charges and pension expense, our first-quarter 2012 non-GAAP diluted EPS was $0.97 per share, compared to a loss of $0.04 in the first quarter of 2011.

Moving to our first-quarter revenue, please turn to page 8.

Services revenue, which represented 89% of our revenue in the first quarter of 2012, grew 3% year-over-year.

Currency had a 1 percentage point negative impact on Services revenue in the quarter, so growth was 4% on a constant-currency basis.

Excluding our US Federal business, Services revenue grew by 7%.

Technology, which accounted for 11% of our revenue, decreased 5% year-over-year.

On page 9 you can see our Services revenue and margin.

Services gross profit margin increased 90 basis points year-over-year to 18.9%, from 18% in the first quarter of 2011.

This reflected improved gross profit margins in systems integration, ITO, BPO, and infrastructure Services.

Our Services operating margin rose by 100 basis points year-over-year to 5%.

Systems integration and consulting revenue rose 8% year-over-year driven by public sector activity.

While this represented year-over-year systems integration revenue growth in two of the last three quarters, we still have more work to do to reach our goal of consistently growing this business at market rates.

Within outsourcing, ITO revenue was flat versus the first quarter of 2011.

We are encouraged by the strong ITO order growth we've seen in the last two quarters, and our goal remains to grow at market rates in this business.

Moving on to Technology revenue and margins on page 10, while ClearPath revenue declined year-over-year we remained committed to our annual goal of maintaining stable ClearPath revenue.

Sales of other technology, which includes third-party equipment, declined by $2 million, or 14%.

Due to a richer mix of enterprise software in the first quarter, we reported a Technology gross margin of 62.2%, up approximately 11 percentage points from the prior year.

Our Technology operating margin improved by almost 15 percentage points to 25.6%, compared with 10.9% in the first quarter of 2011.

Turning to page 11, which provides more detail on our US Federal government revenue over the past five quarters.

Our federal systems business serves three primary sectors of the US Federal Government, Civilian, Homeland Security, and Department of Defense and Intelligence.

In the first quarter of 2012, civilian agencies represented our single largest revenue base within the US Federal Government, accounting for about 49% of our overall US Federal Government revenue.

For the first quarter of 2012, revenue from agencies within the US Department of Defense and various intelligence agencies, represented about 23% of our overall Federal Government revenue.

And revenue from Homeland Security agencies represented about 28% of our overall US Federal Government revenue in the first quarter of 2012.

Compared to the year-ago quarter, our overall US federal revenue declined $32 million, or approximately 20% to $125 million in the first quarter of 2012.

This decline resulted from delayed technology transactions, and lower funding on some Services contracts, as well as the loss of some Services contracts.

We ended the first quarter of 2012 with about $330 million of US Federal Services backlog, which was essentially flat with the first quarter of 2011.

Page 12 shows our first-quarter revenue by geography and industry.

Our North America revenue represented 42% of our revenue in the quarter and rose 5% in the quarter.

Within North America, our revenue from the US Federal Government represented 13% of the total Unisys revenue in the quarter.

Excluding the US Federal Government, our North America revenue rose by 23%.

International revenue declined 1% in the quarter.

On a constant-currency basis, international revenue was flat.

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

The 3% decline in public sector revenue year-over-year was driven solely by the decline in our US Federal Government revenue.

All other public sector business was up 8%, compared to the first quarter of 2011.

Revenue from commercial industry customers represented 36% of our first-quarter revenue, while financial sector was 22%.

Our commercial revenue grew by 10%, while revenue from our financial services customers was down slightly.

For some comments on orders, please turn to page 13.

For the second consecutive quarter, we saw double-digit year-over-year orders growth in our Services segment.

IT outsourcing orders grew by double-digits, but we also saw increases in infrastructure services, business process outsourcing and core maintenance.

From a geographic perspective, we saw year-over-year Services order growth in our North American, Latin American, and Asia-Pacific regions during the first quarter.

Orders in our European regions declined in comparison to the first quarter of 2011.

We ended the first quarter with $5.4 billion in Services backlog, which was down 1% sequentially from December 31, 2011.

Year-over-year, Services backlog was down 6% versus March 31, 2011.

Currency had a 2 percentage point negative impact on the year-over-year comparison.

Approximately $700 million of the March 31, 2012, Services backlog is anticipated to convert into second-quarter 2012 Services revenue.

Over the past 13 quarters, we typically have had between 86% to 96% of our quarterly Services revenue in our opening backlog.

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

Moving to cash, please turn to page 14 for an overview of our cash flow performance in the quarter.

We generated $33 million of cash from operations in the first quarter of 2012, compared to $28 million in the year-ago quarter.

We contributed $68 million in cash to our defined benefit pension plans in the first quarter of 2012, versus $22 million in the first quarter of 2011.

For the full year, we continue to anticipate contributing approximately $240 million of cash to these plans.

The contributions are reflected in the cash flow from operations.

Capital expenditures were $30 million in the first quarter of 2012, down $13 million from the first quarter of 2011.

We continue to expect full-year capital expenditures in the range of $150 million to $200 million.

Our free cash flow was $3 million in the first quarter of 2012, versus the usage of $15 million for the same period last year.

Our free cash flow before pensions, cash contributions, was $71 million for the first quarter of 2012, versus $7 million in the first quarter of 2011.

Depreciation and amortization was $42 million in the quarter, down from $53 million in the first quarter of 2011.

Our cash balance was $655 million at March 31, 2012, compared to $715 million at December 31, 2011.

The decline in cash was principally related to debt reduction.

We are pleased with the continued progress we have made towards our debt reduction goal, and in the quarter, we reduced our high coupon long-term debt by $66 million.

This will further reduce interest expense by approximately $9 million annually.

Page 15 illustrates the improvements we have made over the past 14 quarters in reducing the Company's leverage.

We ended the first quarter of 2012 with net cash of $359 million versus $214 million at the end of the same quarter last year.

Our first-quarter 2012 net cash position is slightly higher than where we ended 2011.

As previously stated, our December 31, 2013, goal is to have reduced debt to approximately $210 million, and we have about $85 million to go.

As indicated previously, we have made some changes to our geographic presence as we've evaluated opportunities to rationalize our geographic footprint.

On March 30, 2012, we completed the sale of our interest in our South African joint venture.

Going forward, we will serve this market through a distributor.

This sale resulted in a gain of $11.3 million, which is included as a reduction to our SG&A expenses.

In light of the significant increase in cash contributions related to our US pension plan, I would like to provide an estimate of future funding requirements related to our worldwide defined benefit pension plans over the next few years, based on the assumptions and market conditions at December 31, 2011.

Turning to page 16, based on these assumptions, the estimated worldwide contributions of $240 million for 2012 would increase in 2013 to approximately $270 million.

Then contributions would begin to decrease, declining to approximately $225 million in 2014, $190 million in 2015, $165 million in 2016, and $145 million in 2017.

Clearly the discount rates and asset returns will not remain constant at the December 31, 2011 levels.

So these are estimates and will likely change at the end of this year and future years.

We wanted to provide this view, although subject to many variables, as we thought the context might be useful as it relates to potential future defined benefit pension funding requirements.

As a reminder, the vast majority of these cash contributions relate to plans that have been frozen, and as such, are not adding new beneficiaries or accruing additional benefit obligations.

Based on the assumptions we mentioned earlier, as we make cash contributions over time, the pension deficits will decline.

As we move through 2012, we will remain focused on driving towards our longer-term financial goals.

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

Great.

Thanks, Janet, very much.

Operator, we'd like to open the call for questions now.

Thank you, Mr.

Coleman.

(Operator Instructions)

And our first question comes from Geoff Dancey with Cutler Capital Management.

First, I want to say thanks for putting this slide in with the defined benefit plan funding estimate.

That's very helpful and gives me a better idea of what your cash needs are going to be going forward.

So I had a couple questions for you.

Just in terms of getting a better handle on what your growth rates could be, when you were referencing the systems integration in the ITO, you've said, and I believe you said this before, that you expect those segments to grow at market growth rates.

Is there any way you could give me a better idea of what that means?

Yes, the way we have been thinking about systems integration ITO is industry growth rates in the mid-single digits.

Okay.

Now, I was looking at a couple surveys recently of Chief Investment Officer spending expectations, and some of those looked a little lower than what I had thought they may be, actually with declining spending.

Does that relate to this type of market growth expectation?

I'm not sure if you're speaking to a broader industry-wide IT industry growth rates across the board, or whether that is specific to systems integration IT outsourcing.

As we put our plans and targets together, we've thought about SI -- systems integration, ITO, our objectives are to grow that in the mid-single digits while we keep our technology business flat, and primarily as it relates to our ClearPath software and server business.

Okay.

And any further color you can give me on the infrastructure services, the core maintenance, and the BPO in terms of future expected growth ranges?

Right.

The infrastructure services, the BPO, and the core maintenance those are all businesses that we've said that are not -- they are important to our business but not in areas where we are investing, nor do we expect to see growth in those businesses over time.

Just as a reminder the core maintenance component of that is the maintenance services that we provide on our own equipment and software.

And that has been declining, and that is something that we would expect to see declines in that over time.

The business process outsourcing, we have not been making new investments in that area.

We have a core group of contracts that are performing that we'd expect to continue, but that is not an area where we're looking for growth.

And infrastructure services is where we're providing warranty and other type of support for companies like Dell, EMC, Lenovo, et cetera, and that is an area where we are not investing for future growth.

So they're a smaller portion of the overall business.

We've segregated those out as areas that we are going to try to maintain as best as we can, but in some cases like core maintenance we know will decline over time.

Okay, thanks.

That's very helpful.

That's all the questions I had for you.

Thank you.

And our next question comes from James Friedman with SIG.

While we're waiting for Jamie to come on the line, let me make sure that I want to clarify a comment that I made with regard to our services opening backlog.

That has historically represented between 86% to 93% of our next quarter's revenue.

Yes, so congratulations on the numbers.

I wanted to get a perspective, first off, I respect that you don't give much guidance and you don't give quarterly guidance.

But we're all human, and I'm wondering in terms of the patterns of demand that you would anticipate seasonally this year, what are your thoughts about the revenue build, now that you're off to a good start across the remaining quarters of 2012?

I think on the services side, again, we would rely on Janet's comments about the opening backlog of services and the percent of revenue in the given quarter that comes from that opening backlog.

And then I think on addition to that, you have the technology business which, as you know, is -- it can be a difficult one to assess quarter by quarter.

That's why we continue to say that that business is best looked at on an annual basis.

And we're pleased that our objective was to keep the ClearPath business flat, and we've kept it flat 2009, 2010, 2011, actually just a little bit of growth, and that continues to be our objective for 2012.

Thanks, Ed.

That's helpful.

I think in a number of public forums you had said, it sounds like in addition to the backlog you also monitor business activity, which can waterfall into backlog, which can waterfall into revenue.

So what observations are you seeing on the business activity front?

Is that accelerating or decelerating?

I think it still continues to be a difficult demand environment.

It's not one where we're so big that we're really subject to and controlled by macroeconomic trends.

They certainly have some impact on us, but, yes, I think we're probably see the same thing that everyone else sees, where it looks like economic activity is ramping up, and then it will hit a speed bump and tends to slow back down again.

But you can look at our business and our performance in Q1.

In Europe as an example, or in the United States or North America, maybe did a little bit better than people would have expected based on economic growth patterns, and perhaps worse in Asia-Pacific and Latin America than people would have expected.

So we're not necessarily controlled by those macro trends.

Could I ask you about a little bit about the linearity across the quarter you just reported?

Did you notice, did March accelerate from January, or if you had had to have these results early in the quarter, would this pretty much have been what you expected?

Yes, I think services -- the services part of the business chugged along throughout the quarter, and the technology part of the business, again, it really depends on when those transactions hit is really what drives whether that's a first, second, or third month of the quarter activity.

Yes, so that's what I'm asking.

Did they hit in the first, second, or third month of the quarter?

I don't think we go into the details of where specific transactions fall.

I don't think there is any particularly anything unusual about the quarter from a linearity standpoint.

Okay.

And then, Janet, so you had this South African disposition; you exited something in South Africa.

We used to see these more frequently with Unisys.

Is there -- are there more assets that you're looking to exit, or have you pretty much exhausted that part of the opportunity?

Jamie, a couple of years ago we said that we were going to look at the geographic footprint, and you're right, earlier you did see us make some, a little bit more in numbers.

This was the first one in a while.

We'll look, as I said in my comments, we've evaluated the opportunities to rationalize it.

This is one that came to conclusion in this quarter, but it's not something that we're going to comment on in the future, but I think we're comfortable with the footprint that we have now.

And we'll always look for ways to see if we can optimize it to make us more productive, hit our goals, and reduce any cash flow drain there.

If I could just add to it, again, I think it is worth noting that this is a really a shift in business model more so than exiting a marketplace.

So what we're doing is just positioning ourselves now to access that market through a distributor, whereas before, we did it directly, or through the joint venture.

Got it.

Ed, Janet, Niels, thanks for taking my questions.

Our next question comes from Bill Smith with William Smith & Company Investment.

Ed and Janet and Niels, congratulations on a very, very good quarter.

Thank you.

You've made tremendous progress in the three-and-half years that you have been there, Ed, under your leadership and you've done a great job.

So thank you for those efforts.

You're very kind.

Couple of things.

One, Janet, I know you've mentioned this in the past about the pension obligation for every 25 basis points.

I think it's $127 million in reduction in the pension obligation.

Is that still -- I'm looking at your chart.

Do I -- is it still okay to think about it in that way, as well, if rates change by 25 basis points, to think about that obligation being reduced by that amount?

All right.

So, Bill, the 25 basis-point change in the discount rate would change the US obligation by $127 million.

Okay.

And then in the international plans, it would change it by another $95 million.

So if you look at our global plans in its entirety, a 25 basis-point change in the discount rate would change it by $222 million.

And just as from an overview perspective, at year-end, that discount rate was 4.96% for the US plans and 4.65% for the international plans.

So 25 basis points, if we had that kind of movement between now and the end of the year, would almost fund the $240 million that you've outlined here for this year.

It doesn't exactly correlate directly that quickly.

The December 31, 2011 underfunding in the US was $1.6 billion and about $400 million internationally for $2 billion total.

And so, if we have the change in discount rates, the 25 basis points change would change that number by $222 million.

It would, if we had a change in the discount rate, that absolutely would -- and it was an increase in that rate, it would decrease the amount of pension expense -- a pension cash funding into the US plans, all of the other assumptions being the same, based upon the way the calculations work.

But it doesn't translate that quickly, Bill, into a reduction in the pension funding.

It is smoothed out over time.

Okay.

And you made a sale recently to Google for some of your patents.

Could you comment at all on that, 36 patents, any other comments you can make about that sale, and including the amount that you received for that?

Yes, Bill, on occasion, we've sold or licensed some of our intellectual property, and as you might imagine, these transactions typically are subject to strict confidentiality provisions.

We don't comment on them unless we believe they're material.

Yes.

And is this -- with your patent portfolio, and we have no idea what that value might be, but could this be an indication that there may be more of these types of opportunities for you in the future?

Bill, that's not something that we would comment on.

Yes.

Okay, thanks again and congratulations on the quarter.

And from Kennedy Capital, we'll go next to Chris McDonald.

Thanks for all of the detail.

I have a couple of questions.

One is the pension reform that's been discussed and proposed in the senate, I don't know if you have a sense for what that -- or how that might impact the Company's position, both from an obligation perspective and from a cash funding perspective.

The pension reform sounds like you know there is two different versions of it, one in the House and one in the Senate.

Clearly any reform that goes in should have a positive impact in reducing the amount of funding we have going forward, but I don't want to comment on that until we see what the actual legislation from a committee standpoint actually gets implemented, if it does before the elections, Chris.

But we are obviously carefully monitoring that situation.

Okay.

I understand.

Second, relative to debt reduction, so the Company will be in a position this fall to basically call all of the debt, as I understand it.

Could you talk about just the various options you have there, the balance sheet's in such great shape, I'm curious to know in general how the Company might approach dealing with taking out some of that higher-cost debt.

Sure, we have two tranches of public debt left.

We have our October 2014 maturities of approximately $186 million, the 12.75% senior secured debt.

That is callable at 106.375% in October of this year.

We also have the January 15, 2016, unsecured senior notes, about $111 million of that left at 12.5%, and that's currently callable at 106.25%.

In the first quarter, we took actions to take out the 2015s, which were senior secured debt, and we called about $40 million of the 2016 unsecured senior notes.

As we go forward, we'll continue to make progress to reduce our debt and hit our year-end debt reduction goal.

I don't want to comment on what our future actions would be, but as you mentioned, all of our remaining debt is callable, and we'll continue to look at ways to reduce the debt to hit our goal, as well as reduce our interest expense on the remaining debt.

So we do have a number of options available to us.

We continue to look at the options and look at the market, to both hit our goal and reduce the interest expense on any remaining debt.

Okay.

Thank you.

And then my last question is related to ClearPath, and the Company's done a very good job of stabilizing the revenue base there.

I was hoping to get a little more insight into what you see as targeted growth opportunities around that part of the business, and how you think about the Company's position in that market over the long term.

Thanks.

I think we continue to think of ClearPath today and into the future as being a mission-critical platform, but the road map that we envision calls for us to continue to make that platform more and more open to running what would be considered non-traditional ClearPath work loads in terms of other operating environments, be it a Windows environment, LINUX environment, UNIX environments, that you can bring the mission-critical attributes that ClearPath provides in its operating environment, to those other systems.

And we think in doing that we'll be able to look for new opportunities to grow ClearPath in those environments that are running per applications and perhaps what are considered less mission-critical environments, but require the reliability and security that the ClearPath system can provide.

So bring additional workloads requiring those kind of attributes to ClearPath.

We're excited about the opportunities that that provides for us.

Ed, is that something that would evolve in a more gradual manner, or would there be capabilities that the Company could add and expand upon that would have a quicker impact in maybe opening up what the addressable market might look like in a more concentrated period?

I think we're doing that today, and we'll continue to do it and accelerate that in the future.

But for instance today, you can run, bring Java workloads into the ClearPath environment today, and pick up some of those attributes that ClearPath provides.

We want to create an environment where it picks up all of those ClearPath attributes of reliability and security.

You can run a lot of application modernization projects and bring new application development technologies to applications running on ClearPath today.

We just want to continue to accelerate that and bring it to a broader and broader set of the marketplace.

I don't think it's ever -- we don't envision ClearPath ever becoming, quote, a general-purpose system for everybody.

It's really going to be about those applications where the client demands the highest levels of security and reliability, and once those attributes at ClearPath provides for those particular applications regardless of what they're written in.

Okay, thank you very much.

Our next question comes from Vlad Shteynberg with Realm Partners.

I have a few questions.

First of all, I just wanted to clarify last quarter I believe, Janet, you said that $680 million would come from the backlog, and if I put that in your ranges of 86% to 93% for Q1, I would get the services revenue range of $730 million to $791million versus the actual of $823 million.

So the actual $680 million represents only 83% of that total services revenue, so there was some out-performance.

So I wanted to clarify where that came from and your color on that.

Sure, you're right, then, in the first quarter of 2012 we started that quarter with opening backlog of $685 million, and that was 83% of our services revenue in the quarter.

I did say in my comments that the range of 86% to 93% is still typical.

We saw that in additional revenue, just come from some sell and bill opportunities across the business in the quarter.

Okay.

Second question is just on revenue growth, is that based on your backlog and the order rates that you see, do you think that's sustainable for the year, or for the next few quarters?

And the related question, North America was very strong at 23% year-over-year growth on sales, so maybe some color there.

Sure.

Well, we do not comment on our revenue growth expectations for future quarters.

We do provide an estimate of what the -- we do provide the opening backlog going into the next quarter for the services business.

But at this time, we do not provide guidance for revenue growth.

We have outlined what our goals are for the business, as Ed covered earlier in the call.

In North America, as you mentioned, we were up 23% year-over-year, and we -- that revenue growth came from public sector and ITO contracts, and we're happy to see that because our North America business had struggled a bit given the economic situation in prior years and prior quarters, so we're happy to see the 23% year-over-year improvement.

And so that's just the general environment that -- so there isn't any one-off contract that shifted into this quarter or that quarter.

It's more of the general environment improvement.

That's correct.

Okay.

Great.

Can you talk about the path to the 8% services margins from here in terms of buckets, where the savings is going to come from?

The steps to get to the 8% services operating profit come from a couple of areas.

One is hitting the revenue growth rates that Ed mentions that our strategic goals for both system integrations and the ITO business.

And including in that is some stability and some improvement in our federal business.

The second is in the area of our operating efficiency, the percentage of our workforce that we have offshore, continuing to improve our portfolio offerings to make sure that they are competitive, that we increase the use of automation.

The third is making sure that our operating cost expenses are appropriate against our services revenue volumes.

And while we have made major shifts and major savings in those costs in the past, we always continue and will continue to look for areas to be more efficient and effective in the general administrative areas, while allowing us some room to invest in solutions, development, marketing, and improving our sales activity.

So really three areas, revenue growth, for the strategic portfolios, and some improvement in federal.

The second, continuing to make sure that the way we deliver our offerings are cost effective, from both the use of automation as well as using offshore resources.

And then lastly, continuing to look at opportunities for us to improve our SG&A as a percent of revenue.

Okay.

Great.

On the technology margins, so great margins with significantly lower sales levels.

Are they sustainable at these sales levels around $100 million?

On the technology business, the margins can vary from quarter to quarter based upon the total technology revenue and the mix of deals within the quarter.

We look for that business on an -- at an annual basis.

It has a fair amount of fixed costs in that business that are spread across the quarter, and it is very hard to call what one quarter will look like versus another.

And so I think it is best measured on an annualized basis.

Right.

But I notice that the -- this quarter, I wasn't expecting great margins, which I commend you on, with sales of around $100 million, so I'm wondering if there has been any step-change in the margins.

I wouldn't view it as a step-change in the margin; I would view it more the mix of deals that were in the quarter.

Okay.

And last question before I get in the queue, so I have you making over $2 in free cash flows despite making $5.50 of pension contributions this year.

And your net cash position now, you will continue to reduce debt.

But the next question, of course, is what's going to be the cash usage, even starting later this year when you get into more cash generative quarters from working capital perspective?

In the near-term our goal, or as what we stated that by the end of the year-end 2013, we want to reduce our debt by 75% from the September 2010 levels.

We still have $85 million more to go, and that's the first priority with regard to the use of cash.

We have pension contributions as we've outlined in the materials for the quarter, and beyond that, I think it's too early for us to comment on additional cash usages until we complete those goals.

Okay, I'll get back in the queue.

Thanks.

And ladies and gentlemen, it appears that is all the time we do have for questions today.

I'll turn the call back to Mr.

Coleman for any additional or closing remarks.

Great.

Thank you, operator and thanks to all of you for participating in today's call.

We certainly appreciate that, and we look forward to speaking with you again on our next earnings call.

Thank you very much.

And, ladies and gentlemen, that does conclude today's presentation.

We thank you for your participation.