Unisys Corp (UIS) 2013 Q1 法說會逐字稿

Good day and welcome to the Unisys first-quarter 2013 results conference call.

At this time, I'd like to turn the conference over to Mr. Niels Christensen, Vice President 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 it's first-quarter 2013 financial results.

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

Before we begin, I would like to cover a few housekeeping details.

First, if anyone who is listening cannot see the slides, please closure your interface and relaunch.

We're advised there are some technical issues, so hopefully that will settle them.

Today's conference call and the Q&A session are being webcast via the Unisys investor website.

You can find the earnings press release and the presentation materials 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.

Today's presentation, which is complementary 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 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.

Good afternoon, everyone, and thank you for joining us today to discuss our first-quarter 2013 financial results.

Please turn to slide 4 of the presentation to begin our discussion.

This was a challenging quarter for Unisys as lower revenue in both our Services and Technology businesses impacted our profitability and resulted in a net loss in the quarter.

We saw lower Technology revenue in the quarter following the strong performance in the fourth quarter of 2012, when we benefited from some earlier-than-expected ClearPath sales.

As we've said, given the variability of our Technology sales from quarter to quarter, we measure this business on an annual basis.

We continue to target flat Technology revenue overall in 2013 from 2012 levels.

In Services, while we were pleased to see growth in IT outsourcing revenue in the quarter, we saw revenue declines from project -based systems integration services where the market for discretionary projects remained soft and where we need to improve our execution.

The lower revenue pressured our Services margins in the quarter, which declined from year ago levels and resulted in an operating margin that was below our targeted 8% to 10% range.

These were disappointing results especially given the progress we've made in recent years in enhancing our profitability and they underscore the need to improve our execution around driving profitable revenue growth while also maintaining a competitive cost structure.

As a reminder, our stated revenue goals are to grow at market rates and our systems integration and IT outsourcing businesses while maintaining flat revenue in Technology.

As I outlined in our last call, to drive revenue in these businesses, we're making investments to enhance our current solution offerings to take advantage of disruptive industry trends such as cloud computing, mobility, cyber security, big data and smart computing, social computing and IT appliances.

Further, we're investing in ClearPath enhancements and follow-on products.

And our Stealth Solution Suite of cyber security products, in application outsourcing to complement our end user and data center outsourcing services and in continuing to build out our reseller channel, which is initially focused on value added resellers to sellers Stealth Solution Suite.

As we look at how we're performing against our revenue goals, we've maintained or grown our ClearPath software and servers sales for each of the past three years.

Innovations we've made in evolving our server offerings have resulted in what we believe is the most secure, open, high-end Intel xeon-based server platform on the market today.

Supporting this comment, I point you to slide 5 which provides a report from The National Institute of Standards and Technology of known security vulnerabilities reported on a wide variety of computer platforms.

As you can see, standing out from the others with an unmatched security record are the two Unisys ClearPath operating environments.

And as noted earlier, we continue to invest in innovations that can expand market opportunities for our high-end server products.

In our Services business, our revenue progress has been mixed.

We were pleased to see our IT outsourcing business grow in the first quarter.

We're encouraged by a strong pipeline of opportunities for IT outsourcing engagements, particularly in the area of end-user outsourcing and support services where we continue to enhance our reputation as a leading services provider.

Recently Forrester placed Unisys as a strong performer in global workplace services, our first placement in this influential report.

Unisys receive the highest scores for client references among all evaluated vendors, which is gratifying given our focus on customer service and satisfaction.

This file is recognition by Gardner in that firms magic quadrants for help desk outsourcing and data center outsourcing services in North America and Europe.

Within our Services business, the biggest issue we're facing from a revenue perspective is in our systems integration business.

Turning to slide 6, there are several different factors that we believe are contributing to the weakness we're seeing in our systems integration business.

First, certainly there's some economic headwinds that we're facing in the market for discretionary projects.

Our largest vertical industry is the public sector where we've been impacted by budget pressures on shorter term government projects.

We've seen deferrals by our clients of planned discretionary projects as well as its trend toward smaller deal sizes and projects of more limited scope.

Second, unlike many of our systems integrator competitors that focus on systems integration and consulting around COTS, or commercial off-the-shelf software, such as ERP applications, our core strength within our systems integration business has traditionally been in addressing a more narrow set of industry vertical application modernization and implementation projects.

Moving to slide 7, to drive improved results in our industry-based systems integration business, we're taking steps to deepen our specialization within our sales and delivery teams.

This involves dedicating skilled specialist to sell and deliver specific solutions for our focused industries which are frequently based on Unisys' application software, such as public safety and security solutions, core banking and retail delivery solutions, voice messaging and other software for communications providers, and airline passenger and AirCargo solutions.

An example of where we've been successful with this specialized industry vertical approach is with our next-generation AirCore airline passengers solution.

AirCore is built on open technology and allows airlines to modernize their passengers sales and services applications.

TravelSky, the leading provider of IT solutions to China's growing aviation industry, recently awarded Unisys the contract for the first phase of implementing AirCore to replace its existing inventory and flight information applications as part of a multi-year modernization project to replace its legacy passengers sales and services systems.

The continued expansion of our AirCargo and cloud-based cargo portal services is also further evidence of our transportation industry success.

In addition to building specialized industry skills and resources needed to win industry specific project opportunities, we believe our investments in building our application managed services capability will make us more effective in competing for systems integration projects and provide more project opportunities.

Until recently, lacking a broader more comprehensive set of these application outsourcing offerings, we've limited ourselves in competing for project based systems integration work, as frequently these projects are part of or closely adjacent to the broader application outsourcing scope and service provider relationship.

In part to address this gap, we're investing in a dedicated set of offerings and a team focused on pursuing growth opportunities for application managed services both for existing clients and new clients.

We believe that having this application-based managed services capability will allow us to more effectively pursued not just longer term application outsourcing opportunities, but also associated application modernization and implementation project work.

It will take us some time to execute the changes I've discussed in our systems integration business especially given current softness in this market.

And as a result, we expect our systems integration revenue to remain soft as we implement these actions.

This quarter's results also highlight the importance of maintaining an effective and efficient cost structure.

We have more work to do in this area both in terms of improving the efficiency of our Service delivery and reducing overhead.

In summary, this was a difficult quarter for us.

While we're disappointed with the quarters' results, we're confident in our strategy and optimistic about the growth opportunities we see in the market.

Together with the actions I've described today to improve our systems integration business, greater industry and solution sale specialization, development of an application outsourcing capability to compliment our project capabilities, and a more effective cost structure, we believe Unisys has the capabilities and offerings as well as the improved financial structure needed to address the market opportunities before us.

I look forward to updating you on our progress in our next call.

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.

Let me start with our overall first-quarter 2013 financial results.

Please turn to slide 9. At the top line, we reported revenue of $810 million in the quarter, which was down 13% year over year.

It was a softer Technology quarter compared to the year-ago period.

And as we've mentioned, our Technology business benefited in the fourth quarter of 2012 from some earlier-than-expected ClearPath revenue.

While we saw a 5% growth in our IT outsourcing business during the first quarter of 2013, revenue in our other services portfolio declined and aggregate Services revenue fell by 12%.

Most significantly, our systems integration business declined by 31% due to lower demand for project-based services and solutions, particularly public sector in quarter sell and bill.

On our last earnings call, we provided the amount of opening Services backlog for this quarter.

We also provided the range that the opening backlog has represented of a given quarter's Services revenue over the previous eight quarters.

The first quarter's Services revenue of $723 million was at the low end of the range implied by the amount of revenue in opening backlog at the start of this quarter and our typical volume of sell and bill revenue in the quarter.

Currency had a 1 percentage point negative impact on our revenue in the quarter, and based on today's rates, we anticipate currency to have a minimal impact on revenue in the second quarter of 2013 compared to the second quarter of 2012.

As a result of the lower year-over-year volume in our Services and Technology segments, as well as the mix of our Technology revenue, our gross profit margin declined from 24.3% in the first quarter of 2012 to 19.9% in the first quarter of 2013.

Operating expenses fell by approximately 1% year over year in the first quarter of 2013.

We were able to reduce operating expenses in the quarter sufficient to more than offset the incremental investments we continue to make in our ClearPath enhancements and follow-on product, our Stealth Solution Suite, application managed services offerings and reseller channel initiatives.

Further, as we noted last year, first quarter 2012 SG&A included the $11.3 million pretax gain related to the sale of our interest in a South African joint venture, which was reported as a reduction of SG&A expenses in that period.

Excluding the benefit of that gain from our prior year SG&A, year-over-year operating expenses decreased by more than $13 million, or approximately 8%.

Interest expense decreased by more than two thirds from $9.3 million in the first quarter of 2012 to $2.7 million in the first quarter of 2013 reflecting the impact of our debt reductions and refinancing.

Other income expense for the first quarter of 2013 was $4.9 million of other expense, which was primarily attributable to a $6.5 million foreign exchange loss related to the devaluation of the Venezuelan currency.

This compares to $13.2 million of other expense in the year-ago quarter, which included foreign exchange losses of $7 million and $7.2 million in debt reduction charges.

First-quarter 2013 pension expense was $23.2 million compared to $25.7 million in the first quarter of 2012.

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

Pension expense is not included in the segment results.

We expect approximately $92 million of pension expense in 2013, compared with pension expense of about $108 million in 2012.

At the tax line, we had a $21.4 million tax provision in the quarter on a pretax loss of $6 million, compared with a $22 million tax provision in the year-ago quarter on pretax profit of $41.9 million.

As I have said previously, our effective tax rate varies significantly quarter to quarter based on the geographic distribution of our income, and we saw that in this quarter.

We reported a net loss of $33.9 million in the quarter versus net income of $13.4 million in the year-ago quarter.

Excluding the impact of pension expense in both years and debt reduction charges in the first quarter of 2012, we reported a non-GAAP net loss of $11.6 million for the first quarter of 2013, compared to a non-GAAP net income of $49.2 million in the prior-year period.

Our first-quarter 2013 diluted earnings per common share was a loss of $0.77 per share, compared to income of $0.30 in the year-ago quarter.

Excluding the impact of the debt reduction charges and pension expense, our first-quarter 2013 non-GAAP diluted EPS was a loss of $0.26 per share, compared to income of $0.97 in the first quarter of 2012.

Moving to discuss our first-quarter revenue in more detail, please turn to slide 10.

As noted earlier, Services revenue which represented 89% of our revenue in the first quarter of 2013, declined 12% year over year and currency did not have a material impact on Services revenue comparisons in the quarter.

Technology revenue, which accounted for 11% of our total revenue, declined 18% year over year, 12% on a constant currency basis.

On slide 11, you can see Services revenue and margins.

We saw lower sell and bill revenue in the first quarter particularly in systems integration project revenue as compared to last year.

As Ed noted, our goal remains to grow at market rates in systems integration but we have work to do to achieve consistent growth.

As I mentioned earlier, year-over-year ITO outsourcing revenue grew 5% in the first quarter of 2013.

Project work may also impact our growth rates in our ITO outsourcing business while the majority of our quarterly revenue is recurring in quarter project revenue, which is more discretionary in nature, is an important source of revenue that can vary from quarter to quarter.

Services gross profit margin decreased 150 basis points year over year to 17.4% from 18.9% in the first quarter of 2012.

This was primarily due to lower gross margins in our systems integration business, partly resulting from the reduced in quarter project volume.

This declining gross margin drove the Services operating margin decline of 190 basis points year over year to 3.1% in the first quarter of 2013.

The past to our longer term goal of 8% to 10% Services operating margin requires revenue growth from our focused services areas, some improvement in our US Federal business, as well as continued improvements in the delivery of our services through increased automation and efficient labor utilization.

These actions would improve our gross margin.

In addition, revenue growth would enable us to better leverage our operating expenses and would contribute to improved operating margins in our Services business.

As we work to drive Services revenue growth through some of the initiatives that Ed discussed, we will continue to take actions to improve our Services operating margins by optimizing our delivery costs and closely managing operating expenses.

Moving onto Technology revenue and margins on slide 12.

Enterprise class software and server revenue declined 16% year over year while sales of other technology, all of which is third-party product, declined by about $3 million.

Lower ClearPath revenue in the first quarter of 2013 as well as less software revenue as a percentage of the total Technology revenue in the quarter drove the decline in Technology gross profit margins from 62.2% to 45.8%.

As we have mentioned before, in addition to the revenue mix, the profitability of the ClearPath business is sensitive to revenue volumes because of the relatively high proportion of fixed costs.

Our Technology operating margins declined from 25.6% a year ago to breakeven.

And as we have said previously, the Technology business performance is best measured on an annual basis.

Slide 13 shows our first-quarter revenue by geography and industry.

Our North America revenue, which represented 42% of our revenue in the quarter, declined 14% with softness in systems integration driving most of this decline.

Revenue from the US Federal Government represented 14% of the total Unisys revenue in the first quarter.

International revenue declined 11% in the quarter and was down 9% on a constant currency basis.

Revenue in our European region was down 13% in the first quarter on an as reported basis and declined 12% in constant currency.

This decrease was principally related to lower in quarter public sector systems integration projects.

The Asia-Pacific region revenue decreased by 17% as reported and 16% on a constant currency basis.

While revenue declined 1% in our Latin America region on a reported basis, it was up 6% on a constant currency basis.

From an industry perspective, public sector, which reported an 11% year-over-year decline in revenue, remained our largest single industry revenue source representing 43% of total revenue.

Revenue from commercial industry customers represented 36% of our first-quarter revenue while the financial sector was 21%, both declined in the quarter with lower Technology and systems integration revenue.

Slide 14 provides more detail on our US Federal Government revenue over the past five quarters.

In the first quarter of 2013, revenue from civilian agencies represented about 50% of our overall US Federal Government revenue.

Revenue from Homeland Security agencies represented 27% of our overall US Federal Government revenue.

Revenue from agencies within the Department of Defense and various intelligence agencies represented about 23% of our overall Federal Government revenue.

Compared to the year-ago quarter, our overall US Federal revenue declined approximately 9% to $113.7 million.

This decline reflected delayed governmental decision making, lower funding on certain Services contracts, the continued roll off of revenue from Services contract lost in prior quarter, as well as lower Technology revenue.

We ended the first quarter of 2013 with about $293 million of US Federal Services backlog, which was down 11.5% versus the first quarter of 2012.

Looking forward, the US Federal environment remains challenging.

We do not yet have a full assessment of the impact of sequestration on Unisys.

We continue to work with the agencies we serve on a contact-by-contract basis to understand the impact but do not know what effect, if any, it will have on the Company.

We expect continued procurement process delays that are often extended by award protest.

Pricing pressures remain significant and competition is aggressive.

While 2012 included a significant volume of recompetes, Unisys is relatively well positioned in 2013 with a smaller number of contacts to defend and we are focused on trying to grow our business through a focus on mission-critical opportunities, offerings that provide innovation and cost savings as well as our ongoing commitment to client satisfaction.

Incumbency is not the advantage it once was and lower win rates are evidence for incumbents across the US Federal marketplace.

For some comments on Services orders, please turn to slide 15.

In the first quarter, our Services orders declined slightly year over year but were flat sequentially.

One highlight in our order performance was the significant growth in IT outsourcing orders which were at their highest level in over four years, driven by strong renewals.

From a geographic perspective, we saw year-over-year Services orders growth in our European and Latin American regions during the first quarter.

Orders in our North American and Asia-Pacific regions declined in comparison to the first quarter of 2012.

We ended the first quarter with $5.1 billion in Services backlog, and backlog has been stable over the past four quarters.

Of the $5.1 billion in Services backlog at March 31, 2013, approximately $650 million is anticipated to convert into second-quarter 2013 Services revenue.

During seven of the past nine quarters, we've noted an increase in the level of sell and bill business as a percentage of the total quarterly revenue, clearly Services revenue.

During that period the amount of revenue in backlog at the start of the quarter has ranged between 85% and 90% of our quarterly Services revenue for the full quarter and the sell and bill revenue has accounted for the remainder.

Moving to cash, please turn to slide 16 for an overview of our cash flow performance in the quarter.

We generated $14.1 million of cash from operations in the first quarter of 2013, compared to $33.4 million in the year-ago quarter.

We contributed $26.6 million in cash to our defined benefit pension plans in the first quarter of 2013 versus $68.2 million in the first quarter of 2012 and as pension funding contributions are reflected in the cash flow from operations.

Excluding the impact of debt reduction charges and pension expense, Unisys generated adjusted EBITDA of $57.6 million in the first quarter of 2013 versus $123.4 million in the prior-year period.

Capital expenditures were $25.9 million in the first quarter of 2013 versus $30.4 million in the first quarter of 2012.

We expect full-year capital expenditures of about $150 million.

We had free cash flow usage of $11.8 million in the first quarter of 2013 versus free cash flow generation of $3 million for the same period last year.

Our free cash flow generation before pension cash contribution was $14.8 million for the first quarter of 2013 versus $71.2 million in the first quarter of 2012.

Depreciation and amortization was $40.2 million in the quarter, down from $41.8 million in the first quarter of 2012.

Our debt balance was $211 million at March 31, 2013, down from $296 million at March 31, 2012 as a result of the series of debt reduction actions completed during the second and third quarters of 2012.

Our cash balance was $629 million at March 31, 2013 and was roughly three times our debt.

And as we have discussed and announced previously, in December 2012, our Board of Directors authorized the purchase of up to $50 million of the Company's common or preferred stock through December 2014.

We have not repurchased any shares under that authorization.

Let me conclude by saying that as we move through 2013, we are focused on improving our Services revenue and margins and will be taking actions to drive top line growth and profitability toward the levels we have outlined in our strategic financial goals.

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

Thank you, Janet, very much.

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

(Operator Instructions)

Eric Boyer, Wells Fargo.

When you talk about your system integration margin or profitability remaining soft while you take action -- while you take actions to implement those initiatives, where do you expect those margins to be throughout this year?

Is it safe to assume they should be probably lower than the 6% to 8%?

We were running towards -- in the second half of the year at about 6%.

We've hit 8% periodically in some of the quarters.

But building off of the 3% in the first quarter in Services operating profit, to get there longer term, we have got to have revenue growth from the strategic areas.

We've said before that that -- when we were running at 6% that was about 1 point of getting us to the 8% to 10% range.

Another point or so would come from the actions to improve the cost effectiveness of the delivery through automation and lower cost reductions, and the remainder coming from greater leverage from the operating expenses.

Given the softness in the systems integration business that we've discussed, we would expect that to continue to carry forward through the rest of the quarters, particularly the next two.

Okay, and then anything that gives you concern about reaching your target for flat year-over-year Service sales through 2013?

It's a goal that we've had in place now for three years, Eric, and we've hit it or exceeded it the last three years.

And there have been other quarters where we've had softer-than-expected quarters, others where we've had stronger-than-expected quarters.

But again, for us the key thing is looking at that on an annual basis and we are aiming at keeping that flat for the year.

Okay, great, thanks a lot.

Ned Davis, William Smith & Co.

A couple of questions.

First of all, the systems integration where you indicated that you've got a lot of specialized spending targeted at certain verticals, but you suggested there is a significant lag.

Can you give us any perspective on how much time is involved to start harvesting the benefits of the spending?

Yes, Ned I think the point I was trying to make is that our systems integration business is really tied in large respects to industry specific applications and capabilities that we sell to our clients, particularly in public sector financial services, transportation and communication.

And what we believe we need to do is one, specialize more in driving greater success in those industry verticals.

But also build a stronger application outsourcing business that's more horizontal in nature that will allow us to compete more effectively for the project-based work that's being done in those non -- in those more horizontal segments of the marketplace.

So we need to do both of those.

Now our goal has been, as you know, is to grow that business at industry rates and we've been carrying in our head that the industry is growing in the 4% to 5% range.

That's where we want to be with this business.

Industry maybe softening some from what we're seeing, but the first step is to stop the decline in the systems integration business.

So we're focused on how do we stop that decline and then how do we turn that into a growth story consistent with the industry.

Okay.

We had another highly publicized -- highly exposed breach of security today with the AT.

And I know each one of these things is different and I know that the correlation between your server business from a failure, secure failure is not necessarily core relative with your overall Services activity.

But I'm wondering, I know you've had a lot of emphasis on marketing these secure systems and work connected with them and I'm wondering whether you're seeing the potential for a big buildup of demand and if you can put any kind of parameters on that over the next few years, or things relating to these breaches at security and data that seem to becoming commonplace now?

Yes, well I think you're right, Ned, they are becoming more commonplace and what you'll find is a large portion of our solutions across all of our businesses are tied to security.

As you know, ClearPath is, we think, the most secure platform in the industry and that's one of the reasons why customers have continued to rely upon ClearPath for their mission-critical computing.

So we also see the market for our Stealth Solution Suite as being a robust market opportunity in large part because cyber security is going up higher and higher on the priorities of CIOs around the world, not just CIOs, but certainly CEOs and CFOs as well.

A number of our services are tied around security offerings as well.

So we think that it's a great marketplace to be addressing, as you say, and we think that the potential there continues to grow and our job is to execute effectively to get our fair share of it.

Okay one last thing.

On the share buyback, the lack of actual purchase of shares, is this reflective of any specific financial considerations or is it -- I mean what would bear on your actual activity on share repurchase with that existing authorization going forward?

Well, I'll take the first part of your answer, no it isn't.

It's not to tied to anything financial, specific financial issue.

Okay.

I know you're not going to project it going forward.

So appreciate it, thank you.

David Phipps, Citi.

I'm looking at your business and you've got great backlog and lots of visibility and so I'm trying to reconcile what a new baseline level and in the big drop on the consulting and systems integration, did you get sequester or -- because the government contracts look like it was -- they only declined 9% it doesn't seem like that would explain all of that.

And I'm trying to get where the reset really was in that business and is it reset, or did we just hit a vacuum of orders that are going to be postponed to a later point in time?

Everything else seems like it can manage.

David, in the systems integration business, as we said in the comments, it's the public sector business and you're right in observing that the impact in the Federal business was a minimal impact.

It is -- was more across the public sector business that we do.

We can sell and deliver within a given quarter.

We think that the constraints on spending in the public sector area have affected those type of discretionary projects.

And as you look at our backlog going into the second quarter of 2013, as I said in my comments, we're at $650 million of backlog, that is down from roughly $700 million a year ago, and I think that reflects the new -- what we're seeing from a demand standpoint at this point in time.

And so did the consulting projects, did they say, stop coming in during the middle of the quarter or did you roll in with this kind of backlog on this business or was this a bit of a -- it's a $66 million sequential decline in that business and that's what I'm trying to -- how did that come about?

Did they not ship products, did they cancel the contracts, did you lose a big contract, I mean, something?

Sure, so when we look at the amount of sell and bill work done within a quarter, this was the lowest quarter that we've seen in the systems integration business for a number of quarters.

A year ago, we were at probably one of our highest percentages of sell and bill business in the quarter.

As Ed mentioned in his comments, the systems integration business does include industry solutions and in there, there are some software sales that can be point in time within a given quarter sold and purchased by customers.

So we have two things going on, less discretionary spending, particularly in the public sector, and a lower execution in the current quarter compared to a year ago, with the amount of systems integration business that we could sell and deliver on within a given quarter.

So should we think about the software that's being sold delayed, is that like a licensed delay as we've seen in some other of your peers?

Yes, it could -- yes, it could be licensed delay, it could be a licensed tied with a systems integration project that's delayed as well.

All right, good luck with that.

Thank you.

Paul Wehner, DLS Capital Management.

Hi, guys, this is actually Dave Steinberg, owns DLS.

My question is you were trying to be polite about the sales and so forth.

Is there any part of this fall off and the -- what you just talked to this gentleman the larger obviously drop off that is related to actually the product you're selling, it is less competitive than your competitors or price related or anything or are you going to basically lay this off essentially on the fact that you've got a lot of sequester municipal drop off in spending?

And I want to know if it's a product issue that you've got here that we're dealing with.

No, David, I don't think it's a product issue.

I think it's -- there's some macroeconomic stuff going on, there's some industry vertical public sector stuff going on.

But I think we're also not ducking the issue that we could execute better than we executed in Q1.

But I don't believe it's a product limitation.

All right so when you mean, and we're shareholders so we're on your side here, we're not trying to beat you up, but -- so if it's execution, sorry can you elaborate a little bit so I can get my arms around this?

I don't want to be the guy selling this thing in the morning, I'd rather be the guy buying it.

So I'd really like you to help me understand that, if you could with another couple quick comments.

Well I'd go back to a couple of points I made in my comments.

A lot of what we do from a systems integration standpoint in these application-based solutions are really tied to industry verticals.

And to be effective in selling those, you need to have good industry vertical expertise.

And that's why I was calling out the success that we've had in the airline industry, both on the passenger side and on the cargo site, because we've invested in industry-specific skills and capabilities to be able to sell those solutions effectively.

And as we look at what we do going forward, we think that we need to invest more in those kinds of skills and capabilities across the other solution sets in the industry verticals that we serve.

So we think that's an area where perhaps we're too generalist and not industry specific enough in our selling approach and selling activities.

Does that help?

Yes, it does.

So how many quarters, in your mind, do you think it's going to take for either a repair or an improvement or stabilization from where we're at, given now you've all this information on what's caused the shortfall and so forth?

It's a work in progress and as I say, we're not exactly going into wind at our back on this as well.

But we're addressing it aggressively and we understand -- we believe we understand what the issues are and we're going after it through that venue, which I just mentioned.

I also talked about how we believe that a stronger application managed services and outsourcing business can also serve as a stronger foundation for winning where project work and implementation work as well.

Okay, I appreciate it, I'm not trying to beat you up too hard I'm trying to make sure I have the right information because we're all trying to make sure we all have our oars in the water in the right direction.

Yes, and I think Janet had made the comment, the next couple of quarters, there's a lot of work to be done.

Okay, great.

Thank you.

Joey Yang, SAG.

Hello, thank you this is Joey on behalf of Jimmy Friedman.

So are we still expecting the $2.1 billion of backlog from the beginning of this year to convert to the Services revenue for the full year 2013?

Right, we started the year with $2.1 billion of Services revenue and that backlog is expected to turn into revenue in 2013.

So are we still back to that will be in the historical range, which is about 60% to 70% of the total Services revenue?

Yes, in 2012, the opening backlog represented 70% of the Services revenue in 2012.

Okay so in the '13, the previous guidance will still remain in the previous guidance, which is 60% to 70% range of the total Services revenue?

Correct.

Okay.

That 60% to 70% in the prior was that -- is that if you go back historically and you look at our performance, the opening backlog has represented between 60% and 70% of the business.

Obviously, with the quarter that -- the quarter that we've talked about with less in-quarter revenue this first quarter, that would skew us more to the 70% than it would be to the 60%.

And 70% is the performance that we had in 2012, but that opening backlog representative of the 2012 revenue.

Got you.

A follow up, so what is the average duration of your system integration projects in general?

The average duration of the systems integration projects can vary from shorter term projects in the three to six month range to a multi-year project.

The multi-year projects are more likely to happen in the public services and the public sector business than in the rest of the commercial or financial business.

So we do have a range from three to six month projects to a handful of multi-year projects predominantly in public sector.

But for the multiple year projects, we need to renew or recompete each year or it's -- ?

No, generally not, Joey.

One that comes to mind is a good example is State of Michigan where we're responsible for developing their new child welfare system in Michigan.

I think that's been a two-year project that's underway.

Got you, thank you.

Last one from me, so is the system integration declining this quarter partially related to the decline in the CleanPath sales also?

So Jimmy -- Joey, if I understood you correctly, the question that you asked was is the decline in systems integration tied to the decline in the ClearPath revenue?

Correct.

No, it is not.

The primary decline in this business is the in quarter project-based sell and bill revenue.

Okay, thank you.

This does conclude today's question-and-answer session.

At this time I'd like to turn the conference back to Ed Coleman for any additional or closing remarks.

Great, Operator, thank you very much.

Let me thank everyone for participating in today's call and let me close by saying that we are focused on improving these results and look forward to talking to you again at the next call.

Thank you very much.

This concludes today's conference.

We thank you for your participation.