Unisys Corp (UIS) 2013 Q2 法說會逐字稿

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

At this time I would like to turn the conference over to Mr. Niels Christensen, Vice President of Investor Relations at Unisys Corporation.

Please go ahead, sir.

Thank you, Operator.

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

Earlier today Unisys released its second-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 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 presentation slides that we will be using this afternoon to guide our discussion, on our investor website.

Third, today's presentation, which is complimentary to the earnings press release, includes a 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've provided reconciliation charts at the end of the presentation.

Finally, I would like to remind you that all forward-looking statements made during this conference call are subject to various risks and uncertainties that could cause actual results to differ materially from expectations.

These factors are discussed more fully in the earnings release and in the company's SEC filings.

Copies of these SEC reports are available from the SEC and from the Unisys investor website.

Now I would like to turn the call over to Ed.

Great.

Thanks, Niels.

Hello, everyone.

Thank you for joining us today to discuss our second-quarter 2013 financial results.

Please turn to slide 4 for an overview of our performance in the quarter.

After a difficult start to the year in the first quarter, Unisys reported a sequentially improved and profitable second quarter in what continues to be a challenging IT spending environment.

We reported diluted earnings per share of $0.46 in the quarter, compared with diluted EPS of $0.99 in the second quarter of 2012.

Excluding pension expense in both periods, as well as a small debt reduction charge in the year-ago quarter, our non-GAAP EPS was $0.91 in the current quarter, compared with $1.41 a year ago.

Our technology business had a strong second quarter, growing revenue 13% on higher sales of our ClearPath enterprise software and servers.

Year-to-date, our ClearPath revenue is up 3%.

As we've said in the past, this business is best measured on an annual basis, and we remain focused on our goal of stable annual technology revenue.

Our primary challenge from a business perspective continues to be in our Services business.

Our Services revenue declined 9% in the quarter, driven primarily by revenue declines in both systems integration and outsourcing services.

The lower revenue impacted our services operating margins, which came in at 4% for the quarter -- up sequentially, but below our 8% to 10% target.

We were encouraged by some improvement in our US Federal revenue from the declines that we were seeing in previous quarters.

Total revenue in US Federal decline 2% in the quarter, and was up 4% sequentially.

The year-over-year revenue decline was due to lower technology sales.

Federal Services revenue was flat with the year ago.

During the quarter we won a number of key US Federal Government contracts, including renewals and new projects with the Department of Justice, the Department of Interior, and the Federal Deposit and Insurance Corporation.

Last week we were also informed that we were awarded a major new single award IDIQ contract from the department of Homeland Security to provide full lifecycle services to Customs and Border Protection in support of its border enforcement and management systems.

This award, which represents new work, and expands on our existing relationship with customs and border protection, is for five years with a one-year base contract, and four one-year options, and a total ceiling value up of to $460 million.

Turning to slide 5, while the services market is challenging, we continue to see growth opportunities in helping organizations take advantage of disruptive technologies, such as cloud, mobile computing and social computing, to deliver the next generation of IT services more effectively and cost efficiently.

From government agencies to commercial enterprises, we're seeing more organizations beginning to adopt these new technologies and new IT delivery models.

At the same time, many organizations are understandably concerned about the security and reliability of these new services.

This is an area where Unisys, with our capabilities in leadership and secure mission critical computing, can provide clear advantages and differentiation in the market.

In the area of cloud computing, for instance, Unisys has been in the forefront of helping U.S. Government agencies, such as the General Services Administration, the National Oceanic and Atmospheric Administration, the Department of Energies Idaho National Labs, and the US National Archives move to secure cloud based e-mail systems based on Google apps for government.

We also recently won new business from the US Department of Interior, a new client, to move its mission-critical financial and business management ERP system to the cloud.

In addition to this cloud computing integration work, we're offering a growing number of industry-vertical and cross-industry software solutions via a cloud base as a service model, enabling to us open up our offerings to a larger market.

Last quarter, for instance, I spoke about our cloud-based air cargo solutions, which continues to attract new airline clients for managing cargo shipments through an easy-to-use web portal.

As another example, in the United Kingdom, much of that country's mortgage processing volume runs on the Unisys Financial Services System solution.

To address a larger share of that market, we're now offering our UFSS solution via software as a service model, and we've already received a contract to move several new financial services clients to our software as a service offering.

In the coming weeks, we also plan to introduce a software as a service version of our Info Image Enterprise Content Management software, which is used by clients in high-volume document processing environments, most notably in public sector and financial services organizations.

And a key element of our IT Outsourcing business is providing IT Service Management software as a service.

Our ITSM as a service solution is now used by more than 140 clients who rely on this cloud-based solution for the management of IT services throughout their organization.

Turning to slide 6, as we look to the second half of the year and beyond, in addition to continued investments in our existing solutions for security, data center, end user outsourcing, and application modernization, as I noted in our last call, we're making additional investments in new areas to drive growth.

These investments are in Stealth Solution Suite of cyber security products, in our reseller channel program, in application-managed services, and within our Technology business and our Intel-based enterprise server program.

Let me touch on each of these briefly.

Regarding our Stealth Cyber Security solutions, we continue to be excited by the growth potential for these software products.

Organizations around the world are searching for better, more cost-effective ways to protect against sophisticated cyber attacks, recognizing that the traditional security approaches, such as perimeter defense and endpoint protection, aren't meeting the challenge.

Our Stealth Solutions take a radically different approach, utilizing advanced cloaking techniques to allow clients most important assets, be they applications, databases, end users, or user communities to go dark on the network, rendering them effectively invisible and providing protection from internal and external threats.

During the second quarter, we announced the availability of our Stealth Solution Suite on Amazon web services, enabling organizations to gain these advanced network security capabilities when moving their work loads to the Amazon Cloud.

As with any disruptive technology, it takes time to educate the market on the new solutions and drive sales among early adopters, but we're encouraged by the growing interest we're seeing in Stealth.

Stealth is also the first of our software solutions that we're offering through our new channel program.

As I mentioned in the past, Unisys currently gets a minimal amount of revenue through resellers and distributors relative to our major competitors.

And we're looking to change that by creating a vibrant channel program.

In recent months, we've been steadily building out our partner network, and to date we've brought on 40 value-added resellers in North America and Europe, as well as a European distributor.

These VARs represent an important new sales channel to help us expand our market reach for our Stealth products, as well as for other future offerings.

A lot of work is being done right now to train and educate these VARs on Stealth, and increase their mind share with Unisys.

And while we're in the early stages of our channel program, we're pleased with the progress we're making.

In addition to Stealth and our channel program, we're also focused on driving growth in application-managed services, which compliments other elements of our IT outsourcing services portfolio.

The application-managed services market is growing as organizations increasingly look to outsource the management of their applications to reduce cost and improve service to their end users.

Unisys offers a number of advantages in this market, including the further leveraging of our consistent idle-based global support network and our expertise in delivering a better end-user experience.

As I noted on our last call, Unisys has provided application managed services or application outsourcing, for many years, but we've done this on a project-by-project basis.

What is different today is that we've pulled our capabilities together from around the world and organized to identify, pursue, and address this market in a broader and more consistent manner.

With some initial windfall ready and a growing pipeline, progress to date is encouraging.

Finally, in the technology area, we continue to invest in our ClearPath line of enterprise software and servers, where we believe we lead the industry in bringing mission-critical capability to Intel X86 technology, while drawing on these strengths and capabilities to enter new markets with new products.

Later this year we plan to introduce a new line of high-end server products that take Intel X86-based technology to new levels of mission-critical performance, giving organizations more secure, cost-effective options for consolidating their server environments, migrating off expensive UNIX platforms, and managing work loads in cloud and virtualized IT environment.

In summary, we are pleased to see improved second-quarter results after a tough first quarter.

We are particularly pleased with the strong technology and ClearPath sales in the quarter.

Our biggest challenge as a Company continues to be driving profitable growth in our Services business that enables us to deliver consistent Services revenue growth, and improved operating margins.

While the Services market is challenging at the moment, we continue to see growth opportunities aligned with our strength, and we're focused on executing on our growth initiatives as we move into the second half of the year.

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

In the meantime, 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 second-quarter 2013 financial results.

Please turn to slide 8. At the top line we reported revenue of $859 million in the quarter, which was down 7% year-over-year, but up 6% from the first quarter.

After a soft first quarter, our technology revenue grew 13% year-over-year in the second quarter, fueled by increased ClearPath sales.

ClearPath revenue was up 18% for the quarter, and 3% for the first half.

Services revenue declined 9% year-over-year but recovered modestly from the first quarter, growing 2% sequentially, largely due to improved levels of project work.

Currency had a minimal negative impact on our overall revenue in the quarter.

Based on today's rates, we anticipate currency to have a one percentage point negative impact on revenue in the third quarter of 2013, compared to the third quarter of 2012.

As a result of the lower year-over-year volume in our Services segment, as well as the mix of our technology revenue, our gross profit margin declined from 26.4% in the second quarter of 2012, to 23.4% in the second quarter of 2013.

Operating expenses fell by 1% year-over-year in the second quarter of 2013.

Our operating expense reductions in the quarter more than offset the incremental investments we continue to make in our key growth initiatives, as well as some additional cost reduction actions taken during the second quarter to lower the company's overhead.

Interest expense decreased by about two-thirds from $7.9 million in the second quarter of 2012, to $2.6 million in the second quarter of 2013, reflecting the impact of our debt reductions and the refinancing in the third quarter of 2012.

Other income expense for the second quarter of 2013 was $14.1 million of other income, principally attributable to foreign exchange gains.

This compares to $4.1 million of other income in the year-ago quarter, which was also primarily related to foreign exchange gains.

Second-quarter 2013 pension expense was $22.8 million, compared to $21.1 million in the second quarter of 2012.

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

Pension expense is not included in segment results.

We expect approximately $91 million in pension expense in 2013, compared with pension expense of about $108 million in 2012.

At the tax line, we had a $22.7 million tax provision in the quarter on pretax income of $49.5 million, compared with a $22.1 million tax provision in the year-ago quarter on pretax income of $75.2 million.

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

The passage of the U.K. Finance Act of 2013 earlier this month will reduce the UK corporate tax rate to 21% effective April 1st, 2014, and to 20% effective April 1st, 2015.

These rate reductions reduce the future value of our UK net-deferred tax assets, and are expected to increase our third-quarter 2013 income tax provision by approximately $11.7 million.

We saw similar impacts to our income tax provision when the UK rate reductions happened in both 2011 and 2012.

We reported net income of $20.4 million in the second quarter, versus net income of $46.6 million in the year-ago quarter.

Excluding the impact of pension expense in both years, and a debt reduction charge in the second quarter of 2012, we reported non-GAAP net income of $42.3 million for the second quarter 2013, compared to non-GAAP net income of $68.4 million in the prior year period.

Our second-quarter 2013 diluted earnings per common share was $0.46 compared to$ 0.99 in the year-ago quarter.

Excluding the impact of last year's debts reduction charge, and pension expense in both quarters, our second quarter 2013 non-GAAP diluted EPS was $0.91, compared to $1.41 in the second quarter of 2012.

Moving on to discuss our second-quarter revenue in more detail, please turn to slide 9. As noted earlier, services revenue, which represented about 86% of revenue in the second quarter of 2013, declined 9% year-over-year.

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

Technology revenue, which accounted for 14% of our total revenue, rose 13% year-over-year, 8% on a constant currency basis.

On slide 10, you can see our overall services margins, and our services revenue by portfolio.

Year-over-year IT outsourcing revenue declined 12% in the second quarter of 2013 from a challenging compare in 2012, particularly within public sector in North America and Australia.

Systems integration was 11% lower in the second quarter of 2013 than in the prior year, reflecting reduced project volume in Europe and Asia.

Services gross profit margin decreased 280 basis points year-over-year to 18.2%, from 21% in the second quarter of 2012.

This decrease was largely due to lower revenue.

The services operating margin declined 400 basis points year-over-year to 4% in the second quarter of 2013.

Despite the year-over-year decline, I do want to point out that we have seen sequential improvement from the first-quarter 2013 services gross margin and operating margin.

We still have work to do to get to our goal of 8% to 10% services operating margin.

Achieving the goal requires improved execution including revenue growth from our focused services area, and 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.

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

Moving on to technology revenue and margins on slide 11, enterprise-class software and server revenue increased 11% year-over-year, largely due to the strength in our ClearPath business.

Sales of other technology, all of which is third party products, rose by about $2 million.

As we have said previously, the Technology business is best measured on an annual basis, and our goal remains keeping annual Technology revenue stable.

While Technology revenue grew in the second quarter, the gross margin of 59.4% in the second quarter of 2013 was 400 basis points lower than the comparable period in 2012.

Our Technology operating margin declined from 28.6% a year ago, to 23.9%.

Slide 12 shows our second-quarter revenue by geography and industry.

Our North American revenue, which represented 41% of revenue in the quarter, declined 6%, with ITO driving most of that decline.

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

International revenue declined 7% in the quarter and was down 6% on a constant currency basis.

Revenue in our European region was down 10% in the second quarter on an as-reported basis, and declined 9% in constant currency.

This decrease was principally related to a decrease in systems integration revenue.

The Asia-Pacific revenue decreased by 20% on both an as-reported and constant currency basis.

This decline largely reflected lower public spending in Australia, and lower systems integration revenue in Asia.

Our Latin America region performed well with revenue growth of 22% on an as-reported basis and 27% in constant currency.

The growth was driven principally by higher technology revenue and increased ITO volume.

From an industry perspective, public sector, which reported a 6% year-over-year decline in revenue, remained our largest single industry revenue source, representing 41% of total revenue.

This decline was largely attributable to reductions in Australia.

Revenue from commercial industry customers represented 35% of our second-quarter revenue, while the financial sector was 24%.

Both did decline in the quarter.

The decline in commercial revenue was primarily attributable to lower systems integration revenue.

Moving on to slide 13, which provides more detail on our US Federal Government revenue over the past six quarters.

In the second quarter of 2013, revenue from civilian agencies represented about 46% of our US Federal Government revenue.

Revenue from Homeland Security agencies represented about 28% of our overall US Federal Government revenue, while the US Department of Defense and various intelligence agencies represented about 26% of our overall US Federal Government revenue.

Compared to the year-ago quarter, our US Federal revenue declined approximately 2% to $119 million, a significantly slower rate of decline than we have seen in recent quarters.

We were pleased to see that the revenue increased by 4% sequentially, and further, as Ed noted, we won a number of significant contracts during the second quarter, and start the third quarter with a new business win with customs and border protection.

We ended the second quarter of 2013 with about $259 million of US federal services backlog, which was down 11% versus the second quarter of 2012.

The US Federal environment remains challenging.

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

Pricing pressures remain significant and competition is aggressive.

However, we believe we have made some important changes in our cost structure and strategic approach that should position us well going forward.

For some comments on services orders, please turn to slide 14.

In the second quarter, our services orders rose slightly year-over-year with growth in systems integration orders.

From a geographic perspective, we saw year-over-year services orders growth in our North American and Latin American regions during the second quarter.

Orders in our European and Asia-Pacific regions declined in comparison to the second quarter of 2012.

We ended the second quarter with $4.8 billion in services backlog, versus $5.1 billion at June 30th, 2012.

The decline principally reflected reductions in our ITO and BPO backlog.

Of the $4.3 billion in services backlog at June 30th, 2013, approximately $645 million is anticipated to convert into third-quarter 2013 services revenue.

During the past 10 quarters, the amount of revenue and 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 15 for an overview of our cash flow performance in the quarter.

We generated $16.1 million of cash from operations in the second quarter of 2013, compared to $57.1 million in the year-ago quarter.

We contributed $34.7 million in cash to our defined benefit pension plans in the second quarter of 2013, versus $50.6 million in the second quarter of 2012.

The pension funding contributions are reflected in the cash flow from operations.

Excluding the impact of the debt reduction charge in the second quarter of 2012, and pension expense in both periods, Unisys generated adjusted EBITDA of $112.6 million in the second quarter of 2013, versus $148.6 million in the prior year period.

Capital expenditures were $38.2 million in the second quarter of 2013, versus $34.8 million in the second quarter of 2012.

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

We had free cash flow usage of $22.1 million in the second quarter of 2013, versus free cash flow generation of $22.3 million for the same period last year.

Our free cash flow generation before the pension cash contribution was $12.6 million for the second quarter of 2013, versus $72.9 million in the second quarter of 2012.

Depreciation and amortization was $40 million in the quarter, down from $46.5 million in the second quarter of 2012.

Our debt balance was $210 million at June 30th, 2013, down from $292 million at June 30th, 2012 as a result of the debt reduction actions completed during the third quarter of 2012.

Our cash balance of $576 million at June 30th, 2013, was almost three times our debt, and our net cash position remained stable versus the prior year at $366 million.

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

We repurchased approximately 612,000 shares of common stock for $11.5 million in the second quarter.

There is $38.5 million remaining under the board authorization.

I would like to take a moment to provide some information regarding our defined benefit plan.

First, let me start with discount rates, which are used to present value pension obligations under US GAAP.

These rates are set annually, and for us, set at December 31st.

The discount rate used to present value the US benefits plan obligation was 4.01% at December 31st, 2012.

For the international plan, the weighted average discount rate was 3.92% at December 31st, 2012.

As we noted during our 2012 year-end earnings release call, a 25-basis-point change in the discount rate would change the US obligations by approximately $140 million, and the international obligations by $122 million.

Historically, our pension under funding on a US GAAP basis has been significantly impacted by the change in discount rate.

Since December 31st, 2008, the discount rate for US obligations has declined from 6.75% to 4.01%, a 275-basis points reduction.

Internationally, the weighted average discount rate has moved from 6.42% at December 31st, 2008, to 3.92% at year-end 2012, a 250-basis point reduction.

These reductions in the discount rate have significantly contributed to the increase in our pension liabilities, which grew from approximately $6.3 billion at December 31st, 2008 to approximately $8.6 billion at December 31st, 2012.

The vast majority of the under funded plans are closed and/or frozen as reflected in our current year service cost within pension expense of approximately $10 million on an annualized basis.

On slide 16, we show the impact on our pension liabilities if the discount rate was changed to reflect the interest rate conditions at June 30th, 2013.

For this estimate, we held all other assumptions constant with those used at December 31st, 2012.

And, of course, our 2013 pension obligations will be calculated using discount rates and other assumptions at December 31st, 2013.

If we were to reset the discount rate to June 30th, 2013 market conditions, the US rate increases from 4.01% at December 31st, 2012, to 4.83%.

The weighted average international rate increases from 3.92%, at December 31st, 2012, to 4.15%.

This would result in an approximate $600 million reduction in our reported pension liability.

Assets have remained stable since December 31, 2012, as positive asset returns during the first half of 2013 have been offset by benefit payments and currency impacts.

With respect to cash funding requirements, we have also provided a schedule on slide 17 that outlines the anticipated funding requirements over the next 13 years based on assumptions consistent with those made at December 31, 2012.

There is no significant change in the funding through 2017 from what we provided in conjunction with our year-end result, but we thought it would be helpful to illustrate payments out through the point where the U.S. funding requirements will return to zero.

The future funding requirements are likely to change based on, among other factors, market conditions and future public IRS discount rate.

Future contributions to international plans will be based on local funding regulations and agreements, and are likely to change in 2014 and beyond based on a number of factors including market conditions, changes in discount rates, and changes in currency.

As you can see, we have expanded our pension disclosures.

I do want to note that these numbers will likely change over time as market rates, asset returns, regulatory environment and other assumptions may change.

However, we wanted to provide you an estimate based on the June 30th, 2013 environment.

Let me conclude by saying that as we move through 2013, we are focused on improving our services revenue and margin, and will continue our efforts to drive top-line growth and profitability.

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

Thanks, Janet, very much.

Operator, if we may, let's open the lines up for questions.

Yes, thank you.

(Operator Instructions)

And we'll pause for just a moment to allow everyone an opportunity to signal for questions.

Yes, thank you.

(Operator Instructions)

And we'll pause for just a moment to allow everyone an opportunity to signal for questions.

We'll go first to Ned Davis with William Smith & Company.

Yes, good afternoon.

I would like to get a little more clarification on the estimated future pension cash contributions.

So the chart that's on slide 17, that does not reflect the June 30 $600 million potential adjustment at all, or does it?

It does not.

Ned, it does not.

The funding requirements -- let me back up.

The discount rate that's used on slide 16 is the US GAAP discount rate.

Right.

The funding requirements that are shown on slide 17 are a function of the regulatory or other -- predominantly the regulatory environment that sets different rates from the discount rates.

So on slide 16, we have updated that for the discount rate environment at June 30, and the estimated future pension cash requirements on 17 are based on the December 31, 2012 rates as they existed.

My question is, I know you can't estimate exactly what the IRS rate would be, or exactly how it would be adjusted, but assuming just that the change in rates since December 31 were to remain in effect at the end of the year, when you did your projection for actual cash contributions at the end 2013, the number would -- the total of these payments would drop.

It's just the timing is a little bit uncertain.

That a correct assumption?

It will depend -- the US funding requirements are set by the PPA rate, and, as we have discussed before, include looking at both current rates and a 25-year average.

So those rates do not move the same direction, or as quickly, as you would see in the discount rate used for US GAAP.

Okay.

Could I just switch over to ClearPath quickly?

The -- it was encouraging to see such an excellent quarter.

I'm wondering with the new server that you are introducing later in the year, are you gaining momentum with new customers, and is there any kind of increment with new customers that you haven't been experiencing the last few years?

Is there some acceleration of opportunity with new customers, particularly with (multiple speakers) Stealth, and all those other -- I'm sorry, yes?

Yes, thanks, Ned.

In any given year, there's a few new customers that come over to the ClearPath platform.

Predominantly the growth in ClearPath capacity in the marketplace is really stemmed from the growth of existing customers' use of ClearPath, either for the traditional work load or, as we've opened the platform up, in some cases moving from additional new work loads over to those existing installations.

What we think is exciting about the platform that we intend to announce later this year is, it opens -- in our view it opens us up to the opportunity to pursue fundamentally new markets for our technology.

Mission critical computing, running on Intel X86 technology to reach new customers and new markets.

Thank you.

Thank you, Ned.

We'll go next to Joey Yang with Susquehanna.

It's actually Jamie Friedman with Susquehanna.

Hi, Jamie.

Hi, Ed.

I want to ask a couple of questions.

First, on the federal business, I know you touched on this briefly, but I think you may have modestly understated the magnitude.

I wanted to see if you could share a little bit more about the Custom and Border Protection assignment which you guys press released, but it was also press released on the Custom and Border Protection website, and if could you give us a sense of the magnitude of this.

Was it in your backlog?

Because it is, I believe, an IDIQ, and when would you expect to start billing for something of this magnitude.

So, as we've said, it's new work for us.

Customs and Border Protection has been a good client of ours for a number of years.

We've had an award winning program, the Land Border Initiative with them, which has been more of a front office support for their mission at the border crossings.

This is really new work for us supporting their back office -- more their back office systems.

So it's new work.

It's one that we've been working on for quite awhile.

We're very excited about having been awarded it.

It's not been in our backlog.

It's been in our pipeline but not in our backlog.

And the ramp-up of the revenue and the degree to which it hits our backlog, our order backlog, will really depend on the funding that occurs for the individual task orders that will be issued on this contract.

Okay.

That was going to be my follow-up, whether it was funded or unfunded.

So I don't know if this is from your press release or from their press release, but there is a public disclosure of $460 million of ceiling volume.

Is that accurate?

It's correct.

It's single-source award of an IDIQ, indefinite delivery, indefinite quantity, which means task orders are going to be issued against this contract.

And so the ceiling value of the whole contract over five years, which is one base year and four optional years, is the $460 million.

Okay.

And then just stepping back, Ed, with regard to services margins -- and it was otherwise a tremendous quarter, tremendous quarter in all respects -- when, though, do you think that we can return to the target margin objectives and services?

And at least as importantly, how do we get there of 8% long term?

Yes, I think -- it's really dependent, as Janet said in her comments.

One, we've got to get revenue growth going and IT outsourcing and systems integration, and we're certainly looking to, in the second half of this year to begin to move up as opposed to moving down in IT outsourcing systems integration.

It also, I think as Janet noted, we need to get that continued improvement in the federal business.

That's a large part of our systems integration business, and we need to see the continued progress there, very happy about what we saw this quarter with the new wins and the second quarter and certainly kicking off the third quarter with the BEMS contract, or the BEMS award.

But in addition to the revenue side of things, we have to keep looking at ways to make our service delivery more efficient -- have a portfolio of services that's more leveragable, that's less dependent on adding labor, as you add services revenue, and continued as we always do, a focus on reducing our overhead to be as efficient as we can possibly be.

But the real crux of it is we are fully engaged on the issue of revenue growth in systems integration and IT outsourcing, and we need to drive that across our business.

Last question.

I don't want to monopolize the time, but if you comment on the linearity of the quarter, was it ratable, April, May, June?

Was it front or back loaded?

Could you comment on the timing of delivery in the quarter?

The services generally are pretty consistent and smooth across the quarter, the technology transactions less so.

As you know it can be very spiky, dependent on when transactions occur.

Some occur early, some occur in the middle, and some occur late.

All right, thank you.

Congratulations.

Thanks, Jamie.

And we'll take our next question from Bill Smith, William Smith & Company.

Hi, Ed.

On the 40 VARs that you've added to your distribution network, is that all just related to Stealth, or could some of that also be related to the ITO and the systems integration and ClearPath businesses as well?

At this point it's all about Stealth.

Again, we're doing sort of two innovative things, or new things, at one time, which is, one, how do we take this disruptive technology to market and reach a broader part of the market than we can reach with our direct sales force?

And two, how do we build a channel, a reseller channel, which is a different way of going to market for us?

So we've really used Stealth as the product to focus on to build the channel around.

Once that channel is built out, we think there's an opportunity to look at other pieces of software for other technology products that we have, to take the market through a reseller channel as well, some of whom may also be the Stealth resellers, or they may require a different skill set for different products.

But right now it's really laser focused in on Stealth.

And is 40 VARs -- would that be the total build out of that network, or could there be more?

Oh, there could be more.

There could be.

What we're trying to do, Bill, with Stealth, though, is make sure that we're signing up VARs that understand the security business, and understand that various technologies are available to meet cyber security requirements, as opposed to opening it up to as many VARs as we can possibly get.

We really want people who are subject matter experts in the area of security.

And are you seeing other opportunities in vertical markets then, or do you think you would, by virtue of the developing these VAR relationships?

Yes, I mean, when Janet goes through our vertical orientation, we talk about public sector, commercial, financial services -- as an example, we don't talk much about healthcare, because we don't have a strong vertical presence in healthcare.

But that's an example of where a reseller that is oriented towards the healthcare industry vertical could help us get broader reach of our product into a vertical that we don't normally cover with our direct sales force.

When you mentioned the 40 VARs, you also mentioned plus a European distributor.

Is that different?

I couldn't figure it out.

IT channels generally are considered to be either one-tier or two-tier channels.

One tier is where the OEM, that's us, manages a reseller network, the value added reseller network themselves.

In a two-tier channel, the OEM does business with a distributor, who in turn has their own network of resellers.

So in the US right now we're going one-tier.

In Europe we're doing a combination of one-tier as well as two-tier approach.

Thank you.

You're welcome.

Thank you, Bill.

(Operator Instructions)

We'll go next to Paul Wehner with DLS.

Hi, guys.

Hey, Paul.

Actually, Ned, the first caller, asked my pension question verbatim, so I'll let someone else take over.

Thanks.

Thank you, Paul.

(Operator Instructions) And we have a follow-up from Ned Davis with William Smith & Company.

Yes, thank you.

I just was wondering, why is the CapEx still at $150 million, growing 15%, I think, year-over-year if revenues aren't growing anywhere near that, or are in negative?

What's in that CapEx that keeps driving it?

So the CapEx, the $150 million, is our estimate of CapEx expenditures for the full year.

It does include our investments in outsourcing.

It includes our software development costs, as well as a small portion is what we use internally.

As Ed mentioned, we are looking to improve our performance in moving revenue from declining to moving, moving up in the second half of the year, based upon the pipeline of what we see in opportunities right now, $150 million for CapEx is our the best estimate of what we expect to be spending for the full year.

Thank you.

Thanks, Ned.

It appears there are no further questions.

I would now like to turn the conference back over to Chairman Ed Coleman for any additional or closing remarks.

Well, thank you, Operator.

Let me just close by saying thank you to everyone that was on the call this evening, and we certainly look forward to you joining us on our third-quarter earnings call here in a couple of months.

But thanks very much.

Bye-bye.

Thank you.

That does conclude our conference.

You may now disconnect.