Unisys Corp (UIS) 2014 Q1 法說會逐字稿

Good day, and welcome to the UNISYS first-quarter 2014 results conference call.

At this time, I'd like to tun 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 its first-quarter 2014 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 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.

Third, 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 reconciliations within 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 2014 financial results.

Let me provide a summary before turning the call over to Janet for a more detailed review of those results.

Please turn to slide 4 to begin our discussion.

Following the strong fourth quarter of 2013, where we grew Technology and Services revenue and profit, our first-quarter 2014 revenue and margins were impacted by lower sales of technology, timing and execution issues on a few IT Services projects, as well as lower-than-normal project-based revenue with our IT outsourcing customers.

This resulted in a breakeven operating profit before pension expense, with a net loss of $54 million in the quarter versus a net loss of $34 million in the first quarter of 2013.

We look for improved overall results through the course of year, driven by anticipated full-year growth in our Technology business, as well as improved Services margins.

Our ClearPath revenue was unusually low in the quarter.

As you know, our ClearPath sales can vary significantly from quarter to quarter, depending on the timing a deal closes, which is why this business is best measured on an annual basis.

Based on the ClearPath opportunities we had in the pipeline, we look for our full-year 2014 Technology revenue to be about $500 million, which is consistent with the average of the past four years and represents growth over 2013.

Revenue from Stealth and Forward!

will be incremental to this.

In our Services business, our goal is to keep our revenue approximately flat for the full year of 2014 and while it continues to be a challenging market for IT services.

We are focused on improving our execution from the first quarter and capitalizing on growth opportunities for some of our newer cloud-based services and solution offerings, as well as for our end-user outsourcing services.

We are confident in our strategy and focused on achieving our financial goals in 2014 and over the 2014 to 2016 timeframe.

As a reminder, those three-year goals, which you can see on slide 5, are to grow our Technology business by leveraging our investments in new products such as Stealth and Forward!, as well as continued innovation through ClearPath.

We continue building out our reseller channel to reach new customers and increase the percentage of our revenue coming from the channel.

And finally, to reach our goal of consistently achieving an 8% to 10% operating profit margin in our Services business by growing in our higher-margin services, simplifying our operations and providing services more cost-efficiently.

To achieve these goals, we continue to invest in innovative offerings and the growing areas of the market.

Slide 6 shows the offerings and programs where we are investing across our Technology and Services businesses.

In the Technology area, we are pleased by the market interest we are seeing in our Stealth Cybersecurity software.

Stealth uses advanced data cloaking and encryption technologies to help organizations mitigate cybersecurity attacks by making devices, data and end users undetectable to hackers and other unauthorized users on the network.

In fact, if you're not authorized to access certain data, you're not even aware the data exists.

Stealth is been marketed by both our direct sales force, as well as by our value added resellers.

As we continue to get the word out on the unique advantages of Stealth, our pipeline of opportunities continues to grow.

During the first quarter, our channel team met with more than 150 organizations to review Stealth, the vast majority of which were introduced to us by our resellers and are new to Unisys.

We are also seeing good initial market interest in our new Forward!

Intel-based server platform.

Forward!

offers a powerful, flexible, lower-cost alternative for organizations looking to migrate from expensive proprietary Unix systems to consolidate [sprawling] data centers onto a standard x86 environment, and to run ERP and cloud applications more securely and cost-effectively.

Forward!

combines standard Intel x86 processors with our own secure partitioning technology, by running Linux and Microsoft workloads in a flexible, fabric-computing environment.

North American manufacturer, JMC Steel, recently completed a beta test of Forward!

that delivered 40% better performance for JMC's mission-critical SAP applications than its existing servers.

This client said that it, quote, couldn't have been more impressed, end quote, with the results and with Forward!, quote, could deliver a significant value as a platform for future and mission-critical workloads, end quote.

We are in the early stages of bringing this new product to market.

Like Stealth, we expect 2014 revenue for Forward!

to be weighted to the second half of the year.

In our Services business, we continue to bolster our solution offerings to take advantage of cloud and software as a service-based delivery models.

During the quarter, we announced expanded capabilities for our Edge IT Service Management solutions, which we offered via and as a service delivery model.

Our ITSM, as a service solution, uses predictive analytics to deliver cost-efficient, personalized IT support services to an organization's end users.

We added 6 more clients in the quarter, bringing the total number of clients using our ITSM platform to 158.

We see growth potential for our Edge ITSM solution in the markets around the world.

In China, for instance, we are partnering with data center hosting provider, 21Vianet, to deliver the Edge solution to businesses and government organizations.

Moving to slide 7, across both our Technology and Services businesses, we believe we have a strong set of compelling value-added solutions to help clients address and take advantage of disruptive trends occurring in the marketplace.

In terms of service and solution quality, we take pride in the awards we've received recently for service excellence from both clients and partners.

We've also made much progress in terms of being recognized as a leader in our areas of strength by firms such as Gartner, Forrester and IDC.

Over the last year, we more than doubled the number of industry analyst reports for Unisys and our offerings are included.

Today, we are being rated as the leader or a major player in such growth areas as mobility, workplace services, and managed services.

And we've also seen significant increases in press and media coverage of Unisys and our offerings.

At the same time, we recognize we need to do a better job of representing and selling our offerings in the market and we continue to make important changes in our sales team and go-to-market model.

We're also increasing our investments in marketing and advertising in 2014 to increase the visibility of Unisys solutions in the market.

All of this work supports our long-term goal of becoming a Company known for financial strength, with the quality of our services and solutions provided ongoing differentiation, and be an acknowledged leader in those areas of strength.

Turning to slide 8, while this was a tough start to the year, we are focused on improved execution.

We look for improved results during the course of the year to drive us to our 2014 financial goals, which we discussed earlier this year.

These goals are to return the Company to revenue growth, continue to invest in new innovative products and services, and grow pre-tax profit compared to 2013 levels before the impact of new product investments.

Thank you for joining us today.

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

Thanks, Ed, and hello, everyone.

Following a strong performance in the fourth quarter, the first-quarter revenue and margins were weaker.

Please turn to slide 10 for a discussion of our first-quarter 2014 financial results.

We reported revenue of $761.7 million in the quarter, which was down 6% year over year, down 4% on a constant currency basis.

Technology revenue in the first quarter of 2014 was down, compared to the year ago period, principally reflecting lower sales of our ClearPath Systems.

The Technology performance continues to be best measured on an annual basis and we continue to target year-over-year growth for this business in 2014.

The average revenue from our Technology segment over the past four years has been approximately $500 million.

As Ed noted, our goal is for our base Technology business to achieve that level of revenue in 2014.

Our Stealth and Forward!

product offerings represent the opportunity for growth above that base.

Our fourth-quarter 2014 results were also impacted by timing and execution issues on a few IT services projects, as well as lower-than-normal end quarter sell-and-bill revenue in our IT outsourcing business.

We started the quarter with $630 million of Services backlog expected to convert into first-quarter 2014 revenue.

As we've previously discussed, 10% to 15% of our Services revenue is typically sold and delivered within a quarter.

In the first quarter of 2014, only 9% of our actual Services revenue was sell-and-bill, below the low end of our historical range.

This impacted not just revenue, but also margin, since the in-quarter project revenue normally has a higher incremental margin percentage.

As I will discuss in more detail later, approximately $650 million of our March 31, 2014, backlog is anticipated to convert into second-quarter 2014 Services revenue.

This level of revenue and backlog is up $20 million sequentially and is about the same level as March 31, 2013.

Currency had a 2 percentage point negative impact on our revenue in the quarter.

Based on today's rates, we anticipate currency to have between 0.5 point to a 1 percentage point favorable impact on revenue in the second quarter of 2014 compared to the second quarter of 2013.

Our gross profit margin declined from 19.9% in the first quarter of 2013 to 17.5% in the first quarter of 2014, as a result of lower year-over-year revenue in Technology, as well as lower-than-expected project-based revenue within our IT outsourcing business, and timing and execution issues on a few IT services projects.

Operating expenses declined approximately 4% year over year in the first quarter of 2014.

This reduction was achieved despite the incremental investments we continue to make in growth programs like Stealth, Forward!, our reseller channel initiatives and our cloud-based solutions.

However, as we mentioned in our year-end earnings release call, because of our anticipated incremental investments in new product and services offerings, we expect 2014 will have $35 million to $70 million higher selling and marketing expenses than we saw in 2013.

During the first quarter of 2014, the incremental spending on these growth programs was approximately $5 million.

While this was more offset by lower operating expenses elsewhere during the first quarter of 2014, we continue to expect that the increase in year-over-year operating expenses for the full year 2014 will be in the range I just mentioned.

First-quarter 2014 pension expense was $19.5 million, compared to $23.2 million in the first quarter of 2013.

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 the segment results and we expect approximately $78 million of pension expense in 2014, compared with pension expense of about $94 million in 2013.

In the first quarter of 2014, our operating loss of $19.9 million was about breakeven before pension expense.

Other expense for the first quarter of 2014 was $9.8 million, which was primarily attributable to foreign exchange losses, including a $5.8 million loss attributable to Venezuela's currency changes.

Other expense of $4.9 million in the year-ago quarter included a $6.5 million foreign exchange loss related to the valuation of the Venezuelan currency.

After the impact of the devaluation, we had approximately $9 million in monetary assets remaining in Venezuela at March 31, 2014.

At the tax line, we had a $16 million tax provision in the quarter on a pre-tax loss of $31.7 million, compared with a $21.4 million tax provision in the year ago quarter on a pre-tax loss of $6 million.

As I 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 $53.5 million in the quarter versus a net loss of $33.9 million in the year-ago quarter.

Excluding the impact of pension expense in both years, we reported a non-GAAP net loss of $34.2 million for the first quarter of 2014, compared to a non-GAAP net loss of $11.6 million in the prior-year period.

Our first-quarter 2014 diluted earnings per common share was a loss of $1.15 per share, compared to a loss of $0.77 in the year-ago quarter.

Moving to discuss our first-quarter revenue in more detail, please turn to slide 11.

As noted earlier, Services revenue, which represented 91% of our revenue in the first quarter of 2014, declined 4% year over year.

Currency had a 1 percentage point negative impact on Services revenue comparisons in the quarter.

Technology revenue, which accounted for 9% of our total revenue, declined 19% year over year, 16% on a constant currency basis.

On slide 12, you can see services revenue and margins.

Services revenue was down by 4%, 3% on a constant currency basis.

Our Systems Integration business revenue was flat on a year-over-year basis in the first quarter.

We saw some growth in Business Process Outsourcing and our Core Maintenance businesses, but our IT outsourcing and Infrastructure Services businesses were down by 8% and 12%, respectively.

As I mentioned earlier, we saw lower sell-and-bill revenue in the first quarter of 2014, particularly in our IT outsourcing business.

This was most notable in Australia and Brazil.

While the majority of our quarterly IT outsourcing revenue is recurring, our 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 160 basis points year over year to 15.8% from 17.4% in the first quarter of 2013.

This was primarily due to lower gross profit margins in our Systems Integration and IT outsourcing business, which were impacted by the reduced in-quarter project volume.

The decline in gross margins drove the Services operating margin decline of 120 basis points to 1.9% in the first quarter of 2014.

The path to our longer-term goal of 8% to 10% Services operating margins requires a number of actions to increase gross margins.

First, fix the execution issues we experienced in the first quarter of 2014.

Services revenue needs growth.

We can see an increased percentage of higher-margin Unisys IP content within our Services revenue mix, continued improvement in our US federal business and sustained improvements in the delivery of our services through increased automation and efficient labor utilization.

In addition to these growth margin benefits, revenue growth would also enable us to better leverage our operating expenses, which would contribute to improved operating margins in our Services business.

Moving on to Technology revenue and margins on slide 13, Enterprise Class Software & Server revenue declined 22% year over year due to lower ClearPath volumes, while sales of other technology, all of which is third-party product, rose $1.2 million to $8.1 million.

Lower ClearPath volume in the first quarter of 2014 drove the decline in Technology gross profit margins from 45.8% a year ago to 42.5%.

As we've mentioned before, the profitability of the ClearPath business is sensitive to revenue volumes because of the relatively high proportion of fixed costs associated with this business and is best measured on a full-year basis.

Our Technology operating margin declined from breakeven in the first quarter of 2013 to a negative 21.2% in the first quarter of 2014.

Slide 14 shows our first-quarter revenue by geography and industry.

Our North America revenue, which represented 42% of our revenue in the first quarter of 2014, declined 5%, with [Service] and Technology driving the decline.

Revenue from the US federal government represented 15% of total Unisys revenue in the first quarter and was up 2% year over year.

We are pleased to see the year-over-year increase in US federal revenue.

International revenue declined 7% in the quarter and was down 4% on a constant currency basis.

Revenue in our European region was down 1% in the first quarter, and on an as reported basis, and declined 4% in constant currency.

The Asia-Pacific region decreased by 12% as reported and 4% on a constant currency basis.

This decline is principally attributable to lower Australian public sector revenue.

In Latin America, currency had a major impact on year-over-year comparisons.

Revenue declined 17% in our Latin America region.

Currency impacted the comparison by 13 points.

It was down 4% on a constant currency basis.

Again, lower in-quarter public sector IT outsourcing revenue was largely responsible for the decline.

From an industry perspective, public sector, which reported a 9% year-over-year decline in revenue, remained our largest industry revenue source, representing 42% of our total revenue.

Revenue from commercial industry customers represented 35% of our first-quarter revenue, while financial sector customers accounted for 23% of our revenue.

Commercial revenue declined 7% in the quarter, while revenue from the financial sector rose 3%.

Slide 15 provides more detail on our US federal government revenue over the past five quarters.

As mentioned, compared to a year ago quarter, our overall US federal revenue rose approximately 2% to $116 million.

This increase reflected higher technology sales than in the year ago quarter, as Services revenue was down about 2%.

In the first quarter of 2014, revenue from civilian agencies represented about 44% of our overall US federal government revenue, while Homeland Security agencies and Defense & Intelligence agencies each represented about 28% of revenue.

We ended the quarter of 2014 with about $305 million of US Federal services backlog, which was up 4% versus the first quarter of 2013.

While we are pleased to see growth in our US federal business in the first quarter, we've seen many of the same challenges as our competitors in this marketplace, including delays in contract awards and continued uncertainty, despite greater near-term budget stability.

For some comments on Services orders, please turn to slide 16.

In the first quarter, our services orders declined year over year and sequentially.

Within our Services portfolio, only Business Process Outsourcing showed orders growth.

From a geographic perspective, we saw year-over-year Services order declines in all regions in comparison to the first quarter of 2013.

We ended the first quarter, with $4.5 billion in Services backlog.

The year-over-year decline in backlog from $5.1 million(sic-see presentation slides "$5.1 billion") at March 31, 2013, reflected reductions in Business Process Outsourcing, Infrastructure Services and IT outsourcing.

As I mentioned earlier, of the $4.5 billion in Services backlog at March 31, 2014, approximately $650 million is anticipated to convert into second quarter 2014 Services revenue.

During the past several years, the amount of revenue and backlog at the start of the quarter has typically ranged between 85% and 90% of our quarterly services revenue for the full quarter and the [Services] revenue has accounted for the remainder.

Moving to cash, please turn to slide 17 for an overview of our cash flow performance in the quarter.

We generated $20.1 million of cash from operations in the first quarter of 2014, compared to $14.1 million in the year-ago quarter.

We contributed $55.5 million in cash to our defined benefit pension plan in the first quarter of 2014 versus $26.6 million in the first quarter of 2013.

Excluding the impact of pension expense, Unisys generated adjusted EBITDA of $26.7 million in the first quarter of 2014 versus $57.6 million in the prior-year period.

Capital expenditures were $44.6 million in the first quarter of 2014, versus $25.9 million in the first quarter of 2013.

The increase in capital expenditures largely reflected investments in our new products, as well as expenditures on automation tools and leasehold improvements that support further consolidation of our real estate footprint.

We expect full-year capital expenditures of between $150 million and $200 million.

We had free cash flow usage of $24.5 million in the first quarter of 2014, versus free cash flow usage of $11.8 million for the same period last year.

Our free cash flow generation before pension cash contribution was $31 million for the first quarter of 2014, versus $14.8 million in the first quarter of 2013.

In the first quarter of 2014, we had year-over-year increases of $28.9 million in required pension contributions and $18.7 million in capital expenditures.

I would like to take this opportunity to remind everyone that we do expect free cash flow in 2014 to be impacted by the increase in operating expenses, by the possibility of higher capital expenditures associated with new deals, and by approximately $85 million of increase in pension contributions that we'll need to make in 2014 versus 2013.

Depreciation and amortization was $40 million in the quarter, flat with the first quarter of 2013.

Our debt balance was $210 million at March 31, 2014, largely unchanged from the year ago.

Our cash balance was $613.8 million at March 31, 2014, and remained roughly 40 times our debt.

As we discussed 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.

During the first quarter of 2014, UNISYS purchased 30,738 shares of common stock for approximately $902,000.

Since March 31, 2014, we have purchased an additional 97,747 shares of common stock for approximately $2.8 million.

About $34.6 million now remains available under the Board Authorization for further repurchases during the remainder of 2014.

Let me conclude by saying that, as we move through 2014, we are focused on improving our revenue and margins and driving topline revenue growth and profitability, as outlined in our financial goals.

We are focused on strengthening our business and supporting our new and innovative products in the marketplace to position the Company for success in 2014 and beyond.

Thank you for your time.

Now I'd like to turn the call back over to Ed.

Thank you, Janet.

Operator, we'd like to open the call up to questions at this time.

(Operator Instructions)

James Friedman, SIG.

Hello, Jamie.

Hi, Ed and Janet.

Thanks for taking my questions.

So Janet, I heard you call out the sell-and-bill on ITO and Infrastructure on slide, I think it's slide 12.

Are those services disproportionately sell-and-bill?

And if so, why is that the case?

Sure.

Jamie, as we've talked about historically,10% to15% of our Services revenue comes from items that are sold and billed in the quarter.

A fair amount of that does come from our IT outsourcing business.

In this quarter, we only achieved 9% of our Services revenue coming from items that were sold and billed within the quarter.

This type of work is project-based work that we're doing in existing customers, particularly within IT outsourcing customers.

It generally comes at higher incremental margins and so when we don't get in that range, it really does impact us both on the revenue and the margin line.

And when we are further and we're doing more sell-and-bill, we can see the impact, not just in the revenue rate and in the margin rate.

So that fact that we only did 9% sell-and-bill in the quarter impacted us at the topline but also impacted us at the Services gross and operating margins.

And what -- to what would you attribute that outlier event this quarter, and what makes you confident that it's going to return to a more normal pattern?

Jamie, I -- this is Ed.

I think it reflects a difficult environment on discretionary spend across the marketplace.

So we do view it as an outlier.

We've had such consistency in this 10% to 15% range over so many quarters that it does strike us as an outlier.

It causes us to reflect -- the elective moves where it's a question of execution on our part and making sure that we're alert to the opportunities for that incremental work and pursuing it aggressively to win it.

Okay.

Meanwhile, US Federal is actually pretty good, at least relative to my expectations, is up year over year.

I know you had mentioned that, as your competitors had observed, it's a tough environment out there.

Why is it that -- is this business for you more stable because of recompetes, or just the technically acceptable standards that may play to your favor?

Why were you opting year over year?

A couple years ago, Jamie, we really saw a decline in that business, coincident with some years where we had a large number of recompetes.

So we were defending business that we had and to win that business, you either had to take some pretty aggressive pricing actions to win and in many cases, we did not win.

We lost a number of those recompetes.

So over the back half of 2012 and in 2013, and so far this year, we've really been in an environment where we've been less susceptible to recompetes and more opportunities to pursue other people's recompetes and win some of that business.

But as Janet said, our Services revenue was still down 2% year over year, and the increase that we saw came from the technology side of the business.

Okay, and then maybe the last thing on technology, and I'm sorry if I missed this, and if I didn't, maybe you could at least qualitatively describe it.

So, where are we in terms of Forward!

and Stealth?

Do we have any material revenue from those in Technology yet?

Or is that still a work in process?

I'd have to characterize it as a work in process.

We have customer wins and with both of those products.

At this point, I'd say the revenue is still immaterial to our results.

As I said in my comments, we expect that to be heavily weighted through the second half of year.

Okay.

All right, thank you.

Thank you, Jamie.

(Operator Instructions)

Glenn Mattson, Sidoti and Company.

Yes, hi, everyone.

Can you remind me real quick, what was the sell-and-bill last quarter?

I remember it was high, but do you remember what the number was as a percentage of the total Services?

Yes, Glenn, it's Janet.

So last quarter, we did 23%.

If you go through each of the quarters in 2013, a year ago in the first quarter of 2013, we did about 11%; second quarter was 12%, third quarter, 10%; fourth quarter, it was 23%.

And we did call out that we thought that, that was more than the higher range.

But if you go all the way back through 2012 and 20011, I think you have to go back into 2010, where we were outside of that, hitting at least a minimum of 10%, generally running north of the 10% and the 11% to 12% range, so coming in at 9% is outside of historical typical range we've seen.

So, I guess it has been more steady until Q4.

But I guess the one comment I would make is, it seems like it's maybe -- this maybe be more for Ed, I'm not sure, but in order to get to that 8% to 10% margin range in the sell-and-bill part, it seems to have -- you have to have a good quarter on that sell-and-bill side of the business, and that seems to jump around a little bit.

How do you consistently get to that margin range?

Any comments on that?

Yes, well, I think getting to that sell -- that more typical sell-and-bill percentage is a part of it.

But Janet, do you want to just comment on those different elements of that?

Sure.

Glenn, if you're looking at the first quarter of 2014, we did about 1.9% operating margin.

When we look at the impact of the lower in-quarter revenue, as well as some of the timing and execution items that we said in our comments, we think they run around 2.5% of a margin impact on that so that if we had been in the range at the low end of the range and had not had those execution issues, we think that that margin would have been more in the -- a bit above 4% margin rate, very similar to what we were running in the second quarter.

When we get mix, the higher revenue and the SG&A leverage, then we're getting closer to the 6%, 5.7% -- 5.75% to 6% operating margins.

When we get into -- in the midpoint of that sell-and-bill range, it has at times caused us to have as much as a 1% operating profit improvement, so that gets us into what we're running at for the 2013 average, which was about 6.2%, 6.3%.

We know to go from there to the 8% to 10% target, it does take, as I said in my comments, the revenue growth, the continued movement towards higher UNISYS IP content in our services offerings, the federal stability, and some better SG&A leverage, to give you a sense of where we see this quarter compared to what we performed at last year in the first half of he year, how we performed in the Services business for the full year of 2013 and for where we want to go to hit our 8% to 10% goals.

Okay.

Can you give a little more detail about what the timing and exclusion issues were on IP services?

Did you get into that, really, or is it -- any specifics there?

Well, we had a few projects where we expected to hit the milestones by the end of the quarter that would be revenue-generating milestones for us, and we did not get it done.

We ended up with incurring the cost of those projects without getting the associated revenue.

And do you feel comfortable talking about what the dollar -- or what type of revenue we're talking about that (inaudible)?

I'd prefer not to.

Okay.

I think you can get the sense of the magnitude in my comments where it said about 2.5 percentage points operating profit is the impact of the combination of the lower in-quarter revenue, just as if we had gotten from the 9% to the bottom of the range, historical range of 10%, as well as the execution challenges.

Okay.

Moving onto Technology really quick.

Let's see, you said there was 150 customer engagementson Stealth, I think, with your channel partners.

(multiple speakers) Go ahead -- Can you go into a little bit more about that?

If you give year over year, how many do you expect of those to convert to revenue or what percent or anything -- more detail about that?

Well, I'm not sure I'm in a position to say how many are going to convert to revenue.

What we were pleased with is the amount of activity that was being generated through this reseller channel and the channel organization that we've been standing up.

And for us to have the opportunity to present Stealth to 150 different commercial enterprises and government organizations in the quarter, again, the vast majority of them are clients or prospects that we've never spoken to before, we think is an indication of one of -- it's certainly an indication that the people are anxious to find a new solution to the Cybersecurity challenges.

They're finding Stealth to be a unique and interesting and differentiated approach to solving the problem.

It says that we've got a channel out there that is bringing to us opportunities to speak to people that we've never spoken with before, all around this theme that we've had of new products sold to new channels in order to win new customers.

So, we are less dependent on our installed base and we have a growing customer base.

Now this is just the first step to getting that business closed, right?

But it starts with exposure to the marketplace and the opportunity to speak with people that we've never spoken with before.

Okay.

But nothing on what kind of feedback you gotten from those customers?

Are those --

Glenn, I'll tell you, the feedback that we get around Stealth is pretty remarkable.

Very, very interesting, and Glenn, I can tell you that we've won new clients again here in the first quarter.

We are pleased with that.

As we've talked the last earnings call about a couple of important engagements and clients that we had won.

So we think that there's a bigger momentum here where we have a real marketplace need being met by a differentiated product offering.

And we're getting out there and getting good energy, I think, around our go-to-market and in the responses that we're receiving from the prospects.

It's not an easy sale.

It's not a short-term sale.

You have to keep -- like most new technologies, you have to talk to the client or the prospect certainly more than once to get the order.

Okay.

Sounds good.

And a quick one on ClearPath.

I guess I think this is either the third quarter that's come in a little below expectations, maybe two of the last three quarters.

On IBM's call, they talked about this being their bottom of the cycle for them for mainframes.

I don't know, is that something maybe just industrywide or is that for them specifically as it relates to their product cycle?

I think ours is a little different.

Ours is more driven, again, ours is more of a software license business than it is a hardware business.

So it's just really a question of when clients want to renew those licenses.

How -- what -- how long a period they want to renew the license for, how large are the workloads that they're going to be running on those systems for our upcoming license period.

And it's -- we always say it's spiky, and not necessarily predictable with precision as to how all those things are going to transpire, and you see it in the quarterly results.

And you're quite right, I think over the last three or four quarters, we have been disappointed on a quarterly basis, at times.

Other times, we've exceeded what our expectation was.

Okay.

I guess lastly on the buyback.

Does that need to be -- is it mandated that, that gets completed by year end 2014?

It was nice to see that shares purchased, and the aggressive action even after the quarter closed.

But is that -- I'm just curious, does that need to be closed by the end of 2014?

The forward resolution goes through December 2014.

So if you don't exhaust the funds, then they would just -- it would be -- okay.

The Board authorization is that the $10 million to $15 million to be spent before December 31, 2014.

Okay, okay.

Great.

That's it for me, thanks.

Thank you, Glenn.

Bill Smith, William Smith Company.

Hi, Ed, did you add any Rs this quarter?

I think you had something like 60 when you spoke on the last quarter call?

Bill, honestly I don't know if we added some or deleted some, but the number is still 60.

There may have been a little bit of churn in there, but it would be minimal churn.

Our number is still 60.

Okay.

And then, if I think about growing the Technology business to $500 million, as you pointed out and if I look at, say, 20% or 21% operating margins, which is what you had last year, something like that in that business and then if you held Services flat at roughly $3 billion and use a 6% margin.

If I look at both of those numbers, say $100 million income on the ClearPath business, the Tech business, and $180 million in the Services business, $280 million not including any incremental business from Forward!

or Stealth, would I be thinking about that correctly?

Would those numbers, if I work with those numbers, would I be in the right ballpark there?

Bill, it's Janet.

So you -- when you reflect on the $500 million that we're talking about the average of the business, you're right that in 2013, we ran around 21.1% margins in the Technology business, and in the Services business, we said that that number, our goal is to get that flat with the [$2.998 billion] that it was in 2013.

So then the question on that business is where we come in total for the Services operating profit for the year.

We've given what our goal is and what we have to do to get from the first quarter performance to the full-year performance, so there's -- I think you have conceptually been consistent with what we discussed without commenting on the specific number.

But without any improvement on the operating, I'll just use the 6% margin, which it sounds like you're in a position to improve upon that.

But just using that 2013 6% number and the 20% or 21% (multiple speakers) -- $280 million without any contribution from Forward!

or Stealth.

Bill, I think the only thing I would comment on would -- in addition to that is the comments we've made about the investments behind the new programs, which we've said could add between $35 million, and $70 million of increase in operating expenses to support those new programs.

Okay.

Thank you.

Thanks, Bill.

Thank you, Bill.

At this time, we have no further questions.

I'd like to turn the call back over to Ed Coleman.

Well, thank you, operator.

Let me thank everyone who attended the call today.

I appreciate your participation and look forward to speaking with you on our next call.

Thank you very much.

This concludes our conference.

Thank you for your participation.