Unisys Corp (UIS) 2015 Q1 法說會逐字稿

Good day and welcome to the Unisys First Quarter 2015 Results Conference Call. At this time I would like to turn the conference over to Mr. Niels Christensen, Vice President of Investor Relationships 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 2015 financial results. With us this afternoon to discuss our results are Peter Altabef, our President and CEO, and Janet Haugen, our CFO.

Before we begin I would like 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 in the presentation slides that we will be using this afternoon to guide our discussion on our Investor website. And 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 their related GAAP measures and we've 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 Peter.

Thank you, Niels, and thank you all for joining us today. When I spoke with you in January shortly after joining Unisys I shared with you my initial impressions of the Company and our priorities for the business going forward. Since that time I've been working with our leadership team and associates, meeting with clients and developing an actionable program to drive improved performance and deliver greater shareholder value. I am confident in Unisys capabilities and potentials but we must move aggressively to accomplish our goals of achieving competitive margins, enhanced cash flow and revenue growth.

Our actions include an organizational redesign to better address our client's needs, optimization of our cost structure and implementation of a go-to-market approach with greater focus on vertical markets and integrated solutions.

In the first quarter our overall revenue grew slightly on a constant currency basis driven by growth in our US Federal business and an increase in technology sales. Our services revenue declined 6% but was flat in constant currency. The Company's overall gross profit margin declined from 17.5% to 16.2%.

Profitability in our technology business improved with increases in revenue. However, our services profitability decreased. Services gross margins declined from 15.8% in the first quarter of 2014 to 14.1% this year. This decline was principally the result of start-up costs on new multi-year engagement and lower project work. We are taking actions to improve our profitability and competitive positioning and I'll discuss those in detail shortly.

First, let me highlight the steps we have already taken. We have realigned Unisys over the past several months. We have moved to an organization with two core client relationship focused teams, Enterprise Solutions and US Federal, and two core globally integrated delivery teams, Services and Technology, all supported by our sales and corporate support teams. This will sharpen roles and increase accountability.

Leadership decisions for the two client relationship focused organizations were made in the first quarter. Ron Frankenfield, who previously led our Enterprise Services Organization leads Enterprise Solutions and Venkatapathi Puvvada, who previously served as interim leader of our US Federal business assumed the position on a permanent basis.

We have been actively recruiting leaders for both core delivery organizations and, as we announced earlier this month, Neil Gissler, formerly of Accenture, has joined the Company to lead our Global Services Team. Neil has an outstanding record of driving growth and cost efficiencies with deep experience in solution architecting, client IT strategy, enterprise architecture, infrastructure, applications and consulting services. Neil's organization will also manage Unisys' worldwide network of client service centers, software service centers and data centers as well as our work with third-party partners including large cloud providers.

Unisys has tremendous strengths to build on, our solutions portfolio, our global capabilities, our deep capabilities and mission critical IT and is well positioned to serve a consumerized business and government mindset. But to succeed we must bring innovated, differentiated solutions to our client's most pressing business and technology problems.

The first step in this journey was the reorganization we completed early in the second quarter to align ourselves more closely with our clients and better meet their needs. We are also taking actions to simplify and streamline our sales processes to pursue opportunities more quickly and efficiently. In addition, we are strengthening our client executive function with better tools, training and more accountability.

The next steps include changes in our cost base, our global delivery processes, our go-to-market approach and our solution offerings. As I communicated in January, we've taken a hard look at every element in our cost base with a view to improving our cost structure and ensuring that we deploy our capital in a targeted manner in order to successfully fund our future.

We have begun an initiative to remove management layers in order to make us more nimble while driving cost efficiencies across all our operations. This effort is critical for us to achieve market levels of profitability and to allow us to fund future initiatives. We are committed to driving these cost reductions while we deliver best-in-class services and technology to our clients. We are reducing the cost of labor and SG&A expenses throughout the Company.

In addition to headcount rationalization, cost reduction opportunities include an improved labor model, both on shore and off shore, aggressive cost management, improvements in how we execute through greater accountability and reduced redundancy. In connection with these initiatives Unisys expects to recognize a pre-tax restructuring charge currently estimated at approximately $300 million over the next several quarters. The Company expects to reduce worldwide headcount by approximately 8%. As a result of these actions, the Company expects to generate annualized savings of approximately $200 million exiting 2016.

A more competitive cost structure is a critical element for our growth initiatives plus we must also develop integrated solutions for vertical industry market segments. We will leverage Unisys's intellectual property and talent to deliver more innovative, differentiated solutions for our clients. We will increasingly focus on vertical markets and integrated offering solutions that build on our strengths, offer attractive growth and margin potential and are a good fit for our capabilities and offerings.

As we look to our verticals, it is worth noting some of the successes in the last quarter across a range of industries. Within the public sector, which includes work for local and national governments around the world other than the US Federal Government, our team expanded the scope of an existing contract with a US state for cloud and infrastructure support services with the inclusion of special purpose cloud platforms.

Unisys also renewed a cloud infrastructure services engagement with a large European state authority that is responsible for that state's courts and law enforcement processes.

In our US Federal business the civilian agency group was selected to compete for task orders to provide a range of information technology products and services under the new Solutions for Enterprise Wide Procurement Five contract. This [SEP Five] contract has ceiling value of $20 billion over the next 10 years and this will be a key contract vehicle to which Unisys can offer civilian agencies solutions such as stealth, clear path forward and edge.

Within Homeland Security our Land Border Integration program for customs and border protection is expanding license plate reader deployments for outbound crossings at 16 new locations across the border between the US and Mexico.

Also in our US Federal business the defense and intelligent group won a piolet to integrate stealth with other technologies to provide critical infrastructure with a robust flexible and extendible integration solution. This pilot is an important step toward obtaining the government certifications required to sell stealth to other defense clients.

Turning to our other industry groups, in Financial Services Unisys extended our service desk, data center outsourcing and technology support services with a large Latin American Bank. We also had a number of wins in our commercial group.

A leading global consumer package goods provider expanded our existing agreement to provide cloud and infrastructure services across multiple new countries. A global pharmaceutical company expanded the scope of its cloud and infrastructure services with Unisys and a large US based high-tech company awarded Unisys a contract renewal for global, cloud and infrastructure services and expanded the scope to include supports for that customer's application environment.

As I mentioned earlier, we're also focused on bringing our clients integrated solutions. For example, as we announced in February, we added industry veteran Tom Patterson to lead our integrated Security Solutions business. We are combining our security services expertise with our engineering capability to offer integrated security solutions including Stealth to clients worldwide.

Our operating model to be a more nimble focused and responsive Company is well positioned to service our business and government clients. Growing our profits and then revenue will come from successful execution of our strategy.

Thank you again for joining us. I'll look forward to sharing our progress with you throughout the year and will now turn over the call to Janet to discuss our first quarter results and the financial implications of our cost reduction initiatives.

We will then open the call to questions.

Thanks, Peter. Hello, everyone, and thank you for joining us this afternoon.

Before discussing the first quarter results I want to cover some reporting changes we made this quarter. These changes are consistent with changes we have made in how we manage the business. Within our services segment, we have new sub-segments that align more closely with our current business focus and are consistent with our new organizational structure.

The new categories are Cloud and Infrastructure Services, which is revenue from work we do in the data center and cloud are, technology consulting, and technology-based systems integration projects as well as global service desk and our global field services.

The second is Application Services, which is revenue from application managed services and application development, maintenance and support work.

And then third, Business Process Outsourcing, which is revenue from the management of client's specific business processes. We have also made a change in certain revenue classifications between services and technology.

Historical information has been reclassified to these new categories and is included in the appendix of the presentation accompanying this call. Additionally, these schedules will be available through the Investor Relations section of our website.

All of my comments today are based on the new reporting classifications.

Please turn to slide three for a discussion of our first quarter 2015 financial results. We reported revenue of $721 million in the quarter, which was down 5% year-over-year but up 1% on a constant currency basis.

I will discuss revenue trends by segment, geography and industry later in my comments. The major currency fluctuations impacting the year-over-year comparison are the euro, sterling, Brazilian real and the Australian dollar. Based on today's rates we anticipate currency will have a 10 to 11 percentage point unfavorable impact on revenue comparisons for the second quarter of 2015 compared to the second quarter of 2014 and an unfavorable impact of 7 to 8 percentage points for the full year.

Our overall gross profit margin declined from 17.5% in the first quarter of 2014 to 16.2% in the first quarter of 2015. Of the 130 basis point reduction, increased pension expense was responsible for a 110 basis points while the remaining 20 basis points reduction reflected lower services gross margin partially offset by higher technology gross margin.

Operating expenses declined by approximately 4% year-over-year in the first quarter of 2015. Included in the results was an increase of pension expense from $19 million in the first quarter 2014 to $27 million in the first quarter of 2015 as a result of lower discount rates and changed mortality tables as we discussed in our year-end earnings call.

Excluding the impact of pension expense in both years, we reported breakeven non-GAAP pre-tax results for the first quarter of 2015 compared to a non-GAAP pre-tax loss of $12 million in the prior year period.

We reported a net loss of $43 million in the quarter versus a net loss of $54 million in the year-ago quarter. Our first quarter 2015 diluted loss for common share was $0.87 compared to $1.15 in the year-ago quarter.

On a non-GAAP basis first quarter 2015 diluted loss per common share was $0.32 compared to $0.74 in the year-ago quarter.

Slide four shares our first quarter 2015 revenue by segment, geography and industry. From a segment view services represented 89% of our first quarter 2015 revenue. Services declined 6% year-over-year but was flat on a constant currency basis.

Technology represented 11% of our first quarter 2015 revenue and was up 3% year-over-year. However, as we mentioned on prior calls, quarterly seasonality can vary from year-to-year. The technology revenue is best measured on an annual basis and, as I said last quarter, we had some strong headwinds on the technology business in 2015. Negative currency pressures continue and we have lower licenses up for renewal than in a typical year.

Looking at the Services Segment in more detail, Cloud and Infrastructure is our largest services sub-segment and represented 53% of our overall first quarter 2015 revenue. Currency was the most significant driver behind the 10% year-over-year decline.

Our next largest sub-segment is Application Services which was 28% of our overall first quarter 2015 revenue. Our new work at the US Federal Customs and Border Patrol under the [Bends] contract was the major contributor to the 3% growth in Application Services.

Business process Outsourcing was 8% of our overall first quarter 2015 revenue. BPO revenue declined 12% year-over-year. All of the operations are outside of the US and Canada and currency movements caused most of the decline.

Moving to geography, US and Canada represented 49% of our overall revenue and grew 9% on the strength of our US Federal Services revenue. Revenue outside US and Canada represented 51% of our overall first quarter 2015. All of these regions declined on both a reported and constant currency basis. On a constant currency basis the largest decline was in Latin America, particularly in Brazil which had significant revenue last year for the work we performed in support of the World Cup.

From an industry perspective, we break out our revenue into four groups, Commercial, Financial Services and two industry groups within government, US Federal and Public Sector which includes work for local and national governments around the world other than the US Federal Government.

Based on first quarter 2015 revenue commercial is our largest industry group representing 35% of our overall revenue. Revenue from our cml industry customers declined 7% but was up slightly on a constant currency basis. Financial services represented 21% of our overall revenue. Revenue from financial services industry customers declined 10%, down 2% in constant currency.

Public sector represented 26% of our overall first quarter 2015 revenue and declined 10%, down 3% in constant currency. And US Federal was 18% of our first quarter 2015 revenue and grew by 13% year-over-year.

Moving to discuss our first quarter segment results in more detail, please turn to slide five. Services gross profit margin decreased year-over-year to 14.1% from 15.8% in the first quarter of 2014. The services operating margin declined 280 basis points to negative 1.3% in the first quarter of 2015. Our first quarter 2015 services margins were impacted by start-up costs on new multiyear engagements as well as lower project work in our existing services account.

Technology revenue, which accounted for 11% of our total revenue, rose 3% year-over-year, 13% on a constant currency basis principally reflecting higher sales of our proprietary software and servers. Technology growth and operating margins improved year-over-year due to higher sales of our proprietary software and servers.

For some comments on services orders please turn to slide six. In the first quarter of 2015 our services orders rose year-over-year driven by cloud and infrastructure orders, particularly in the US and Canada. We ended the first quarter with $4.5 billion in services backlog. This level of backlog was flat year-over-year as reported but represented an 11% increase on constant currency basis.

Of the services backlog at March 31st, 2015 approximately $590 million is expected to convert into second quarter 2015 services revenue. The amount of the revenue in backlog at the start of the quarter is estimated to be between 90% and 95% of our quarterly services revenue for the full quarter.

Moving to cash flow, please turn to slide seven for an overview of our cash flow performance in the quarter. We used $43 million of cash from operations in the first quarter of 2015 compared to $20 million generated in the year ago quarter. The declining cash from operations is largely due to lower accounts receivable at the start of the quarter and lower revenue in the quarter, higher net inventory and higher cash tax payments.

Capital expenditures were $58 million in the first quarter of 2015 versus $45 million in the first quarter of 2014. The increase in capital expenditures reflected higher investments and outsourcing assets. For the full-year we anticipate CapEx of $175 million to $200 million which will be down versus last year's CapEx of $213 million.

Excluding the impact of pension, Unisys generated adjusted EBITDA of $41 million in the first quarter of 2015 versus $27 million in the prior year period. We had free cash usage of $101 million in the first quarter of 2015 versus free cash usage of $25 million for the same period last year. The increased usage reflected the combined impact of lower operating cash flow and higher capital expenditures. Our free cash flow before pension cash contributions was $62 million for the first quarter of 2015 versus free cash flow of $31 million in the first quarter of 2014.

On our last earnings call Peter discussed the need to look at all elements of our cost base to create a more competitive cost structure and rebalance the Company's global skillset to take advantage of growth opportunities. We have done so and as we announced in our earnings release earlier today, we expect to take a pretax charge of approximately $300 million over the next several quarters. We currently expect a reduction in our worldwide headcount of approximately 8% and we will also be reducing our facility's footprint. These actions are expected to generate annualized savings of approximately $200 million exiting 2016.

The cash outlay for these items is expected to [recur] over the rest of 2015 and 2016 so we do not have an immediate need to fund the full amount of the charge. In addition, some of the costs are self-funding within a quarter or a relatively short period of time. To the extent we find that the charges we must fund to require it, we will avail ourselves of financing available to us in the capital markets.

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

All right, Janet, thank you very much. Niels, I think we should now open up the call.

(Operator Instructions). Our first question comes from James Friedman with Susquehanna.

Thanks for taking my questions. So let me start out with on the cash balance as we move across the restructuring what would you anticipate would be the forecasted low of the cash balance say at the end of 2015 for starters?

So, Jamie, we have identified the actions and we are in the process of working the timing of those actions. We have some places where we have freedom of movement and control and when we do that in other places we need to have discussions with local works groups and follow certain regulations so at this point in time we expect the expenditures to be, cash expenditures under the program, to be more weighted into late into 2015 and into 2016. But beyond that at this stage it's a bit too early to tell.

And, Janet, when you say you would access the capital markets over the years we've seen you and your officers have a number of different creative strategies for that, convertibles, straight debt. Shall we be thinking those this time or is it more likely weighted towards equity?

You know, at this point in time we are looking if we do need to access the capital markets we will look at the market availability at that time and, as you would expect, we will look at every available option at the time and make the decision then but we do not have a set decision at this point in time.

Okay and then, Peter, when -- do you think that it's appropriate to start measuring the Company at least and in the restructuring phase more on the progress of your cost actions and your profitability as opposed to the cadence of the revenue?

Jamie, first of all, I think you and the other analysts who follow us are -- will measure us any way you wish so I don't necessarily think it's for me to say. I will say, and you saw this in my remarks, that right now we are really focused on taking these costs out and on making sure from a go forward standpoint we've got the right solutions and the right focus in the right markets so I do believe that the costs will come out before the revenue will pick up, which is why you heard me a couple of times refer to increased profitability and then increased revenue.

It's not that we're not going to focus on the revenue side, we're focusing on the revenue side every day and kind of the purpose of me beginning to add for you guys flavor about the types of deals we're winning was to tell you we're in the market and we're focused on winning business. At the same time I think for us to do long-term what we need from a revenue growth standpoint we still have some building to do and that building is going to come over the next -- I really expect the building to come over the next 12 months as we really align our solutions going forward.

Okay that makes sense and then I just had one housekeeping so, Janet, you had commented about the year-over-year foreign exchange impact and I wasn't sure if I heard you right whether that number was positive or negative but if you could repeat what you said apropos of the second quarter I mean?

So, Jamie, my comments were that in the second quarter based upon rates today we expected to have a 10% to 11 percentage point unfavorable impact on the revenue comparison.

Got it.

And then I said 7% to 8% unfavorable for the full-year.

Okay, all right thanks for the update, appreciate it.

(Operator Instructions). Ned Davis, William Smith and Company.

I wanted to drill down a little bit more on some of this restructuring. First of all, can you characterize in a little more detail? Is it sort of across the board or is it to move headcount from the US to lower wage cost markets around the world? Can you give a little bit more flavor to it because what you're saying is that this is something that has existed in Unisys for quite a while and you're not looking to have an immediate revenue impact from it but it's something that is necessary to be competitive so I am a little bit kind of in the fog about exactly what this involves.

Ned, this is Peter. Thanks very much for the question. I hope I will lift the fog but if I don't give me a follow-up question please, or at least lift it as much as I can. So one of the things I mentioned on our last call, which was my first call back in January, was that we were really going to do a deep dive look at our cost basis and cost structure. I wanted to make sure we did that from the bottom up and not from the top down so we were launching that effort about the time of our Analyst Call in later -- in late January and so over the past three months what you are seeing on this call is the result of those actions so we really did a combination of top down and bottoms up.

Obviously Janet and I gave out targets to each of the organizations in the Company, all of the SG&A units, all of the operating units. What we were targeting from an SG&A standpoint was for this organization right now in our life cycle kind of the bottom of the top quartile of performance if you look at the various Hackett surveys and all of those, so that's where we were going. So if you pick 100 random companies in our market and our size we'd lock in at about 25 so of the 25th best. That's really the target we set, especially for all of the SG&A units. That's a substantial move from where we are today, where our SG&A, as you know, has historically been higher than that. So you're seeing pretty significant cuts with this in the SG&A really across the board in all of our SG&A units.

When it comes to the operating units and our delivery units the cuts are smaller. They're there; they're all across the board but they're not there to the extent that we wanted to impact our ability to deliver services. Now so that's just a general view of how we have approached this and let me give you some more detail. So with particularity around the numbers and you mentioned labor, the 8% number that we're talking about is a net number so 8% are the net reduction of headcount so that is not just simply a question of moving heads from one location to the other. That's a net reduction so this is a substantive set of actions so I guess that's my first comment.

My second comment is it is global so it does affect all of our regions but it does affect some regions more than others and I think you can see the time that we're giving ourselves to complete this action and the time we're giving ourselves to get those cost savings on an annualized basis by the end of 2016 that's because a significant amount of the activity here involves countries where there are -- where we're not entirely free to take this action unilaterally. So and that goes again to Jamie's question about cash flow effect of the $300 million because exactly when these actions will all take place will obviously affect cash flow at any particular time, including calendar end 2015.

So now back to your question about well, this must have been in existence for a while so why are you doing it now? I tend not to want to be a historian about how the Company performed in the past. I will tell you this is not easy stuff. In the sense that this does -- these types of charges you can see from the cost of the charge, $300 million to take out a net $200 million, that's not an insignificant cost and I think that unless the Company had determined it was ready to take this charge it's a very difficult thing to do quarter-by-quarter kind of cut-by-cut.

And so I think with my arrival we've really decided it is really time to make the structural changes and bite the structural bullet to really make us much more cost competitive from a margin standpoint than we have been before. I do believe that as we do that we'll be more cost competitive from a growth standpoint because once we get our costs in line it's going to be a lot easier to bid and win new sales work. So your last comment there was about growth. I do believe this will position us to grow on a profitable basis more quickly going forward but I do believe that's going to take a while because it's going to take a while to take these costs out.

Thank you, very comprehensive answer, it's very helpful. Switching over to this important recent hire, Mr. Gissler, and some of us know how Accenture has operated over the years, what's your expectation for what he can accomplish in your services marketing initiative? I mean what's going to change? You mentioned you want a shorter sales cycle. I think that certainly would be desirable but what other things do you think are potentials out there of him and the team that he is going to be running?

Yes, Ned, that's -- thanks for that question too. Let me back up a second and before I talk about Neal in particular let me kind of deal with our approach to personnel. So it is really a blended approach. We've got some terrific leaders at Unisys. We have some terrific leaders who have been at Unisys and, as you could see from my comments, we're very much using those leaders in our go forward model. At the same time we are really taking some outstanding people from the marketplace and bringing them in for really a couple of reasons.

One is as we evolve we're going to need some talent that we don't necessarily have today. That's particularly true as we really focus on our go-to-market verticals so you're going to see us as we go forward bringing in some people that really have perhaps some more vertical focus than we've necessarily had in the last few years but it's also true about some of our capabilities that we have today. So in addition to Neal we issued a press release about Tom Patterson, who has a very significant background, most recently at CSC in security. We issued a press release last week about Casey Coleman who has come in in our US Federal Group and she is going to lead our civilian practice and has an outstanding background and I think you see a lot of press about her. Even more recently we just brought in a gentleman named Eric Hutto who I had worked with previously at Dell and at [Pro Systems] who will work in our Enterprise Solutions Team in the US and Canada.

So it's not just Neal. It's a number of really qualified people from really all over the industry. In particular about Neal, and you mentioned Accenture. He had a sterling career of 28 years at Accenture. What we have really done over the past four months is we've consolidated our services delivery function. That services delivery function in the past had actually been in multiple different organizations reporting to multiple direct reports to the CEO and over the last several months we've kind of been getting ready for Neal. We've been putting it together; we've been consolidating it and we did not actually launch that team as a complete independent services delivery unit until two weeks ago when Neal arrived so this is a new approach for Unisys.

We expect frankly a lot from this new team, some of it because of Neal, some of it because of the way we're now organized. You know, we are organized now with a global delivery model to leverage our talent across the board. We expect one set of unified operating systems for each of our global delivery units.

We've also revised and streamlined even how we approach delivery and services so we've created a new clouded infrastructure team. We've created a new applications services team and we have a BPO Group. Those teams did not exist in their current format more than a month ago. Now, getting back to Neal in particular, I expect that he will create replicable global processes beyond what we currently have. I expect that that will increase our quality, increase our ability to report our quality to our clients which will give our clients more confidence in us and the ability to grow existing business. I think growing same source sales is a really important part of what Unisys has to do. In my experience growing same store sales comes from better reporting to clients and showing clients you're doing a really good job and I think we have a fair amount of way to go in this Company on that.

I also believe over time he is going to be able to decrease costs and I think that will be -- that is included in our go-to-market -- excuse me, in this action we are including some of those cost savings. Frankly, I think we're going to get more and I think we're going to get more on the delivery side than we have in the current one-time approach that we have showed you. We'll do that on a current basis.

Finally, Neal has been involved in Accenture at a strategic level as well as at a cost delivery level. That includes growing clients. It includes growing looking strategically across that company on vertical integration, on developing integrated solutions so I expect Neal to really be a full partner with our other senior executives in really formulating our vertical go-to-market strategy in the future. Obviously he is only going to be a part of that team but I think he'll be an important part of that team.

Thank you very much, appreciate it.

Brian Gesuale, Raymond James.

Peter, it's clear you took a really deep look at the Company. Can you maybe talk to us from a strategic standpoint what your thoughts are on potential divestitures in the overall portfolio of the Company, as well as how you'll interact with the potential liability going forward?

Yes, Brian, thank you for the question. Let me try to cover both of those and also cover a little more of the strategy as you referenced. The Company has had a pretty active history of divestitures for a long time. I won't say that it has divested everything that it can divest but at this point I think it's what we are going to be doing -- let me put it this way. I think we're going to be less likely to go and sell specific units because frankly most of the units we have in this Company are really integral to growing it going forward. We do have a couple of joint ventures. I don't necessarily think we will sell those joint ventures but they are somewhat separate from the operations of the Company and somewhat divorced from them and I think we'll talk more, Brian, going forward about exactly do those joint ventures fit into the overall future of the Company, what you can expect from those in terms of revenue and how they'll play out so let's just put that aside as a to come back to you on future calls.

With that as the exception, I think what you'll see from us rather than divestitures is looking very hard at our business from a profit margin and cash flow standpoint. As we make decisions on how to reformulate and really focus on certain verticals, we're not doing it based only on mass. We're not doing it based off what business we have today. We're really doing it based off where are we truly distinctive? Where can we truly drive value for our clients?

And I measure value in part by profit margin. What are our clients willing to pay and why is that more than our cost? I will tell you that's an important element that we are driving at the Company today and that will affect how we go forward. And it will affect I think over time our mix of new business, which I think will change pretty significantly more than just what will we divest. You know, one of the assets of Unisys, and I won't say it's been underutilized before, but I will say that we intend to maximize its utilization is the intellectual property we have here.

You know, you read about a couple of other services companies talking about a software driven services model going forward and in fact we already have the tools to do that so if I just look at some of Unisys, let's take government for example, so if we look at our government framework government makes up a pretty sizable amount of our Company so based off this quarter numbers, government is about 44% of our revenue. That includes 18% in US Federal and 26% of what we call public.

Just to give you an example of some of the software that we already have that backs up some of our government business, so in what I would consider a sub-segment of government called justice and public safety, going to the UK our software drives crime investigation technology in 43 different police forces across the UK including the Metropolitan Police Force in London. We have our TASPO software which stands for Targeting and Analysis Systems Program Office, which is part of a bigger group of software framework we have called [LIDA] that is targeting at Customs and Border Security facial recognition and other biometric recognition software and services. In fact, our systems are now involved in 98% of the US inbound vehicle traffic at border crossings in the United States.

Within Social and Citizen Services, again as part of government, we've got some very significant software that we use for health and human services, particularly at the state level, and we're processing over [100 in million] state cases annually in health and human services.

In financial services you see software that we software that we have for mortgage processing and core banking that we do on a global basis around the world. In transportation, Brian, and I don't know how much people know this; 25% of the world's air cargo is processed on Unisys LMS software and 15 of the top 25 global airlines and more than 200 airlines are using our AirCore reservation system software. And that's before we get to things like the stealth security, which we are in a very focused operation of now in really targeting stealth user applications for financial services, for government, for healthcare and life sciences and for energy and transportation.

So that's just a couple of items but as we drive higher margins in our services business, you can expect software to play a significant role and we have a head start in that but I wouldn't say that as a Company we've necessarily led with that and that's going to be a change for us.

Great, Peter. Thank you for that detail. That's very helpful. One just quick follow-up, I don't think it's been a surprise to many on the difficult macro and some of the currency headwinds but maybe on your Federal business, is that a business that's turning here with maybe a more positive budget cycle and maybe some of the positioning in hires that you've brought in? Is that a business that we should be fairly optimistic on over the short and intermediate term?

Well, yes. You know, Brian, it's a good question. The short answer is yes. When I arrived in January that team, I have to tell you by the time I arrived and sat down with that team I was impressed by it. The interim leader at the time, Venkatapathi Puvvada, he really struck me as somebody who is driving that team in a very focused way. You may know that he is otherwise known as PV in the commercial marketplace, very well known. He is a three-time winner of the Fed 100 Award and this year won the Eagle Award, which is kind of a lifetime achievement award for Fed 100. It's a very big deal. I've had an opportunity to meet many of our federal clients and will be meeting more and that team is very well respected. That said, he is not standing still.

Casey's arrival as head of our civilian group is a big deal as well, so the federal marketplace is one where if you look at the peer group last year it was a tough, tough environment and I want to be careful that I don't pain too rosy a picture because stuff just happens, right? I mean you get sequestration; you get a ton of issues with respect to re-competes. You get issues with respect to government requirements for small, medium businesses. I will tell you we lost the ability on a not insubstantial government contract this year because it went small, medium business and we're just not able to re-compete on it other than as a relatively modest sub.

So I can't tell you that all will always be rosy there but I can tell you we expect to be fully competitive in the federal marketplace. We expect to win our share of deals and we expect that share to go up but it is the federal marketplace and it's kind of cyclical and lumpy.

Great. Thanks so much for taking my questions.

That concludes today's question and answer session. At this time I'll turn the conference back to our speakers for any additional or closing remarks.

Okay thank you, operator, very much. I do want to thank everyone for joining the call. As always, Niels, Janet and I are available to continue the dialogue and I will say again in addition to the slides that Janet provided, you will find on our Investor Website a tradition we started last quarter, which is an Investor Relations Snapshot which provides even more information and we are continuing to develop that and we'll have more information there as quarters go by.

Other than that, I'll look forward to speaking with you next quarter. Thanks very much.

This concludes today's conference. Thank you for your participation.