Unisys Corp (UIS) 2015 Q3 法說會逐字稿

Good day, and welcome to the Unisys third-quarter 2015 results conference call. At this time I would like to turn the call over to Mr. Niels Christiansen, Vice President of Investor Relations at Unisys Corporation. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone, and thank you for joining us. Earlier today Unisys released its third 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 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'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 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 to discuss our third quarter results and the progress we are making toward our goals of transforming the business and improving our financial results. In the third quarter, we improved our underlying operating profitability sequentially, showed progress in our services business, and began implementing a go-to-market strategy with improved offerings and capabilities that are enhancing our competitiveness in the market. We are increasing our focus on higher value integrated solutions that combined industry domain expertise with leveraged capabilities.

There are three primary pillars supporting this transition. The first is an emphasis on a more vertically oriented go-to-market strategy that provides more domain knowledge, deepens our client and prospect discussions, and allows for customized offerings within each vertical while leveraging a central delivery engine. The second pillar is an improved services and software revenue mix with an emphasis on growing our consulting, security, applications, and higher margin cloud and infrastructure work. The evolving mix of revenue will include enhancing the Company's software and intellectual property portfolio. The final pillar is an optimized cost structure that is expected to reduce SG&A over the longer term to approximately 13% of revenue and also yield greater efficiency in our services delivery organization, supporting an increased services gross margin.

In the quarter, we had several accomplishments. In September, we presented our new positioning and differentiated solutions at two Unisys industry analyst events in the Americas and EMEA. You can find presentations from these events on the investor relations section of our website. We highlighted innovative IP-based vertical solutions and horizontal service and technology offerings. These offerings leverage advanced capabilities in areas such as cybersecurity, mobile, data analytics and the cloud.

We have had numerous instances of positive analyst feedback since these events. In one example, Technology Business Research, a leading independent technology market research and consulting firm that attended the Americas event wrote, quote, Unisys has a sound plan to become a Tier 1 IT services provider, and that our unified message of focused vertical services and horizontal technologies brings new life to this mature but transforming IT services company.

During the third quarter, our security solutions practice announced a range of advanced security products and solutions, including a new software-based release of Stealth which delivers identity-based micro segmentation to protect sensitive data by making endpoints undetectable to unauthorized parties. Our security solutions continue to be well-received. For example, New Network World has name Stealth among its new products of the week, noting that it, quote, secures data using micro segmentation and cryptography to limit a user's or potential attacker's view of data and services to only a tiny segment of the enterprise. By virtualizing all network security, Unisys has reduced security deployment times and management complexity.

Unisys recently earned a positive placement as a high performer within the trust as-a-service, a new category in the HFS Blueprint report. The report places a strong emphasis on the ability of security service providers to influence enterprise transformation as well as support broad-based technology and services delivery. And finally, NelsonHall recently placed Unisys in the Leaders Quadrant of their evaluation of providers of managed security services. Security wins and expansions during the quarter included Stealth, identity management and managed services with organizations that included a large US federal agency, a US state, a foreign government, a utility company in Latin America, and a large European-based multinational foods products company.

Operationally in the quarter, we are realigning our client-facing accounted executives consistent with our vertical strategy. We are progressing well against our previously announced cost reduction plans, which contributed approximately $21 million in lower costs during the quarter. Our goal remains to achieve $100 million in annualized net savings by the end of 2015 and an additional $100 million by the end of 2016.

In terms of our third quarter business results, we reported revenue of $739 million, a decline of 16% from the same quarter last year, down 8% on a constant currency basis. We had 1% growth in our services segment on a constant currency basis, which is the third consecutive quarter of constant currency growth. As we have highlighted throughout the year, the technology business faces a very challenging year-over-year comparison in the second half due to lower license renewal opportunities and currency impacts. Our focus on a more vertically oriented go-to-market strategy builds on our already significant presence globally among many large enterprises in the verticals where we are focused. We have identified several vertical initiatives where we see the most significant growth opportunities and where we are focusing investments to enhance our solutions and offerings.

Within the government sector, we see growth opportunities in the area of justice, law enforcement, and border security, one of our vertical initiatives. Around the world, government organizations are faced with challenges of how to efficiently process daily immigration traffic and manage high-risk threats, modernizing justice and law enforcement operations, cloaking sensitive government data and manage digital environments to secure citizen data and thwart adversaries, and to take advantage of mobile technologies and cost-effective cloud-based IT delivery environments. These are markets that Unisys knows well and where we have strong offerings and credentials with the work we are doing for organizations such as the US Customs and Border Protection, the US Department of Justice, the State of Florida, the UK police forces, the Bavarian Ministry of Justice, and the Australian Department of Defense.

Within the financial services sector, we see an opportunity to grow our revenue in commercial and retail banking by helping financial services organizations exploit digital and other channels to better serve their clients, make use of predictive proactive fraud detection tools and techniques, and improve time-to-market and flexibility, all reducing costs by taking advantage of as-a-service delivery models. This is an area where Unisys has substantial strength, building on our work serving over half of the top 25 global banks. We are focused on providing innovative services and IP-based solution offerings to expand our share of this growing market.

Moving onto the commercial sector. One example of our presence in this sector is our position as a major supplier to the travel and transportation industry with advanced IP-based solutions in the area of passenger service systems, airport passenger facilitation, airport operations management, and logistics and cargo management. Our solutions are used today to move about 25% of the world's air freight, or 20% of the world's passengers and improve operations at more than 100 airports worldwide. We are focused on helping airlines and airports take advantage of new digital technologies and delivery models to provide continuous innovation.

One recent example of our work in this space is a home-printed bag-tag solution. We developed this solution to allow passengers to self-tag their bags at home for easy drop-off at airport counters. When implemented at the Billund airport in Denmark, this solution reduced the total working hours for passenger handling by 13%, reduced 40% of the queue time in the check-in bag drop point, enhanced customer satisfaction, and reduced flight delays due to check-in by 70%.

This was a strong quarter for orders, including important renewals with many of our largest customers. Within the government sector we extended a contract with a government agency in the Philippines to operate and support a civil registry system which relies on our intro image software database consisting of over 156 million images of civil registration documents. We extended our relationship with a government agency in New Zealand to provide application management, application development and modernization and a private cloud services in support of a vehicle and driver registration system.

Within the US federal portion of our government sector, we had a number of exciting awards. Building on our recognized expertise in this area, we signed a contract with the Department of Transportation's Surface Transportation Board, a new client, to provide cloud migration services for email and collaboration to a Microsoft Office 365 cloud environment. We also expanded an enterprise storage services contract with another new agency client to extend Unisys secure private storage more broadly within that agency.

In the financial services sector, Unisys signed a contract with Capita, the UK BPO leader and a new client for Unisys, supporting their contract to outsource and transform the mortgage service operation of a large bank. Unisys will deliver application management services, workflow and imaging capabilities, and new multi-channel mortgage services for an improved customer experience. As part of this engagement, Unisys will work with Capita to migrate 260,000 mortgage accounts to the Unisys financial services system, the platform that supports more than 40% of the UK mortgage market. The Unisys solution will be delivered via a software-as-a-solution -- software-as-a-service model for the Unisys' UK data centers.

In the commercial sector, we expanded our cloud and infrastructure services work with an international retail chain in the US and a global retailer in Latin America. We renewed cloud and infrastructure services engagements with US-based multinational companies in life sciences and manufacturing industries. We also won a new cloud and infrastructure services contract with a leading global manufacturer of food products for their work in Brazil.

We are also recognized for our innovation and thought leadership by a number of third parties during the quarter. Our client the City of Philadelphia was recognized by Government Computer News at its annual GCN awards last week. The award acknowledged the City of Philadelphia's 311 system, which has now been migrated to salesforce.com based on a relationship management solution that we implemented on behalf of the City. Microsoft named Unisys the Azure Innovation Partner of the Year, recognizing our use of Azure in a range of solutions, including global deployment of our Edge Service Management IT solution and the creation of an automated provisioning platform for the Service Now Enterprise Cloud on Azure. We expect 2015 will be a transitional year, and we are making progress on our path toward sustainable profitability and competitive differentiation. To help you understand our plans with greater specificity, beginning in 2016 we will be providing annual guidance on overall revenue, operating profit and free cash flow.

Thank you again for joining us. I will now turn the call over to Janet to discuss our third quarter results in more detail before we open the call to questions.

Thanks, Peter. Hello everyone, and thank you for joining us this afternoon. In the third quarter, non-GAAP operating profit margins was 7.2%, and almost double sequentially reflecting the benefit of the cost savings action taken by the Company. In the quarter, services revenue grew on a constant currency basis for the third consecutive quarter. And both gross and operating margins improved sequentially. Our technology revenue, which can vary significantly based on the timing of software license renewals as well as the volume of low margin third-party technology sales, declined 51% year over year. The timing of license renewals within a year causes the technology revenue to be very lumpy. For example, we have closed two larger license renewals in October that were expected to sign in September. If they did, the year-over-year comparisons would be better.

We have discussed our expectations for the technology business throughout the year. And as we have noted, the second half of 2015 has lower license renewal opportunities than in the year-ago period. Additionally, as we mentioned on our last call, the calendarization of technology revenue is different from 2014. In 2014, technology revenue was 30% in the first half of the year and 70% in the second half of the year. In 2015, we anticipate technology revenue will be more like 42% in the first half of the year and 58% in the second half. Currency negatively impacted year-over-year technology revenue comparisons by 5% in the third quarter. And based upon current exchange rates, currency is anticipated to have a negative 7% to 8% impact for the full-year technology revenue comparison.

Moving on, let me provide an update on our ongoing cost reduction plan. We are on track with our plan. As previously announced, we expect to record pretax charges of approximately $300 million over 2015 and 2016. The cash/non-cash split of the $300 million is that $280 million is estimated to required cash outlay, of which $225 million is for headcount reduction-related costs and $20 million of the $300 million charge relates to non-cash items. Geographically, of the estimated $300 million charge, $220 million is for actions in EMEA, which are skewed more into 2016, and $80 million for the rest of the world. Through the third quarter of 2015 we recognized pretax charges of $70 million under this plan, $17 million in the third quarter of 2015 and $53 million in the second quarter of 2015. These cost reduction actions are anticipated to generate annualized savings of approximately $200 million exiting 2016.

During the third quarter, our savings related to these actions totaled approximately $21 million, $14 million in lower operating expenses and $7 million in lower cost of services. With $21 million of savings in the third quarter of 2015, we are already close to the quarterly run rate of $25 million necessary to deliver the goal of annualized savings of $100 million that we have targeted to achieve exiting 2015. The cash outlay for these cost reduction actions, which commenced in the second quarter of 2015, is expected to continue through 2015 and 2016. Cash payments of $25 million were made in the third quarter, bringing our total cash payments this year to $38 million.

Please turn to slide 3 for a discussion of our third quarter 2015 financial results. We reported revenue of $739 million in the quarter, which was down 16% year over year and 8% on a constant currency basis. Services revenue grew slightly above 1% on a constant currency basis, so the overall decline in revenue was attributable to the lower technology volume for the reasons I noted earlier. We were pleased to report the third consecutive quarter of year-over-year constant currency services revenue growth. Based on today's rates, we anticipate currency to have an 8 to 9 percentage point unfavorable impact on revenue comparisons for the fourth quarter of 2015 compared to the fourth quarter of 2014, and an unfavorable impact of roughly 8 percentage points for the full year.

Our overall gross profit margin of 19% declined from 26.6% in the third quarter of 2014. Of this 760 basis point reduction, the cost reduction charges and increased pension expense were responsible for 230 basis points of the decline, with 100 basis points due to currency fluctuation. The remaining 430 basis point reduction reflected the impact of lower gross margins in both services and technology.

Year over year, operating expenses declined $26 million, which was net of a $9 million for cost reduction charges and a $2 million increase in pension expense. Excluding cost reduction charges and pension expense, operating expenses declined 25% year over year, or $38 million, reflecting a $14 million benefit from our cost reduction action, currency benefits of $15 million, and the remainder from other operational actions. Our operating profit margin of 7.2%, the non-GAAP which is before restructuring charges and pension expense, almost doubled sequentially, reflecting the benefit of the cost saving actions taken by the Company. Our third quarter 2015 diluted loss per common share was $0.19, which included $0.33 for cost reduction charges and $0.53 for pension expense. This compared to diluted earnings per share of $0.95 in the year-ago quarter, which included $0.35 for pension expense. On a non-GAAP basis, third quarter 2015 diluted earnings per common share was $0.67 versus the $1.30 in the year-ago quarter.

Slide 4 shows our third quarter 2015 revenue by segment, geography, and vertical. We have also added a view of revenue type that provides visibility into the split of our services revenue between recurring and nonrecurring. From a segment view, services represented 89% of our third quarter 2015 revenue. Looking at some elements of the segment in more detail, cloud and infrastructure services decreased by 5% on a constant currency basis. This reflected lower in-quarter sell-and-bill revenue than in the prior year. Application services was up 17% on a constant currency basis. Our work at the US Federal Customs and Border Patrol under the BEMS contract and other border security work contributed to the revenue growth.

Moving to a geographic view, revenue from US and Canada declined 4% in constant currency, reflecting lower technology revenue, including lower third-party technology product sales to the US federal government. Our EMEA and Asia Pacific regions reported constant currency revenues declines principally related to lower technology revenue. And the Latin America region reported constant currency growth of 6% with growth and both services and technology revenue.

From a vertical perspective, within government, US federal grew by 17% year over year while public sector (inaudible) other components of our US government group, declined 19% in constant currency. Revenue from financial services customers increased 9% in constant currency, principally reflecting higher technology revenue. And revenue from the commercial sector declined by 21% on a constant currency basis due to lower revenue in both technology and services.

Moving to discuss our third quarter segment results in more detail, please turn to slide 5. Services gross profit margin declined 150 basis points year over year to 17.3%, with currency causing 50 basis points of that decline. In addition to currency, our third quarter 2015 services gross margin was impacted by continuing transition costs on a few multiyear engagements and lower in-quarter sell-and-bill revenue. Our services delivery team is working to improve services gross margin by refining our services delivery model, solution guidelines, workforce pyramids, the mix of onshore and offshore resources and leveraging automation. We also expect some benefit from our cost reduction actions in the gross margin, although the most significant reductions to cost of revenue will come from our actions in Europe, the majority of which will not begin to take effect until 2016.

Services gross margin increased 1.6 percentage points compared to the second quarter of 2015. This sequential improvement reflects the benefit of our cost reduction action. While our services operating margin of 4.8% in the third quarter of 2015 was down slightly year over year, we saw a continuation of the sequential improvement with a 260 basis point increase that reflected the benefit of approximately $17 million in savings related to the cost reduction actions taken during the past two quarters.

Technology gross margins declined 630 basis points year over year to 55%. Currency fluctuations negatively affected technology gross margins by 450 basis points. The remaining 180 basis points decline reflected the lower revenue. The operating profit margin decreased as the declines in operating expenses were more than offset by the gross margin impact of lower revenue. Technology gross profit margin increased to 55% from 43.9% in the second quarter of 2015 due to a richer mix of revenue. Sequential technology operating profit margin increased to 20.7% from 15.6%.

For some comments on services order bookings, please turn to slide 6. We had a good order bookings quarter, particularly for renewals. In the third quarter of 2015, order bookings were $778 million. Order bookings increased year over year and were up in every region. We ended the third quarter with $4.4 billion in services backlog. Backlog was up 2% year over year and 10% in constant currency. Of the services backlog at September 30, 2015, approximately $585 million is expected to convert into fourth quarter 2015 services revenue. The amount of revenue in backlog at the start in the quarter is typically between 90% and 95% of our quarterly services revenue for the full quarter.

Moving to cash flow, please turn to slide 7 for an overview of our performance in the quarter. Before pension and cost reduction charges, Unisys generated adjusted EBITDA of $99 million in the third quarter of 2015 versus $141 million in the prior-year period. We generated cash from operations of $20 million before pension funding and cost reduction payments in the third quarter of 2015 compared to $51 million in the third quarter of 2014. Third quarter cash flow from operations was adversely affected by slower payments from two of our larger public sector clients in the US. Both entities are experiencing budget delays and this has affected their ability to pay vendors. This is not a collectibility issue, but it has created near-term funding challenges in those entities which delayed approximately $40 million in anticipated receivable collections during the third quarter.

Including the cost reduction payments of $25 million and the pension funding of $40 million in the quarter, cash used in operations was $45 million for the third quarter of 2015 compared to operating cash usage of $8 million during the third quarter at 2014, which included $58 million of pension funding. Capital expenditures of $57 million in the third quarter were up about 4% year over year. We continue to work through a number of engagements that have required significant levels of capital, but remain focused on implementing a more capital light model. For the full year we anticipate CapEx of approximately $220 million.

We had free cash usage of $101 million in the third quarter of 2015 versus free cash usage of $62 million for the same period last year. Free cash usage before the pension contributions and cost reductions was $36 million for the third quarter of 2015 versus free cash usage of $4 million in the third quarter of 2014. The increased usage principally reflected the impact of the public sector receivable -- the public sector budget delays impacting our receivables that I just mentioned. At the end of the third quarter, the Company had approximately $293 million in cash and approximately $310 million in debt.

I also wanted to provide an update regarding our defined benefit pension plan. On slide 8 we show assets, liability, and the underfunded position as reported in the Company's financial statements at December 31, 2014. We also provided the value of assets at September 30, 2015 and an estimate of the liability at 2015 if all actuarial assumptions remain constant, except for the discount rate used to present value the pension liability. The net effect would be an approximate $200 million improvement in the underfunded position from December 31, 2014. As always, we will reevaluate the pension calculations at year end to provide updated estimates of the ongoing contribution requirements related to the US and international plans.

During the third quarter we continue to make progress towards our objective of improving the competitiveness of our offerings, as Peter covered. Our cost reductions are tracking in line with our plan to create a more competitive cost structure and rebalance the Company's global skill set. Thank you for your time, and now I would like to turn the call back over to Peter.

Janet, thank you very much. Operator, we are ready to open the call for questions

Thank you.

(Operator Instructions)

Our first question is from James Friedman with Susquehanna.

This is really good work on the improved presentation of the financials, and I appreciate it. There's a lot different directions that I can go. But let me start out with your comments, I'm going to direct the first couple to Janet.

You're calling out the $40 million delay in the collection of the receivables from two government clients, Janet. I'm wondering, though, how did that impact, if at all, the cadence of growth in that segment, because you actually put up a good number in federal services? So how should we reconcile those two observations?

So Jamie, the $40 million delay was not in US federal government budget delays. It is in local entities in the US, state entities in the US where they have got budget negotiations going on. And as part of that there was a delay in budgets being [approved], therefore a delay in paying their bills. And as a result we saw $40 million of a delay in customer client payments that we would normally see coming through the quarter not flowing through the cash from operations. But it did not affect the cadence of growth in this sector.

Okay, yes, I got my signals crossed there. I put it all into the same government. In terms of -- I just want to make sure I'm following the slides right because I didn't see where you'd be -- the performance that you describe from application services and the cloud, is that decomposed in slide 4, which is a fascinating slide, but I don't see those service lines? Yes, maybe you can help us with that.

So Jamie, on slide 4 we do have the segment detail and then below we do have the growth on the constant currency growth from the geographic perspective and the vertical or industry perspective. We did not -- we don't have a section on here that does comment on the growth of the various sectors. I understand why my comments, you can't see on the charts itself.

So we're trying to give some flavor around the underlying components, where did we see growth. Clearly in application services, federal government. Our federal government business had a really strong quarter, they continue to do excellent work in the application service areas, most notably as they bring up the BEMS contract in federal. Now, they did benefit in that quarter from some accelerated implementations under that contract as the federal government closed out their fiscal year and the agencies took advantage of having FY15 funding available to accelerate actions.

Okay. And I guess now that I'm looking at it, you can see this segment breakdown in your appendix on, maybe it's slide 15. So Peter, a question for you.

With regard to the technology performance, was the year-over-year decline really just calendarization? Because that's obviously beyond the Company's control. How do you feel like the technology segment is performing based on the opportunities that you actually had?

Yes. Jamie, that's a great question, and thank you for being on the call. Thank you also for commenting about the data. As I hope is apparent, we are working to really increase transparency around the numbers. So when you look at the data sheet we've got out there, as Janet points in her comments, for the very first time ever, at least in my understanding, we are now providing recurring versus nonrecurring services numbers.

I think you are seeing much more detail from us around the data. It's our attempt to make this easier for you guys to understand. And we want to tell the story. The technology story is complicated.

There are several things going on this year and as we look forward to next year as well. So in the big picture, and then I'm going to turn it over to Janet, you really have three things going on. And those involved our, if you will, our third-party sales of technology where we're reselling third-party technology.

Sometimes we're doing that as part of a specific deal, sometimes we're doing it more as a one-off. Those one-offs, as Janet can talk about, are relatively less exciting to us. The second thing going on is obviously ClearPath and ClearPath renewals. And the third is the other software that is proprietary and what we think will happen with that.

Janet, I think you're actually in a better position than I am to try to flesh out Jamie's question.

Sure. Jamie, I'd just point to one of the comments that is in my comment. When we look at the implied seasonalization and the calendarization of the year, when you look at our performance in the first half of the year, I mentioned that, that was anticipated to be about 42% of our over-year revenue. If you extended it out and you adjust for currency, there is a decline that we are anticipating in the technology business on a constant currency basis.

And as Peter mentioned, going into 2016 there are three things going on. We're continuing to see margin pressure in this third-party product revenue. The lower margins, we just don't see the value of that and we expect to see continuing into 2016 lower volumes of that third-party product.

We continue to see -- we are anticipating that we're going to continue to see the same type of pressure on the ClearPath revenue as we did in 2015. And while we feel positioned for an increase in other proprietary software revenue, when we put them all together, all three of those things together, we are anticipating to see technology revenue to be down in 2016 on a constant currency rate, kind of as we expected to be down in 2015. Then after that to flatten for a few years before ultimately turning to growth.

Okay. That's really helpful. I appreciate the color. I'll turn back into the queue.

Thanks, Jamie.

Our next question is from Ned Davis with William Smith and Company.

Yes, thank you. I reiterate the comment that Jamie made about the transparency. It's really getting much easier, if you well, to understand what's going on. So related to that, the cash flow dynamics are -- there are a lot of moving parts going out through 2016.

You've got the remaining investment in the cost reduction program, the cash investment. You've got this CapEx which you're hoping to reduce as a ratio to revenue, if I understood your comments, although that's a process that takes some time. And then you've got the pension funding and then the need for outside financing.

It looks to me like you had a net change of about $260 million-odd in the net cash, net debt, however you want to look at it of the Company year to date. I'm wondering, I don't want to ask you to give specific guidance on this, but I'm wondering where the net cash position is likely to bottom out, net debt, net cash, however you to want to look at it, and when, given your current plans for the cash investment in both the pension and the cost reduction program.

It's just I think there's so many moving parts it's still, even with the transparency, hard for an outsider to project this. Even if you can get some color on this, I would appreciate it.

Sure, Ned. As you look at -- you appropriately identified the non-operational items that are affecting cash, the impact of the cash restructuring charge, which I mentioned was roughly $280 million of the $300 million charge we've taken, and then the pension funding out over time. With regard to the cash component for the cost reduction charge, I said a little bit -- we've added some more disclosure this quarter.

$220 million of the cost reduction charge relates to actions in EMEA. Those actions are skewed into 2016, just based upon the timing of how the negotiations with the works council happen and when the workforce would move. That is a big driver of cash demand for us, and most of that requirement is in 2016, particularly in the second half of 2016 and may carry over into 2017, depending upon the timing of the negotiations.

From a pension funding perspective, we have given information out previously that all things being equal with regard to currency, the 2016 pension contributions will be roughly around the rate for 2015. And that would look like that for going into 2017 and 2018. From a capital expenditures standpoint, the capital expenditures that I talked about this morning -- this afternoon we're estimated to be about $220 million higher than what we have done previously.

They are coming from increased costs on some contracts that have already been won. As we go forward and looking at new deals and new deal structures, we are already implementing the use of the capital light type of process, so we expect to see some benefit and lower capital expenditures as we go into 2016. So when you put those in play, then the net debt -- the net cash position, assuming the current debt profile, the push point is in now the second half of 2016 and going into 2017.

Okay, thank you. Peter, I had a question. That was very impressive new order numbers, at least a sharp leap compared to certain other periods. I'm wondering, the comment on the -- in the slides says that there was strong renewal.

Given your earlier comments about response to the Company's technology and some of these sessions you've been in, I'm wondering what kind of progress you are making with new or potential new accounts, major accounts, particularly outside of the government sector with both the technology, the software, but also your services offering, a leaner, meaner Company going forward, a maybe more credible Company going forward. Any color you can give us on that, please?

Yes, Ned. By the way, thanks for the questions. Again, I appreciate the thoughts about the way we are providing information.

Probably three comments to what you're saying. With respect to technology, and again we just had two multi-day analyst conferences for the industry analysts. And I will tell you, there was -- the interest we got at the analysts are mirrored by interests in the client base around things like the cybersecurity -- I will tell you it's not just cybersecurity. The physical security of biometric capabilities we have, which are primarily today used in the US federal government, clearly show applicability with governments around the world, and maybe even some commercial clients around the world.

So -- but there is a take-up time on this. And there's a sales effort and there's a delivery effort as we scale our delivery capability as well. It's not just about the sales people. So I would tell you that I feel good about our technology.

I think we have a lot more interest than I have seen in the last couple of quarters. But it is going to be a while before that converts to orders and before it converts to revenue. But I feel very good about it.

In terms of services, your second question. It's a really interesting question. Because I think what we are creating with a new services delivery model is I think of view of the profitability of certain segments of our business and what that profitability can be under our new operating model. So we have been a bit hampered in looking at deals based off the profitability of those deals.

I will tell you if I look at the gross margins that the Company was accepting for deals in the past, they were lower than I am comfortable with. And that's kind of how we got into this situation from a margin standpoint. So at one end we are increasing our target margins, which is going to make us a more selective seller.

That is actually putting negative pressure, if you will, or pressure on our sales pipeline, because we are being more selective about what we're willing to do and where we're willing to play. That's actually hurting the pipeline. But at the end of the day, and I think that, that will have a short-term negative affect on the pipeline, although if you look at the size of our pipeline, it's pretty flat year over year.

But I think the longer-term implications are that it will be positive. And we are going to get more quality work that will be higher margin work. And I think we have a better visibility as to what the margin is. But I've been pretty clear, Ned, this is a year, 2015 is my first year here. There are a lot of moving pieces. It is a transitional year, and we're still working through that.

But I feel good about our visibility for margin. And I feel good that we're putting more disciplined into the margin of the deals we want to do going forward. I don't know that's responsive to your entire question. If I missed, let me know.

(Multiple speakers) Just one kind of sort of technical question, then, or -- do those comments that you just made about the margins and how you're approaching it apply equally to the 50% of the services that's international as compared to domestic? I mean, is it an equal kind of a pattern worldwide?

They do.

Okay.

Yes it is. So the other thing we did is we have instituted as part of the model a global view by service line. So in the past we really looked at things regionally, and we still look at things regionally. And in some sense all sales are local.

So those two columns you see in our data sheet around regional revenue, they are never going away. But we're doing a lot more analysis across this service lines, whether it be end user or the rest-of-cloud in infrastructure applications, BPO, et cetera. And within those categories.

What we're seeing is a lot of commonality across the geographies. And so yes, the answer is we are absolutely applying that on a global basis.

Thank you very much.

Our next question comes from Frank Jarman with Goldman Sachs.

Great. Thanks for taking my questions, guys. I just wanted to follow up. I think in September you guys had a $350 million secured bond deal on the market, and I think you opted to hold off on coming to market with that deal.

I just wanted to check in and see where you are in terms of thinking about coming to the market with a deal. How important is that capital to your future funding needs, especially given the $40 million of delayed receivable that is still outstanding? Thanks.

So we are continuing to explore the wide range of financing alternatives. We went to the market, as you mentioned, with an opportunistic transaction.

We were not willing to consider doing something that wasn't within the parameters of what we feel is appropriate for us going forward. And so we have not settled on one. We'll continue to evaluate the alternatives.

Frank, this is Peter. I want to thank you for the question. And obviously happy to do follow-ups with you and any of the other analyst on the call.

Thanks.

Our next question comes from Arun Seshadri with Credit Suisse.

Hi, guys. Thanks for taking my question. I just wanted to ask about services revenue growth. You gave us, I think, for the first time in a little while services bookings in a very granular fashion. So appreciate that.

Just wanted to ask, is some of the cadence of these orders converting to revenue? I don't know if you can give us some sense for sort of what the seasoning of the service and orders are and sort of how much of that converts to revenue in any given -- and how many quarters out?

And also wanted to get a sense for -- I think we saw services revenue in 1Q was up -- sorry, orders were up substantially in 1Q and I think this quarter, 2Q was down. Just trying to get a sense for when some of the recent momentum will start to result in some more, some larger growth on the services revenue line.

Yes. Arun, this is Peter. Thank you for the question, or the questions. As you know, this, from an order standpoint, both the services and in our case the technology business is particularly lumpy. And the lumpiness will be not only in the size, or the aggregate size, of the orders but in the mixture of the orders.

So this quarter in the aggregate we had a very good quarter. Obviously sequentially and year over year our backlog is up. All of that is good. But a fair amount of this quarter's orders were renewals. And I think I pointed that out, as did Janet.

So you do have to be -- again the backlog number is really kind of the most appropriate number to use for us. And if you look at Unisys over time, it is actually been a very good indicator of future services revenue. In fact, I mentioned in my comments that we're going to start giving guidance on an annualized basis in 2016, which this Company hasn't provided in a number of years.

So we will start giving revenue guidance, profit guidance, cash flow guidance. And again, that is the result of our being able to understand our numbers with this depth, being able to start talking to you about these number with this depth. And then we want to share with you, now the we think we have a view of it, where we will continue to progress in the future.

But one of the elements of guidance we have always provided has been the backlog and this idea about what percent of services backlog go into revenue in the next year. So that is just by way of a preview, and then I'm going to hand it over to Janet.

Sure. Arun, thanks for your questions. So I mentioned in my comments that we did have a really strong renewal quarter this quarter that impacted order bookings. We have finished our third consecutive quarter of seeing constant currency revenue growth.

We start the fourth quarter with $585 million of services revenue in backlog for the fourth quarter. Historically that's typically been between 90% and 95% of our revenue. As you look at the third quarter that we just completed, the opening backlog represented 92% of the services revenue in the quarter.

Got it.

I hope that's helpful.

Yes, that's extremely helpful. One more question I had was in end user, in North American end user outsourcing, just wanted to get a sense for how much that represents on a quarterly basis in revenue? And also can you talk about changes in the competitive environment here? I think some of your competitors have experienced some pretty dramatic changes recently. And if you could also comment on pricing there in that market, that would be helpful. Thanks.

So Arun, again a great question. I don't have -- I don't believe we break down the end user by geography. I can tell you, and Janet will correct me if I get this wrong, but I think end user is about 27% of our total Company revenue. So if you look at our fact sheet, cloud and infrastructure services is 51%. So it is a little over half of that 51%.

With respect to the market for end user, I would tell you, I think we believe that, that is a fairly competitive market. There are a number of players in that market. We believe we are a real quality player in that market.

If you look at the magic quadrants of some of the analysts you will find us in the magic quadrant of the magic quadrant. We're right at -- in the top corner. And I think that's true for a reason. We have global reputation as being among best-in-class in end user. So I think we are a quality player.

I think part of my comments earlier to another question about margins and about the model we internally have to improve the cost structure around our end users. As we improve the cost structure, I will feel better about growing that more aggressively. But in the meantime, we're being more careful about the deals that we sign and the margins that we get for those deals.

So I believe we are the quality player and we need to be recognized as such, and we need to make sure that we've got the right business model for that business. Based on the analysis we've done, we can get there. This is a business that I feel increasingly good about going forward, but we need to make sure we've got the economics down.

Got it. Thank you. Can I also ask, in the same end user outsourcing market, do you feel like it's a growth -- I mean, do you think it continues to grow? Are there any sort of significant challenges there? Or do you think the market [grows], and it sounds like you're confident business can grow in the market, but just wanted to sort of hear your --

I do believe we can -- look, it's a competitive market. There are some other very large players out there, and there's some players that are trying to get into the market. And anytime in a market you have players trying to get into the market, you don't quite know exactly how they are going to approach that from a pricing perspective.

So I believe there is pressure on that. But at the end of the day, I believe in this market it is more about us than the competitors. We were industry leaders in personas which are a very important value out here. We're doing a lot around automation concerning end user. We have a very solid offering here.

It's really more about us and more about what margins for that business we are willing to take. And I think it is a little bit of a change for us. We need to be compensated at a fair margin for that work. So that is going to take a little adjustment in the marketplace.

Thank you very much for your comments, Peter. Appreciate it.

We take our final question from Grant Jordan with Wells Fargo.

Good afternoon. You provided a good bit of detail on the technology side for expectations for constant currency to be down for 2016. Is there anyway you can give us an idea maybe the order of magnitude of that decline, whether it be low single digit or otherwise?

Grant, let me just make sure I understood your question. We have given some visibility into what we think for 2016 for technology. We've given an expectation for full year 2015 on the impact of currency for the year. Are you asking us for what we think about services going forward?

No, I'm sorry. On the technology side you mentioned you expected it to decline again on a constant currency basis for 2016, and I was hoping you could help give us an order of magnitude of what you would expect then for the decline.

What I was mentioning is that if you are looking at the total year of 2015, and you look at our 42%/58% flip between the first half and the second half of the year, and if you factor that in and then recognize that we've got about 8 points of constant currency impact in 2015 to 2014, that backs into a constant currency decline roughly in the 14% to 15% range. And I was mentioning that, that would be the rate that, when you put up all the three factors that Peter and I both mentioned would affect the comparison in technology between 2015 and 2016, and after that expect it to flatten out.

Okay. And then on the cash outlays for the restructuring charges, you mentioned that many of those charges you would be able to delay until the second half of 2016 when you would have to make those decisions. Can you give us any more color on maybe the cash payments that you would expect either in Q4 or the first half of 2016 until we get to that, to the larger outlays in the end of 2016?

So I'll point back to in the restructuring charge itself the split between the US and the rest of the world, between $220 million and $80 million. The $80 million for the rest of the world are most of the cost reductions in the cash outlays in 2015.

And if I was to roll forward through the fourth quarter I think we'd end up with a total here in the neighborhood of about $55 million to $60 million of cash outlays related to that program. And that leaves the bulk of the payments in EMEA coming in 2016, and they may roll a bit over into 2017.

Okay, that's very helpful. And then just one question on the income statement. You've got a $17 million add-back and I was wondering if you could help -- tell us how that's allocated between costs of revenue, SG&A and R&D expense. And then just to follow on that, if there's any way you would allocate that between the services segment and the technology segment?

Right. So we had $21 million of savings in the third quarter for the effect of the cost reduction program. $17 million of that is in the services segment and the remainder is in the technology segment.

Roughly -- almost all of that is going between -- through the SG&A line with about $9 million going through cost of services -- I'm sorry, $7 million going through cost of services. So the $21 million, $17 million is in services, $7 million of that $17 million is in the cost of services line. The rest of it is in SG&A. And then the remainder is in the technology business with all of that predominantly in the SG&A line item.

Okay. Got you. Might have to follow up with that afterwards.

More than happy to, Grant.

And I think that's all. Okay, great. That's all our questions. Thanks.

Thank you for taking the time to be on the call. We're more than happy to follow up, Grant.

I'd like to turn the call back over to our speakers for any closing comments.

Thank you. I'd again like to thank everyone for having joined the call. As I pointed out and Janet pointed out, there is more data than we have ever had on our analyst website.

I also want to reiterate for those of you who want to dig even deeper into our offerings and into our capabilities, there are now on that analyst website a host of presentations and materials from our industry analyst meetings from September, and I hope you find those enlightening as well. Look forward to the next call. On behalf of Janet and I, thanks again.

Once again, that does conclude today's call. We appreciate your participation.