Unisys Corp (UIS) 2016 Q1 法說會逐字稿

Good day, and welcome to Unisys first-quarter 2016 results conference call. At this time I'd like to turn the call over to Mr. Niels Christensen, Vice President of Investor Relations at Unisys Corporation. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone, and thank you for joining us. Earlier today Unisys released its first-quarter 2016 financial results.

With us this afternoon to discuss our results are Peter Altabef, our President and CEO, and Janet Haugen, our CFO. We're also joined today by Inder Singh, Chief Marketing and Strategy Officer, who leads our global marketing communications organization and Investor Relations, joined the Company at the end of the first quarter. We're pleased to have him with us.

Before we begin I'd 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 presentation slides that we will be using this afternoon to guide our discussion on our investor website.

Third, today's presentation which is complimentary to the earnings press release includes some non-GAAP financial measures. These have been Provided in an effort to give investors additional information. The non-GAAP measures have been reconciled to the related GAAP measures, and we have provided reconciliations within the presentation.

From time to time, Unisys may provide specific guidance regarding its expected future financial performance. Such guidance is effective only on the day given. Unisys generally will not update, reaffirm or otherwise comment on any prior guidance, except as Unisys deems necessary, and then only in a manner that complies with Regulation FD.

And finally I'd like to remind you all forward-looking statements made during this conference call are subject to various risks and uncertainties that could cause the actual results to differ materially from our expectations. These factors are discussed more fully in the earnings release and in the Company's SEC filings. Copies of those 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 first quarter financial performance and the progress we're making to improve the Company's profitability and increase our competitiveness and market differentiations. Our first-quarter results demonstrated progress toward our objectives of improved profitability and cash flow. We had a non-GAAP operating profit margin of 2.9%, which was up from negative 0.3%, or 320 basis points year over year. Our adjusted cash flow in the quarter was up $100 million year over year.

Our continued progress in improving our cost structure was a key driver behind the improved profitability and cash flow. In the first quarter of 2016 we achieved $25 million in incremental annualized savings, building on the $100 million in net annualized run rate savings we achieved exiting 2015. This was a significant milestone, and we remain on target with respect to our cost reduction initiatives.

In first quarter of 2016 our revenue declined 3% on a constant currency basis, which was consistent with the guidance we provided. Services revenue declined 2%, also consistent with our expectations on a current currency basis. We were very pleased by the strong performance of our US federal business, which drove its sixth consecutive quarter of year-over-year services revenue growth. The federal team continues to performs very well, and distinguish Unisys in that market.

Services order bookings in the first quarter were down compared to the first quarter of 2015. And it was our second consecutive quarter of year-over-year declines. We have a strong pipeline for the remainder of 2016 and are aligning our sales and client executives to capitalize on the opportunities to drive bookings and grow backlog.

Our technology business is lumpy quarter to quarter, and as expected, included fewer ClearPath Forward license renewals in the first quarter of 2016 than in the prior year. First quarter 2016 technology revenue was down 10% on a constant currency year-over-year basis, which was also in line with our guidance.

We also completed a convertible note offering in March. While Janet will speak to the transaction in more detail, I am pleased that we were able to strengthen our balance sheet, provide the Company with greater flexibility to meet our requirements, and expand our ability to invest in opportunities that can help build our business.

As much as our cost reduction efforts are an important element in improving our competitive position and enhancing the efficiency of our delivery engine, so too does a strong capital structure. The combination of a stronger balance sheet and cost structure creates a solid base for growth and enhances our go-to-market efforts. I believe we made significant progress with each of these foundational elements in first quarter.

We worked aggressively throughout the quarter to strengthen our industry vertical go-to-market initiatives and to integrate our expanding and enhanced leveraged solutions into those initiatives. In the quarter we had success in extensions, expansions, and new logos. Within the government sector, our public business includes all government clients outside the US federal government, and accounted for 26% of our first quarter revenue.

During the quarter we had a number of client wins. In Asia Pacific, the Australian Department of Immigration and Border Protection selected Unisys as its systems integration partner for the first phase of a new traveler border clearance platform that is designed to speed and automate the processing of lower-risk travellers to focus resources on those of higher risk.

In EMEA, building in our expertise in justice and law enforcement, Unisys was selected by The Netherlands Administry of Safety and Justice to implement and manage a new jail management solution for penitentiaries across the country. Unisys will use the Unisys law enforcement application framework, or ULEAF, to help provide high quality modern jail management services to custodial institutions throughout The Netherlands.

In Latin America, PRODESP, the government-owned provider of IT services to the State of Sao Paulo, renewed on our ClearPath Forward platform which supports multiple applications, registration, records, and identification systems for that State's more than 27 million citizens. In the US, the Washington State Department of Social and Health Services awarded Unisys a five-year $20 million contract to provide a private cloud solution. Unisys ClearPath Forward services are a core part of this as a service solution, providing streamlined and cost effective management for the cloud infrastructure and associated application environment.

The federal business, which represented 21% of our first-quarter revenue, had several impressive wins in the quarter as well. NASA's Langley Research Center renewed its simulation and aircraft services contract through which Unisys provides analysis, design, development, testing, operations and maintenance for NASA's flight simulation facilities and research aircraft systems. We also won an application support contract with a law enforcement agency to support its detention services applications which provide prisoner designation, housing, transportation, medical care and detention information and analysis. And we expanded an application services contract with an agency responsible for domestic security to provide new analytics, visualization and common framework capabilities for passenger systems and redesign of cargo trade entity programs.

Moving onto the commercial sector. It was also an active quarter in the commercial sector, which represents 32% of our revenue. Air Canada, in our travel and transportation industry, extended and expanded its utilization of our cloud-based air cargo application. In Asia Pacific, HubSky Network Company, a new client, appointed Unisys to provide end-to-end design and consulting activities, including data center planning, design, implementation and management services for HubSky's new cloud-based data center in Beijing.

Riverbed Technology, a leading provider of application performance infrastructure, selected Unisys as its partner in EMEA to provide on-site installation and maintenance services for key Riverbed products including converged infrastructure platforms for cloud-enabled serer virtualization, storage management and wide area network optimization. And Eli Lilly extended and expanded our long-standing global managed services relationship in support of its global IT operations and critical business functions.

Within the financial services sector, which represented 21% of our revenue in the first quarter, some key wins included in Asia Pacific a new banking client which chose Unisys to deliver check processing services through our BPO operations in the region. In Latin America, Banco Nacional de Costa Rico renewed on our ClearPath Forward platform to run its core banking platform and the system that controls its ATM network.

As I'd mentioned before, security is a core focus for the Company. I'd like to discuss security in three ways. Most broadly, our goal is to distinguish Unisys through a focused effort to build leading security protocols into all of our solutions Company-wide. Second, while security will be increasingly evident in all our solutions, our specific security project portfolio is receiving more emphasis, including managed security, security consulting, and security infrastructure services, as well as our Stealth security business. A good example of new work in this broader area is the Australian Department of Immigration and Border Protection contract I mentioned earlier.

And third, we are very focused on growing our Stealth business, which includes as a service, licensing, services and maintenance. Our Stealth offerings are examples of market-leading innovative software-based security solutions. And we have expanded our Stealth solution suite from three offerings, which include Stealth Mobile, Stealth Core, and Stealth Cloud, to five with the addition of Stealth Identity and Stealth Analytics. This week we announced the availability of Stealth Cloud for Microsoft Azure to seamlessly deliver micro segmentation security from client enterprises to the Microsoft Azure Cloud.

Stealth Cloud provides an additional layer of security that leverages and easily integrates with Microsoft Azure's existing strong security. Enterprises can dynamically and simply extend their on-premise infrastructure to Azure using the extended data center capability of Stealth Cloud that automates the shifting of secure work loads from their data centers directly into Azure. Stealth Cloud for Azure enables clients to establish a single secure platform for both their data centers and their cloud environments, reducing complexity and cost in a hybrid environment and removing roadblocks for many organizations looking to leverage the cloud.

During the quarter new Stealth contracts included a US Defense Department agency that began using Stealth on Amazon Web Services, leveraging the extended data center capabilities to enhance security over sensitive data stored and analyzed in the public cloud. This is indicative of the interest we have seen in the Stealth Amazon Web Services model from the US defense and intelligence community.

Our direct sales team, which has also seen significant interest across our geographic base within the banking, energy, government and retail industries. And we had a number of wins including engagements with a large retailer and a multinational supplier of products and services to the oil, gas and power generation industries. In addition, earlier this week we announced that ANGKASA has implemented the Unisys Stealth solution to secure personal information and account details accessed via its self-service kiosks across Malaysia. This solution secures communication between the self-service kiosks and ANGKASA's data center from hackers or unauthorized access, protects critical IT assets and secures sensitive customer data.

And yesterday we announced that Mitel Networks Corporation, a business communications leader, is teaming with Unisys to offer Stealth Security to protect mobile communications and cloud access for 60 million users in 100Mitel's countries around the world. Unisys will provide new security-enabled offerings to Mitel's mobile and enterprise customers based on our Stealth Mobile security product. This will provide Mitel with a highly differentiated security offering for its diverse global client base which can be easily integrated into its product line, a voice over IP, mobility and cloud services. In addition, Mitel will be using Stealth to protect its own systems, data and intellectual property. In sum, we are seeing improved market penetration with Stealth, including improvements in the quality of the pipeline and a reduction in the average sales cycle.

As a follow-up to a comment from an earlier call, I also wanted to discuss that we have now completed our evaluation of our software portfolio to identify and focus investment in a select group of offerings that are aligned to our integrated go-to-market priorities.

Finally, we have also continued to build our leadership team. And I'm very pleased that Inder Singh has joined the Company as Chief Marketing and Strategy Officer. Inder leads our global marketing and communications organization, which as Niels mentioned, now includes Investor Relations. In just a month, Inder enhanced our thinking on Unisys branding, marketing and our outreach to investors and analysts.

In addition, Andy Stafford joined the Company earlier this week as leader of our global services delivery organization. Andy will play a critical role in both advancing our next-generation offerings and in executing our cost optimization program. So I'd like to thank everyone again for joining us. And I'll now turn the call over to Janet before we open up for questions.

Thanks, Peter. Hello everyone, and thank you for joining us this afternoon. In my comments today I will provide comparisons on a GAAP and non-GAAP basis. The non-GAAP results exclude our pension and cost reduction charges. Unless otherwise mentioned, any comparisons are on a GAAP basis.

Please turn to slide 3 for a discussion of our first quarter 2016 financial results. We reported revenue of $667 million in the quarter, which was down 8% year over year, 3% on a constant currency basis. The overall decline in revenue reflected a 2% constant currency decline in services revenue and a 10% decrease in technology revenue. I will discuss our segment results in more detail shortly.

The success of our ongoing operating cost reduction action was evident, as operating expenses declined $21 million, or 14%. Non-GAAP operating expenses declined 25%. Our non-GAAP operating margin of 2.9% rose 320 basis points year over year, reflecting the benefit of the cost reduction actions taken by the Company. In the quarter we continued to execute against our cost reduction program. Our actions in the quarter generated approximately $25 million in annualized run rate savings, which raised our program to date savings to $125 million against a target of $200 million as we exit 2016. We remain on track.

Our first quarter 2016 diluted loss per common share was $0.80, which included $0.49 for cost reduction charges and $0.42 for pension expense. This compares to a diluted loss per share of $0.87 in the year-ago quarter, which included $0.55 for pension expense. Non-GAAP diluted earnings per common share was $0.11 in the first quarter of 2016 versus a loss of $0.32 in the year-ago quarter.

In the first quarter we recorded a tax provision despite recording a pretax loss. As I have said previously, our effective tax rate varies significantly quarter to quarter based on the geographic distribution of our income in that quarter. Based on our current tax position, future quarterly results with a comparable geographic distribution of income would likely include a tax provision, even in periods with a pretax loss. Adjusted EBITDA for the first quarter of 2016 was $60 million versus $43 million in the prior-year quarter. Adjusted free cash flow improved $100 million year over year to $38 million in the first quarter of 2016.

Moving to slide 4, which shows our first-quarter 2016 revenue by segment, geography, industry and revenue type. From a segment view, services represented 89% of our first quarter 2016 revenue. Looking at some of the services revenue in more detail, cloud and infrastructure services revenue was 50% of our overall revenue and increased 7% on a constant currency basis, reflecting lower contract volumes on public sector accounts in the US.

Application services were 32% of our overall revenue and increased 10% on a constant currency basis on the strength of justice, law enforcement and border security work, particularly in our US federal business. BPO revenue was 7% of our overall revenue, all of which is delivered outside the US. Half of the year-over-year decline was due to currency with the other half a result of lower revenue from our IPSL joint venture in the UK.

Moving to a geographic view. Revenue from the US and Canada, which represented 51% of our first-quarter revenue, declined 3% in constant currency, principally reflecting lower year-over-year technology revenue. Incremental project work in our US federal business drove the sixth consecutive quarter of year-over-year US federal services revenue growth. But we do not expect to see that level of project work to extend into the second quarter of 2016. Our EMEA region reported an 8% constant currency revenue decline, due largely to the lower BPO revenue I mentioned a moment ago.

Asia Pacific and Latin America regions reported constant currency growth of 9% and 8% reflectively. In Asia Pacific services revenue growth, which largely reflected the benefit of the recent New South Wales government contract win and higher BPO volume, offset lower technology revenue in the quarter. In Latin America we saw growth both in services and technology revenue.

To discuss our first quarter segment results in more detail, please turn to slide 5. Services revenue declined 2% in constant currency as declines in cloud and infrastructure and BPO offset the growth in application services. Services gross profit margin rose 10 basis points year over year to 14.2%. We continue to pursue higher margin services to improve the aggregate margin profile of our services business. Our services operating margin of 0.7% in the first quarter of 2016 rose 200 basis points year over year, reflecting the benefit of the operating cost reductions we have taken over the past 12 months.

Technology revenue decreased 10% in constant currency, reflecting reduced ClearPath Forward revenue, which can vary significantly from quarter to quarter based on the timing of license renewal. Technology operating margin percent more than tripled year over year to 18.1% due to the benefit of the operating cost reductions.

For some comments on services order bookings and backlog, please turn to slide 6. The first quarter of 2016 was a soft bookings quarter overall with orders of approximately $300 million. From an industry vertical perspective, the financial and US federal sectors had order growth while commercial and public sector declined. As Peter mentioned, we have a strong back pipeline for the balance of 2016 and are focussed on executing against the opportunities we have to improve our order bookings and build backlog. We ended the first quarter with $4.1 billion in services backlog. Of that services backlog, approximately $545 million is expected to convert into second quarter 2016 services revenue.

Moving to cash flow. Please turn to slide 7 for an overview of our performance in the quarter. Our cash flow performance improved year over year. We generated cash flow from operations of $24 million in the first quarter of 2016 compared to cash usage of $43 million in the first quarter of 2015. Free cash flow improved by $89 million year over year as a result of the increased operating cash flow and lower capital expenditures. Adjusted free cash flow improved by $100 million year over year to $38 million in the first quarter of 2016 and at the end of the first quarter, the Company had $514 million in cash. The debt balance at March 31, 2016 was $465 million.

Please turn to slide 8 for a discussion of our recent convertible notes offering. On March 15 we issued $190 million of five-year 5.5% coupon unsecured convertible senior notes with approximately $160 million in net proceeds after fees associated with the transaction and the cost of the capped call transactions. About a week ago we issued an additional $23.5 million of the notes with the exercise of a portion of the underwriters over-allotment. These notes have the same terms and conditions as the notes we issued in March. In connection with the issuance of these additional notes, we entered into further capped call transactions at a cost of $3 million, which raised the total cost of the capped call transactions to about $27 million.

The total value of the offering was $213.5 million, and Unisys received net proceeds of $180 million in total. The proceeds of the offering are for general corporate purpose. This additional liquidity provides the Company with more flexibility to address future capital requirements, including the August 2017 maturity of $210 million of 6.25% senior notes. In light of the uncertainty within the high-yield debt market and our evaluation of other financing alternatives available to us, we felt it was in the best long-term interests of the Company to secure financing which provides Unisys with a stronger balance sheet to address the near-term maturities, support our business, and enhance our ability to invest in the Company as we execute against our business strategy.

With respect to our pension obligations, there have been no change to our previous estimates on pension expense or contributions for 2016. Returns on the assets associated with the US plan were approximately 1% for the first quarter of 2016.

On our fourth quarter 2015 earnings call in late January, we provided financial guidance for 2016. We continue to expect overall 2016 revenue in the range of $2.775 billion to $2.875 billion. We anticipate a non-GAAP operating profit margin of between 7% and 8% in 2016. And we anticipated our adjusted free cash flow for the year will be in the range of $160 million to $200 million.

During the first quarter, we demonstrated significant progress toward our objective of improving our cost structure to increase our profitability and strengthen our cash flow generation. Our cost reduction actions are tracking in line with our plan to create a more competitive cost structure and rebalance the Company's global skill set. We continue to focus on enhancing the competitiveness of our offering and building the go-to-market and delivery capabilities that will enable us to generate sustainable revenue growth in the future. Thank you for your time. And now I'd like to turn the call back over to Peter.

Thanks, Janet, very much. With that, operator, we'll open up the call to questions.

(Operator Instructions)

Jonathan Lee, Susquehanna Financial Group.

Jonathan, thanks for being on the call.

Thanks, Peter. It's actually Jamie Friedman. So congratulations on these numbers. I just had a couple of questions.

On slide 6, if you could revisit some of the math in terms of the sell and bill contributions. So specifically if you look at the $545 million of services backlog that is expected to turn to services revenue in 2Q. Yes, if you could kind of revisit the ratio that comes intra-quarter, that would help me. Thank you.

Sure, Jamie. Thanks for joining the call. So the $545 million of services backlog, the backlog is what is expected to turn into the second-quarter 2016 revenue. [That generally] represents between 90% and 95% of the quarter's revenue. In the first quarter of 2016 the opening backlog represented 94% of the services revenue in the quarter.

Got it. Thank you. With regard to -- so I realize you're reiterating the guidance you provided, what was that, January 28. You came in ahead of us in the Q1, at least. You talked, Janet, to the total revenue. Any contemplation of the specific segments between service and technology that you had stated back in January?

Jamie, I'd point to the performance in the services and technologies segment in the first quarter of 2016. You'll see that they're generally in line with the guidance comments that we gave for the full year. And our comments are that we still see ourselves in line with the overall guidance that we gave in late January.

Got it. And then maybe the last one, if I could. In terms of the slide 4 where you decomposed -- it was very helpful by the way, to decompose the bar charts. Where is security landing? Is it over-indexed in any area? In other words, is it bigger in federal or enterprise, financial or commercial? How should we be thinking about your security solutions? Thank you.

Jamie, this is Peter. That's a great question. And it's one of the questions that I will tell you over the past couple of weeks with Inder now in the shop, we really all kind of have been talking about that. The way I have been looking at security for a while now, but I think I kind of enunciated it a little more clearly in the remarks, is really through this kind of three layers.

So the first part of this Company, as I think of Unisys and I think of how we will distinguish ourselves in the market going forward, in every element of our business, whether it's end user, whether it's cloud, whether it's applications or BPO, and obviously in the technology segment, we are building into every single one of our offerings advanced security. Now that doesn't mean we're building Stealth into every one of our offerings. It is not necessarily applicable. But security itself is going to be something we are going to be discussing and showing our clients in everything we do.

We think that not only is Stealth kind of a leading edge product for us. But in reality this Company has been in the security business for decades. And as you and I know because we've discussed it, and I think as most of the people on the call know, products like ClearPath Forward are absolutely leading edge in security. There has not been a single known instance of data forcibly extracted from that operating system, which is unique among operating systems in the known world. So we just -- we're just going to go very deliberately and take security as a core differentiator in the whole Company.

Now that said, that second element, or the second peeling away of the onion, is this idea of discrete security business. So you know we have a managed security offering. You know we have security consulting.

I think I mentioned on the last call that we were integral in the technology consulting for the 50th anniversary Super Bowl earlier this year. So all of the -- and we do firewall security. We do a whole host of cloud and infrastructure. I have to tell you, we haven't always thought about those revenues discreetly.

One of the challenges that we are working on is how do we describe for you guys clearly kind of the extent of that second part of the onion, which is our broader security services which does include Stealth, but is a lot bigger than Stealth. In fact, we think multiple times the size of Stealth's current revenues. So we're working hard how to figure out how to try to define that for you guys.

And then the third element is Stealth. And Stealth, as I mentioned, includes not only software licensing but includes as a service provision. It includes services, it includes implementation work and maintenance.

So when you look at the second two layers of that onion, what you find is security all over the place. So you find consulting services and managed services which are in both the cloud and the application space. You find some security work in some of the BPO offerings we do, specifically around identity management. And obviously you find security in technology.

So when we -- one of the challenges we have is when we provide numbers, there are only so many ways we want to provide it, or we will confuse you and ourselves. And right now, I thank you for congratulating us on the slide.

We're working to figure out, how do we do a better job in the future of trying to isolate for you our security business as a whole, as well as Stealth. Keeping in mind the short answer to your question is, you find bits of that revenue throughout the stacks that we're currently showing.

Got it. Thank you very much.

Joan Tong, Sidoti & Company.

Good afternoon. A couple of questions here. First off, Peter, you mentioned the pipeline is very strong. And obviously the booking number has been down two quarters in a row, and so has the backlog number.

So I'm just wondering what gives you the confidence that like things going to improve going forward? And maybe give some color about the pipeline that you have at this point?

Yes. Joan, thank you for the question. And it's certainly a good question. And as I alluded to in my remarks, I don't believe that we have had a strong -- the last two quarters have been particularly strong for us. And we need to do better on that. I think I referred to our pipeline as strong as opposed to very strong. Maybe that's just kind of parsing words.

Let me try to quantify it for you. Our pipeline for the next nine months, and we are really focussed right now on 2016, is slightly larger than our pipeline for the same nine months was in 2015.

So if we look at the last two quarters of signings and say, well, we have not done as well quarter on quarter in the last two quarters. We are expecting to do, if we do what we expect to do, we're expecting to do slightly better in the next nine months than we did in the same period a year ago.

Sales are not guaranteed. Pipeline is not guaranteed. You win some, you lose some. But we do look at that pipeline and say, we are encouraged by that.

So that's one reason why I mentioned the subject in my remarks. The other is, of course, we're spending a huge amount of energy and focus in advancing our solutions. So we believe that our solutions are going to be stronger than they have been in the Company and stronger relative to the market than we have had in the past. So we would expect our win rates to begin to increase.

The countervailing piece of that is we're getting more selective. So part of the -- and you've seen us be very open that we're really not too interested in empty calories. So we are really focused on building this Company and signing contracts that we don't think are in our long-term best interests from a profitability standpoint would give us a boat anchor going forward.

Now that said, we have to do both jobs. We have to both increase sales as well as increase the margins for those deals. So we're not going to be dogmatic and go off any of these in too rigorous a fashion. But we are looking hard at both margin, quality of the deals and pipeline.

In whole, we like what we see over the next nine months. And we believe that we're going to be able to ramp sales.

Sure, sure. And then how about maybe just some additional comments regarding Stealth or regarding security? Can you just kind of maybe mention some of the business wins that you actually win because you have the security piece of it?

Sure. Again, and I hope I've done a good job and hopefully we'll do even better in future calls in talking about these three layers of security. With respect to Stealth in particular and Stealth-related sales, Joan, I listed several of those in the call. And so I would encourage you to go back and look.

What you'll find, which you did not see in earlier quarters, is a geographic breadth in Stealth. You see Stealth used in Latin America. You see Stealth used in Asia Pacific. You see Stealth used in North America. I can't remember whether I have a particular instance of Stealth in EMEA, but I think that we do. And you certainly will in the future.

So what we have really done now as those offerings are maturing is what really started as a North American base is really going global. Now, that's true with our direct sales force. It's going to be even more true with our partners.

So AWS, Microsoft, Mitel, all of these are very global organizations. And we have now got the capability of using Stealth all across the planet. So I think you're seeing a lot of activity there. And you're seeing it kind of throughout our business.

Now with respect to your specific question of, how does it help you perhaps win a bigger deal? I would mention -- I would go back to that deal I talked about in Australia. So that's not a Stealth situation per se, although Stealth might wind up as part of the offering solution.

But that's a situation where we're using our justice, law enforcement and border protection suite of products specifically around -- about border protection, and really taking some of the learning we have in the United States and elsewhere in the world, and taking that to Australia. That is going to result in work that will go beyond simply security software or identity management software, and will get us larger work.

Okay. That's -- thanks for the color. And then I guess the next question is regarding Europe. And Europe is an area that you really want to fix. And can you just give us an update in terms of the progress there, the turnaround initiated and the progress and benefit, cost benefit and things like that specifically related to Europe?

I will. And then Janet, please feel free to add to my comments. When we talk about Europe, really the first thing you go to, I wish it wasn't the case, but it is. And the first thing you talk about is the cost of programs that we have put in place, because it really is important to Europe.

So as Janet and I mentioned on the last call, when you think about our initial cost, or what we call go-forward program, initially that was to take out about $200 million of annual run rate cost. We expected to get $100 million last year, $100 million this year, and we are on track to do that.

But we actually have expanded that program to $230 million as a potential. And what we did was we actually took $30 million of the original $200 million and we moved it to 2017. And then we put a new $30 million into 2016, all without increasing the overall anticipated cost of $300 million.

The piece we moved out, that $30 million we moved out, was $30 million of the roughly $100 million of annual run rate cost savings in Europe. We moved out that $30 million because, frankly, it is simply very expensive.

And from a cash standpoint we wanted to do the quick hits first. And from a return on investment standpoint, while we think it is still a good return on investment, it's not as powerful as some of the others.

So what I would tell you is we're still on track to do $70 million of the initial $100 million of go-forward cost savings in Europe by the end of this year. And what Janet and I said last call is, yes, we kind of think we're going to get that $30 million next year. But we're going to look at it more carefully, and we'll just make sure we're on board when we do that.

Okay. Peter, I'm sorry to interrupt. Can you just remind us what is the charges related to, or the charges and also to cash laid out related to that $30 million that you might and might not want to do?

Joan, what we mentioned was that the cost reductions have about $100 million worth of cash requirements in 2017, and roughly $80 million of those cash payments in 2017 relate to the $30 million that Peter had mentioned.

I see. And that piece that you might not want to do at this point but you haven't really disclosed that, that definite answer that you might (inaudible) forward or not?

Yes. So Joan, as Peter mentioned, it is clearly part of the plan that we want to accomplish through the cost reductions there. We look at the timeline for executing that. We look at the amount of cash usage for it. And what we need to do from a workforce standpoint.

And as Peter said, we looked at those $30 million of savings with the requirement of $80 million roughly of cash out. We're continuing to look at, is there a better way to do it, is there an alternative way to do it, can we accomplish that in a slightly different fashion that perhaps might use less cash? But right now, based on all we know, that would be the estimated time of the charge, time of the cash expense -- expenditure, and the savings that would come from that, Joan.

Got it. All right. Thank you. Thank you, guys.

Thanks, Joan.

Ned Davis, William Smith & Company.

Yes, thank you. And again, some nice operating improvement in the quarter. I had a couple of housekeeping questions. First of all, if you're providing -- if you were providing guidance for shares outstanding on a GAAP fully diluted and non-diluted basis for the second quarter and the rest of the year, what would that denominator be?

And so Ned, it really does depend upon the level of net income as to whether we're anti dilutive or dilutive. For the full year, you would be adding 17.2 million shares to the share base. So the estimate for the year would be 67,105 on the diluted share base. For the second quarter you're going to add roughly -- to the current share base of 50 million, you're going to add roughly 21.6 million to get you to 71.6 million for the total share average in the second quarter.

All right.

If it's dilutive, right? Ned, if it is dilutive. If it is anti dilutive we would be back in the basic shares.

Maybe another way to express it is if you took the midpoint of your guidance for both revenues and margins, what would a good number be for the fully diluted shares for the balance of 2016, leaving out the first quarter. Just the final three quarters. If you just hit your guidance number, the midpoint of guidance.

We gave guidance on revenue and operating profit. We did not give any guidance on the tax number, Ned.

Right.

And so as I mentioned in my comments, and as we've had previously in different quarters, we have great variability on that tax provision line, and --

That's my next question.

(Multiple speakers) So I mentioned in my comments that the tax provision that we had in this quarter, even though we had a loss, if we have that same level of income and geographic mix, you're still going to have that type of provision going forward in each of the respective quarters. So I would just want --

So how would that translate into a share count, then? If you just assume that. Make the assumption you'd still have that weird situation of paying taxes against a GAAP loss.

Well, let me clear that -- that's a tax expense not cash taxes out of the Company. It's the way the GAAP (multiple speakers).

I understand, it is an accrual, right. I'm just talking on an accrual basis. What would that -- if you took the guidance and then made the assumption that the tax situation just continued for the year, do you have a range for the share counts for the year? Is it --

Yes. The share count, Ned, would be the same, depends by quarter by quarter, as I mentioned. The annual share count on a diluted basis is 67,105. And the basic is roughly 50 million even.

Okay. All right. One other thing. The capped call, does that get amortized over the expected life of the debt? Because you said in your slide that you took $24 million -- or you took a big chunk of it in the quarter. But you said cost of capped call, $24 million in 1Q, $3 million in 2Q. Is that a GAAP charge or is that really what you cost you out of pocket?

It is what it cost out of pocket. It is not something that amortizes. So if you look at the total amount of capital that we issued, which is the $214 million of notes, if you reduce that by the fees and you reduce that by the cost of the capped call, which is what gets you down to the $180 million.

Right. And then so for bookkeeping purposes, if we were trying to model this we would expense the interest based on the gross amount of the debt (technical difficulties)?

That's correct. The 5.5% coupon.

All right. Now switching over on this tax issue. Why is the Company paying taxes, in practical terms, when it has all these charges and -- well, why are you accruing taxes, to be more specific about it?

So, two things --

What is causing that?

Two things. First from a cash tax expense, as a Company that does business in more than 35 countries on a global basis, we do have income tax expenditures globally. It has ranged between $50 million and $60 million. It's pretty consistent. That's generally the cost of the overall infrastructure.

When it comes to the tax expense, we are in accounting where all of our tax attributes, for the most part, have valuation reserves against that. So in countries, which represent about 50% of our countries, where we are profitable, have been profitable, we recognize a normal tax provision.

In countries where we have incurred losses, as we were talking earlier about the challenge particularly in continental Europe, we do not get the benefit of those tax losses. And so as a result what generally happens to us in any given quarter is that we don't have the benefit from some of a loss position in those countries where we've had long-time challenges. But we're paying tax in those legal entities, in those countries where we have been and continue to generate profitability.

Ned, this is Peter. I want to thank you for each of those questions. And I guess I want to add my support to Janet and what she is trying to do, and what Inder will do now that he is coming on board. So we started last quarter to provide guidance, as you know, for the first time in 10 years.

And part of the rationale, first, I think that that's the right thing for this Company to do at this time. And I think our job as a management team is to make your job simpler and easier. And our numbers get a little complicated. And so what we're trying to do by providing guidance, is make it more easier to model and more easier to understand.

It's pretty clear, and this conversation helps, but it has been clear even before this conversation, that while we have taken it several steps, including the revenue, the profit, the cash flow there are a couple more steps that would be helpful for you and others. And those are around our taxes and around guidance around share count.

So one of the things Inder is going to do working with Janet and Niels and our team is really see how we can take this to the next level, continue to expand our disclosure and analysis to you to keep trying to make this easier and easier and easier. So that's on us. And it's one of the things we will be working on in the months to come.

I appreciate the complexity of doing it. And I greatly appreciate your steps to try to make it somewhat easier for all of us. Thank you very much.

You're welcome. And thank you, Ned.

(Operator Instructions)

Ana Goshko, Bank of America.

Thanks very much. And thank you for the details on the progress on the cost reduction plan, because that is really what I want to do focus on. You did pre-empt some of my questions.

Janet, for the rest of 2016, can you give us some kind of guideposts on how we should think about the costs -- reductions that we should see sort of quarter by quarter, and where those will break out within the various cost line items, between COGS or SG&A?

Sure, Ana. As we've talked about previously that the cost reduction program is roughly 60% in the operating expenses and 40% in the cost of services delivery line. The upfront activities in the program have really been weighted towards the operating expense line. And you can see that in our run rate for operating expenses.

As we go forward, we're looking to see more of that benefit continue in the services gross margin, show up in the services gross margin. And that is more weighted into the third and fourth quarter actions that we would have taken.

We said that we were going to generate another $100 million worth of savings in 2016. We've added $25 million to that in the first quarter. I would -- as it rolls out I expect the remaining $75 million to be weighted to the third and the fourth quarter as opposed to being even through each quarter. And that as we're looking into the third and fourth quarter, those cost savings will start to show up in the services gross margin and services operating margin line.

Ana, what I would say is our confidence that we're able to execute that is strengthened by the arrival of Andy Stafford. So Andy is a long-tenured veteran of Unisys, having joined the Company on Monday -- on Tuesday, actually. So he is really brand new to the Company. He is not at all new to our industry.

So Andy has a long track record of success, most recently at Accenture. He led their global delivery team, over 100,000 professionals at Accenture. He personally lived in India for five years as an integral part of the Accenture leadership team there.

So he is no stranger to operating efficiencies, not only taking costs out but increasing discipline and methodology. So we have, as I mentioned in my comments, we really welcome Andy's arrival. And we think he is going to do great things for our services delivery capability on a global basis.

Okay. Great. That's great to hear. Secondly, just an accounting question. If I look at slide 7, and then, Janet, you have $18 million of the cost reduction payments. Is that something that was expensed this quarter, or was that only a cash outflow in the quarter and then expensed (inaudible)

Sorry, Ana. If you're on page 7, that cost reduction will be the payment. If you look on slide 16 and you'll see it in a number of places in Schedule E, the GAAP to non-GAAP reconciliation, you will see there were $26.9 million of cost reduction charges that went through the P&L in the first quarter. So we are trying to show on slide 7 the cash and in the additional information, as shown on slide 16, what went through the P&L on a GAAP basis.

Okay. And then sorry to be so accounting focussed, but where are those charges on the income statement? Are those in SG&A?

Sure. The $27 million in the current quarter is broken up between about $11.5 million in the cost of revenue services line, and then $15.4 million in the operating expenses -- $13.3 million in SG&A and $2.1 million in R&D.

Okay. That's great. Thank you. Because as you can imagine, I'm trying to get to more of what the ongoing normalized costs are. Okay, great.

And then secondly, on the capital market financing that you were able to complete, just wondering how you think about your cash balance right now and your comfort with your liquidity levels? I think you still have about $80 million of cash restructuring payment to make this year, and as well as pension obligation. I want to understand how you feel about your ability to end the year with a comfortable cash balance, especially as you look at 2017 with the (multiple speakers).

Sure, Ana. So we have ended the quarter with $514 million in a cash balance. And as we look out through the year, we have considered both the cost reduction actions that we still have to take, and as well considering the fact that the -- we have the $210 million of debt maturing in 2017.

And so the importance of having done the convertible note transaction to strengthen our capital position was to enable us to continue through the cost reduction actions and the planned activity that we have. But equally important, and probably coming up before some of those 2017 cash payments, is the maturity of the 2017 note.

Okay. Okay. Well, thank you very much.

Thanks, Ana, for joining the call.

And that does conclude the question-and-answer session. I'll now turn the conference back over to you for any additional or closing remarks.

This is Peter. Thank you, Janet, for helping on the call. I hope that as I mentioned in response to Ned's comment, Janet and I are both continuing to provide more and more color, both as to the business and as to the finances. We expect to continue to do that and to expand that in future quarters.

We're also on the road. So we expect to be meeting with investors and analysts on a more proactive basis going forward. Niels and Inder are both working diligently to set those up. And we extend a welcome and a request to anyone on this call, as we are setting up our travel schedules to please let us know if you would like us to include you in those schedules.

So with that, I want to thank everyone for joining us. And look forward to the next call.

Well, thank you. That does conclude today's conference call. We thank you for your participation today.