Unisys Corp (UIS) 2016 Q3 法說會逐字稿

Good day and welcome to the Unisys third-quarter 2016 results conference call. At this time I would like to turn the call over to Courtney Holden, Vice President of Investor Relations at Unisys Corporation. Please go ahead.

Thank you, operator. Good afternoon everyone. This is Courtney Holden, Vice President of Investor Relations speaking. Thank you for joining us. Earlier today, Unisys released its third-quarter 2016 financial results.

I am joined this afternoon to discuss those results by Peter Altabef, our President and CEO; Janet Haugen, our CFO, who as we previously announced will be retiring at the end of this month; and Inder Singh our Chief Marketing and Strategy Officer, who will step into the role of CFO on November 1, after Janet's departure. 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 discussions on our investor website. Third, today's presentation which is complementary to the earnings press release includes some non-GAAP financial measures. The non-GAAP measures have been reconciled to GAAP measures and we've provided reconciliation within the presentation.

Although appropriate under generally accepted accounting principles, the Company's results reflect charges that the Company believes are not indicative of its ongoing operation and that can make its profitability and liquidity results difficult to compare to prior periods, anticipated future periods or to its competitors' results. These items consist of pension, and cost reduction, and other expenses. Management believes each of these items can distort the visibility of trends associated with the Company's ongoing performance.

Management also believes that the evaluation of the Company's financial performance can be enhanced by the use of supplemental presentation of its results that excludes the impact of these items in order to enhance consistency and comparativeness with prior or future period results. The following measures are often provided and utilized by the Company's management, analysts, and investors to enhance comparability of year-over-year results as well as to compare results other companies in our industry, non-GAAP operating expenses, non-GAAP operating profit, non-GAAP diluted earnings per share, free cash flow and adjusted free cash flow, EBITDA and adjusted EBITDA, and constant currency. From time to time, Unisys may provide specific guidance regarding its expected future financial performance. Such guidance is effective only on the date 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 (inaudible). Finally, I would like to remind you that all forward-looking statements made during this conference call are subject to various risks and uncertainties that could cause the actual results to differ materially from our expectations.

These factors are discussed more fully in the earnings release under the Company's SEC filing. Copies of those SEC reports are available from the SEC and from the Unisys investor website. Now I would like to turn the call over to Peter.

Thank you, Courtney, and thank you all for joining us today to discuss our third quarter financial performance and the progress we are making to enhance the Company's competitive positioning and financial performance. Over the course of the third quarter we saw a number of positive trends for the business. And there were also a few areas where we still need to make progress.

Slide 4 in the presentation highlights some of the major takeaways from the quarter. Q3 was a strong quarter in terms of sales activities. We entered the third quarter with our services backlog at $4.1 billion, up 7% sequentially, driven by some key contract wins. We also continue to execute on our vertical go to market approach, which I will discuss shortly.

The progress we've made on the cost cutting front, along with our ongoing shift to a more asset-light business model has reduced our capital expenditure needs and led to significant improvements in our cash flow. This resulted in an $87 million increase in operating cash flow in the third quarter, $106 million increase in free cash flow, and $105 million increase in adjusted free cash flow, all on a year-over-year basis.

This was our second consecutive quarter of positive free cash flow and our fourth consecutive quarter of positive operating cash flow and adjusted free cash flow. Improving the performance of our services business has been a top priority, and we are making ongoing efforts to improve the margins of that business.

This quarter, services gross margin went down 60 basis points year over year with nearly two-thirds of this attributable to some favorable context in 2015 within the Federal business. Excluding the impact of these contracts, and ongoing investments in additional solutions capabilities, gross margin for the remaining services business would have been up this quarter on a year-over-year basis.

Services operating profit margin came in at 2.6%, which was down year over year, also due to the factor that impacted gross margins that I just mentioned. As well as including investments in additional solutions capabilities at the SG&A level. Although down year over year, services operating margin was up 50 basis points sequentially, with the Q3 being the most profitable quarter this year for our services business at the operating profit level.

We believe that we are evolving that business to position it to expand in profitability. We continue to see stability in our technology business. In the third quarter, technology revenues were better than we anticipated being roughly flat year over year.

Likewise, higher revenues have helped drive robust operating margins of 32% in this business relative to 21% in Q3 of 2015. Lastly, we continue to focus on improving our overall revenue tracks. This quarter, all sectors were relatively stable on a year-over-year basis in terms of revenue with the exception of financial services, which was down year over year due in large part to our weaker, as expected, technology quarter than the year ago period.

Based on all of this, we are reaffirming our full-year guidance for revenues, non-GAAP operating profit margin and adjusted free cash flow. And Janet will go through the detailed numbers shortly.

Turning to slide 5, I would like to highlight in a bit more detail some of the positive trends we saw this quarter with respect to sales. On a year to date basis, our total contract value, or TCV, which represents the estimated total contractual revenue related to side contracts, was up 22% versus the comparable period in the prior year. Additionally, services backlog ended the quarter up 7%, as I mentioned, against the second quarter of this year.

In terms of new business pipeline which includes both new logos and new scope work for the year to date period, we saw growth of 6.5% relative to the comparable period last year. With that backdrop, I will now discuss in more detail some of the trends we've seen in each sector over the last quarter, along with some key accomplishments highlighting our continued focus in our vertical go-to-market strategy and the traction we've begun to see with it.

In our Federal business, which represented 20% of our total revenues, we continued to see stability and have demonstrated a solid track record over the last two years. Growth this quarter was modest. The Federal Services backlog, however, has shown good growth since the beginning of the year, which indicates forward momentum going into the next government spending cycle.

One example of an important win within the Federal business for us this quarter was a re-compete for a contract with the US Customs And Border Protection Agency to modernize that agency's technology for identifying people and vehicles entering into and exiting the United States. Our public sector accounted for 27% of total revenue this year. Revenue for the sector was relatively flat on a year-over-year basis.

However, we saw number of positive achievements. As an example of how we're developing a product or service offering from one government agency and then finding ways to deploy a similar solution more broadly, this quarter we announced the launch of Digital Investigator, which is a crime investigation system enabling law enforcement agencies to share critical crime investigation information across applications at agency [boundaries].

While we initially developed this offering with United Kingdom police agencies under the name of Holmes, which we spoke about on last quarter's call, we have now developed a version that can be sold widely around the world. We also saw a number of significant wins this quarter within the public sector. A notable example was a contract we signed with the Philippine Statistics Authority to design and operate phase 2 of it's civil registration system modernization project.

This contract was a renewal that required significant innovation. Under the 12 year contract, which is the largest contract we entered into this quarter, Unisys will deliver digital government services to modernize the civil registry systems and manage the end-to-end process to originate, authenticate, secure, and issue civil registry documents such as birth certificates to citizens.

Our commercial sector represented 32% of our total revenue this quarter. Revenue for the sector was down 2% this quarter compared to the same period last year. We have seen positive signs relating to this business for the third quarter, including a contract with TravelSky, which is the leading provider of information technology solutions for China's aviation and travel industry, to provide expanded capacity for their registration and distribution systems. This work will build on the momentum of our recent success with TravelSky toward migrating their passenger sales and service applications to our Air Corps next generation passenger system and fits within our travel and transportation industry initiative.

Our financial services sector contributed 21% of our total revenue this quarter. That sector saw revenue decline 27% year over year, driven largely by expected declines in the technology portion of the business, due to a tough compare with the third quarter of 2015.

That quarter we had the benefit of a large contract. Despite the decline this quarter, we saw a number of positive developments. As we recently announced, our appointment manager, or AM Solution, for financial services institutions is now integrated with Stealth and available via the Microsoft Azure public cloud.

AM is used by banks and building societies as a new cloud delivery model enables pay-for-use billing and immediate access and availability of the solution, allowing for greater agility at a reduced cost. Within financial services, we announced a number of key wins in the quarter, including growing our relationship with Prudential PLC, a British multinational life insurance and financial services company headquartered in London. In addition to Prudential's use of our clear forward technology to support its life and pensions business, Unisys is now also providing a fast automated disaster recovery solution to ensure uninterrupted service.

I would like to provide an update on some of the progress we are making in EMEA, which has continued to be challenged from a revenue and profitability standpoint. Excluding EMEA, operating margin for the rest of the Company would've been up year over year during the quarter. As expected, revenue in this region has continued to decline as we have consciously exited various countries and contracts consistent with the strategy we have previously let out.

I mentioned our new leadership team in EMEA at our last quarterly call. That team led by Tom Higgins, who joined us in February, has made significant strides. As part of our move to a new operating model in Europe, we reorganized our business toward a regionalized hub model supported by regional client services and delivery teams across EMEA. In conjunction with this, we announced the divestiture of our Italian SAP practice last week. The SAP practice in Italy was not leverageable with our new operating model due to client preferences to be served in-country, unlike our SAP practice in Spain which is leverageable with our global operations. Our core Italian business remains unchanged.

Secondly, we have started negotiations for a new social plan in France as part of a series of contemplated actions in the region to improve profitability. Turning now to our focus on security, we are continuing to build leading security protocols into all of our offerings, not just those specifically targeted as security offerings. With respect to our dedicated security offerings, we have some significant advancement. We see industry recognition for Unisys Stealth as a leading edge technology continue to grow.

One recent example of this was an ethical hacking competition, in which roughly 100 contestants, including skilled professionals from the FBI, the Army National Guard and other intelligence community experts, with advisers from the NSA acting as coaches attempted to access Stealth-protected data residing on a workstation connected to a public network. The Stealth-protected data was untouched throughout the contest, which indicates the effectiveness of the product's use of micro segmentation and encryption to protect critical data. Although revenue generated by Stealth is still small, we continue to be encouraged about its prospects based on positive proof points for its value proposition such as this event, and the certifications we announced last quarter.

Additional examples of positive proof points for the quarter include growth in the number of corporate clients using Stealth by 34% year over year. Stealth revenue up 84% year over year and the qualified pipeline for Stealth increasing 10 times versus the third quarter of 2015. Stealth is only one of our security offerings, and we continue to focus on security, not only as a core part of our business but in specific security-related offerings.

With respect to some of those I refer you to our press releases issued last week. Finally, we recently announced a new release of our ClearPath Forward software. This new release makes it easier and more efficient for IT organizations to secure critical computing infrastructure, modernize their environments and transform their data centers into engines for digital business. The release has more than 30 new security features. With that, I will turn over this next section to Janet Haugen, our CFO.

Thanks, Peter. Hello everyone and thanks for joining us today. In my comments today I will provide comparisons on a GAAP and non-GAAP basis. The non-GAAP results exclude pension and cost reduction charges.

Please turn to slide 7 for a discussion of our third quarter 2016 financial results, which was a good cash flow quarter for us. Revenue tracked in line with expectations based on our full-year guidance. We reported revenue of $683 million in the quarter, which was down 7.6% on a reported basis year over year, or down 6% on a constant currency basis.

Third quarter 2016 non-GAAP operating profit margin was 6.7%, down 50 basis points year over year. As Peter mentioned, the decline is coming from the services business, where operating margin percent was down year over year but up sequentially. Technology margins increased year over year. Diluted loss per share was $0.56 versus a diluted loss per share of $0.19 in the prior year period.

Non-GAAP earnings - diluted earnings per share was $0.41, relative to $0.67 a year ago. Shares used to calculate third quarter and year-to-date GAAP and non-GAAP diluted earnings per share are shown in schedule B in the appendix to the presentation accompanying our comments today.

Moving to cash flow, the third quarter was highlighted by continued improvement in cash flow generated by the Company. In the third quarter of 2016, we generated $43 million of operating cash flow in the quarter compared to an operating cash usage of $44 million in the same period last year. Operating cash flow also improved sequentially. Adjusted free cash flow, which is the free cash flow, generated from the business excluding the impact of cash payments for our cost reduction program and for pension funding, increased $105 million to $69 million in 3Q 2016 compared to a usage of $36 million in 3Q 2015. Adjusted free cash flow also improved sequentially.

Turning to slide 8, our year-to-date trends highlight the progress we have made throughout the year in terms of improving profitability and cash flow. As we anticipated, revenue was down on a year-to-date basis. However, operating profit margin is up 380 basis points relative to the year-to-date period last year.

Non-GAAP operating profit margin is up to 7% for the year to date period, which is a 340 basis points increase relative to the same period last year. Operating cash flow of $101 million was generated, compared to an operating cash flow usage of $109 million during the same year-to-date period last year. Lastly, adjusted free cash flow for the year-to-date period this year is up to $161 million, representing a significant improvement from the adjusted cash flow usage of $123 million for the same period last year.

Turning to slide 9 for an overview of our revenue in the third quarter of 2016, this chart shows a breakdown of revenue based on segment, geography, sector, and revenue type. I will talk about the segment trends shortly, but one thing I will highlight here is that as expected, technology this quarter accounted for a smaller portion of revenue than last quarter.

As a result, our revenue from recurring services represents a higher portion of third quarter 2016 revenue. Additionally, as Peter discussed we're seeing traction with our vertical go to market strategy such as improvement in our contract signing with TCV, or total contract value up year over year and services backlog up sequentially. Of the $4.1 billion we had in services backlog as of the end of the third quarter, approximately $538 million is expected to convert into fourth quarter 2016 services revenue.

Turning now to revenue by geographic region and sector on slide 10. As we look at the breakdown by geographic region, year-over-year US and Canada revenue was down 3%, which includes flat revenue from our US Federal group. Asia-Pacific was roughly flat year over year on a reported basis, but down slightly when measured on a constant currency basis. Revenue from EMEA declined 15%, or 9% on a constant currency basis. This was mostly driven by declines in services, as the tech revenue for EMEA was roughly flat.

As we have mentioned on earlier calls, we have been repositioning our EMEA business and as Peter mentioned, we recently announced the divestiture of our SAP services practice in Italy, which had approximately $8.5 million in annual revenue and 70 employees. This divestiture is expected to close in the fourth quarter. Latin America was down 17% driven by lower technology revenue in that region along with a slight decline in services revenue.

On the sector breakdown, all sectors with the exception of financial services were relatively stable this quarter on a year-over-year basis. Financial services saw a revenue decline of 27% this quarter on lower technology revenue coming from software license renewal. Additionally, we had lower cloud and infrastructure services revenue year over year within our financial services sector.

Moving on to our segment results, please turn to slide 11. Services revenue declined 8% in the third quarter, largely attributable to lower cloud and infrastructure revenue within our financial services sector and public sector. Services gross margins at 16.7% was consistent with the second quarter of 2016 despite the lower services revenue in the quarter. Year-over-year services gross margin was down 60 basis points. As Peter mentioned, this was largely attributable to the Federal business which was helped in the third quarter of 2015 by some higher margin projects.

Additionally, we continue to invest in solutions capability which impacts both the gross and operating margin lines. Excluding these two impacts, services gross margin would have been up year over year for the quarter.

Services operating margin, although impacted on the year-over-year comparisons by the gross and portfolio operating expense investment, increased 50 basis points sequentially representing the strongest quarter this year. Our technology business had another nice ClearPath Forward quarter, yielding good year- to-date performance. As I discussed at the end of the second quarter, we expect 2016 to have a different seasonal pattern than recent years. We anticipate first half 2016 technology revenue to be slightly higher than the second half of 2016.

Slide 12 highlights the significant improvement we saw this quarter in cash flow. As a result of continued cost-cutting measures and our focus on contract renewal and extension profitability, we generated operating cash flow of $43 million, significantly improved over a cash flow usage of $44 million in the third quarter last year. This marks the fourth consecutive quarter of positive operating cash flow.

We also reduce our spending on capital expenditures for the quarter and for the full year. As we have discussed previously, we have been transitioning to a more asset like business model which contributed to lower CapEx again this quarter. The decline in CapEx, coupled with the higher operating cash flow, led the Company to generating $6 million of free cash flow versus a usage of $101 million in the third quarter of 2015.

For the full year, we currently anticipate CapEx around $160 million to $175 million. Additionally, we generated $69 million of adjusted free cash flow which is an increase of $105 million relative to the prior period. We ended the third quarter of 2016 with $443 million in cash.

I will now give a brief update on our cost reduction program. Please turn to slide 13. As we have discussed previously, in April of last year we announced a multi-year cost reduction program designed to create a more competitive cost structure and to rebalance our global skillset. This program was established with the goal of achieving $200 million of annualized run rate cost savings exiting 2016. Earlier in the year, we expanded the cost savings opportunity to include the possibility of an additional $30 million of annualized cost savings exiting 2017 while staying within our estimated charge of $300 million.

Through September 30, we have achieved $185 million against our $200 million goal in annualized savings exiting 2016. And we are on track to hit the $200 million. In the third quarter of 2016, we began to take action toward realizing the additional $30 million of annualized saving opportunity exiting 2017. Our third quarter 2016 results include a $31.9 million pretax cost reduction charge, of which approximately $20 million relates to a portion of the additional 2017 savings opportunity.

Including the third quarter of cost reduction charge, we have recognized $188 million of the estimated $300 million in cost reduction charges since the beginning of the program. We anticipate $15 million to $20 million of cost reduction charges in the fourth quarter of 2016. The majority of the remaining charges we anticipate will be in 2017.

From a cash perspective, the cost reduction plan was estimated to require $280 million cash usage. Through September 30 we have used $121 million. We anticipate approximately $20 million of cash used in the fourth quarter of 2016. The remainder is currently estimated at requiring $80 million to $90 million of cash usage in 2017, $30 million to $35 million in 2018 and $15 million to $20 million in 2019.

Looking at some of our key year-to-date trends, we can see that these efforts are having a significant impact on our financial performance with non-GAAP operating profit margin up 340 basis points year-to-date relative to the corresponding year-to-date period last year. Additionally, year-to-date adjusted free cash flow is up $284 million versus the corresponding year-to-date period last year.

For an update on our pension liabilities please turn to slide 14. This chart has been updated to reflect the delay in adoption of the new mortality tables by the IRS. This had the impact of lowering required cash contributions for 2018. This is not a permanent elimination of those contributions, but rather distributes them over several years after 2018 to create a slightly smoother trend.

There are numerous factors that could impact required contributions in the future, both positively and negatively. The largest influences on our pension obligation continue to be asset returns and interest rates.

Slide 15, as we discussed last quarter, highlights our tax attributes as of December 31, 2015. This information is also found in our tax footnote in our 2015 annual financial statements. Before valuation reserves, we had $2.1 billion in deferred tax assets. Under GAAP, most of these tax attributes are fully reserved, as you can see on slide 15, resulting in net deferred tax assets of $114 million on the December 31, 2015 balance sheet.

If Unisys generates future taxable incomes in jurisdictions where we have net operating loss carried forward and other favorable tax benefits, and depending on the timing of that taxable income, the gross value of up to $2.1 billion could be available to reduce or eliminate the related income tax. As we look at the remainder of this year, we are reaffirming our full-year guidance for 2016 on revenue at $2.775 billion to $2.875 billion.

On non-GAAP operating profit margin at 7% to 8%, although guiding toward the low end of that range consistent with our commentary at the end of the second quarter and on adjusted free cash flow at $160 million to $200 million. With that, I will turn the call back to Peter.

Thank you, Janet. I also want to thank you for your extraordinary service to Unisys in the past 20 years. I would like to remind everyone that Inder Singh, who will take over as CFO upon Janet's retirement at the end of this month is also on the call. So Inder, Janet, and I will all handle the Q&A. Operator, please open the line.

(Operator Instructions)

James Friedman, Susquehanna.

Hello. Janet, let me echo those congratulations. You have been a great leader for this Company.

Thanks, Jamie.

Thanks for being on the call.

My pleasure. But Janet you are not off the hook yet, though, I want to ask you a couple of things. First about the technology revenue that was contemplated? Technology did seem to over index in the first nine months? My math suggested you did $207 million in the first half, you did $289 million year to date, your original guide was $345 million to $365 million? I realize it was a while ago.

But that would imply that you did between 56% and 60% between the low-end and high-end year to date? You are saying it will be more -- it sounded like it would be slightly front end loaded, like first-half loaded? I'm trying to figure out, is there potential upward revision of that original $345 million to $365 million so we can figure out where to land the Q4?

Sure Jamie, and you are right to recognize the fact that the technology business has had a good third quarter and a good year to date result. We did anticipate different seasonality in 2016 than we have seen previously. As we look at this year end, we did $206 million in the first half of 2016 and we expect the second half to be slightly lower than that, maybe a 51% to 49% split, roughly.

When you look at that number, that is another increase in our expectations for the technology business and what we talked about at the end of the second quarter on our earnings call. So it has been a good performance by the technology business. Same client base, same license renewal but we think that its reflective of client receptivity to the enhancements in the ClearPath Forward product line that Peter mentioned.

Got it. I just want to ask the same about services? So you - I think you had said $538 million of the services backlog would be recognized in the fourth quarter? But this quarter, if I got my numbers right, it was $537 million in the Q2 for the Q3, which implied it was a little bit more than 11% sell and bill? I'm trying to basically get the same comment on the Q4 relative to where we should be landing in services?

Sure. So when you look at the full-year for services revenue, we have got it on what -- and we still reaffirmed our guidance on total revenue. As you look at that services backlog, it has been converted in -- the opening backlog that converted in the third quarter. Then the opening backlog that converted -- that will expect to convert into the fourth quarter.

You are right that in the third quarter we saw a little bit more of cell and bill in the quarter. We think that is a trend that has the potential to continue into the fourth quarter as well.

Okay. Got it. I don't want to monopolize the call but maybe I could sneak in one more. You were free cash flow positive -- not adjusted cash flow, but if I'm calculating this right, you were actually free cash flow unadjusted positive $6 million in Q3?

Absolutely.

Okay. In addition, you made some comments and you were kind of going fast there, Janet, about the out year cash considerations? I'm sorry, can I ask you to repeat that, the $80 million and then the $30 million to $35 million?

You are referring to the cost reduction charges, Jamie? Previously when we talked about the cost reduction program we had said that the costs, the cash usage would end about midyear 2017. Based upon us looking at the remaining actions which are, as we've talked about before, predominantly in EMEA but there are actions elsewhere. We have extended that time period, where that $280 million of cash would be used.

So through September 30 we have used $121 million. We anticipate another $20 million in the fourth quarter of 2016, bringing up the number that would make it $141 million of cash usage through the end of 2016. 2017 is $80 million to $90 million, 2018; $30 million to $35 million. And then the remaining portion of $15 million to $20 million would be in 2019. So previously it was much more weighted to 2017.

We think we have a plan. The beginning of the plan we took a charge for it this quarter that would extend those payments out across multiple years as opposed to being weighted in 2017.

Got it. If I could just sneak in one more? Peter, I was wondering in terms of - first of - all slide 9 is very helpful -- Federal, Financial, Public Sector, Commercial? In terms of what your expectations are going forward, is there anything to call out financials in terms of year-over-year comp? Do you expect that to be stabilized as we move forward?

The financial services were really -- the year on year decline is over really the result of a large technology sale in the quarter a year ago. So was really a one time difficult comparable. Not indicative of our confidence in financial services as a sector at all. In fact, you saw me talk about one of the AM product we've now put on Microsoft Azure.

We're rolling out an omni channel product of banks. We do work with about 450 banks and financial institutions around the world. Many of those use our underlying technology. ClearPath Forward and applications built on that. They're looking to move into omni channel capabilities.

We're the best people to give them a real next generation digital omni channel solution. That solution, we're actually working on finishing and we will roll it out toward the end of the fourth quarter of this year. That's not anything we've done before.

We've not gone to those 450 clients and said, we can get you right up to the customer facing funds with the next generation omni channel solution that integrates fully into your back end core banking system. We're actually quite energetic about financial services and the ability to attract new kinds of revenues from those clients as well as new clients.

Got it. Good job. Appreciate the color.

Joan Tom, Sidoti & Company

Good evening. A couple of questions here. Obviously the total contract value is increased as well as the sequential backlog increased? Very encouraging especially talking about reverting the trend that we have seen in the past couple quarters.

Peter, I'm just wondering, is it too early to take into consideration, with all the things you are doing, think about how 2017 is going to be like on revenue as well as service margin?

Yes, I think it is a little too early, Joan. Inder, who is changing hats and moving over to the CFO role in November has been really busy in his Chief Strategy Officer hat that he has had now and getting us ready for looking at next year. We're not ready to do that yet. We have not yet taken that to our Board for review, but we're getting close.

So we will get back to you on that on the next call, obviously. We do expect, as we started this year to give you guys guidance on cash flow, on revenue and on profitability. So that will be coming in the next call.

With respect to how does revenue play out and what the relationship between revenue and TCV -- it's not an exact science or exact relationship. So just to talk about TCV for a minute. The reason we gave you the 22% year to date increase over last year was because it is pretty lumpy. Sales have always been lumpy. You may recall in the first quarter, that we had a down quarter against the last year and my expectation then was that in the last nine months of the year, we would outsell TCV for the last nine months.

So I did not actually say we were going to exceed last year, I just said I thought we could have a better performing last nine months. And I wasn't 100% sure that we would be able to fill the gap. Well, we're on track to fill the gap. And so for the first nine months we are now ahead of where we were for the first nine months of last year.

So I think that is very strong in terms of how we look at our competitiveness. In the quarter, if you did the math, you would find that we were, our TCV in the quarter was up 92% over the quarter before. That is just one of those things. It comes and it goes.

The more important numbers of the annual numbers or in this case the nine-month numbers that we have. As we look at those nine-month numbers and the 22%, the other thing that is important to me is we kind of divide sales between technology sales for which we get one-time revenue, renewals, and then what we call new business. New business is a combination of new logos or brand-new clients and new scope at existing clients.

Remember, we have got well over 1,500 really wonderful clients. That is very fertile ground in addition to the new logos. If we look at the nine-month numbers, the year to date numbers, and we say okay, your TCV is up 22% year-over-year, where's that coming from in terms of each of these elements -- technology, renewals and new business.

The technology sales are up about 10%, the renewals are up 36% and the new business is up 7%. So the new business number, obviously is encouraging to see that growing, but depending on the length of the contract, depending on how long it takes to implement, you don't necessarily see that revenue for a while. The renewal number at 36% is certainly more than encouraging.

But there again, it is not a one for one. I mentioned one of the contracts we signed this year in the Philippines is a 12 year contract. You just have to take them as they go. I do believe that this increase in TCV is ratification that we are more than relevant in the marketplace and we are signing a bunch of good business. So how does that translate into revenue next year? We'll have to see.

This Company has had declining revenue for a number of years. The comparables are always difficult when you are in a situation like we are where we are first focusing on margins, and then cash flow and then revenues. We want to make sure that as we are signing new business, we're doing it in a disciplined way.

I think I said on an earlier call something to the effect of we were hopeful that sometime during next year we would, if you will, flatten out. I think that is still reasonable, but if you think of it that way, that does not necessarily happen at the beginning of the year and I don't think it will. So revenues for the entire year will probably be a little lower than this year. But at the same time, I do not expect revenue decline next year at the extent that we had it this year. So I think we are making progress on the revenue side.

Got it, got it. Thank you for the long answer. That's very helpful. In terms of visibility concern, I understand it is difficult to really give guidance for this for next year, but I'm just wondering for the technology revenue obviously we talked about it is related to the renewal timetable of certain customers?

How's it looking compared to this year, next year versus this year? And on top of that you obviously have a very nice kicker from the enhancement of the ClearPath Forward.

I think we talk a lot about where we need to go as a Company. We talk a lot about the services, numbers and getting the services margins up. It takes a lot of our focus on these calls, Joan, and it should. Because ultimately, if were going to get to where we want to be from a financial standpoint, we need to continue to increase those services numbers in both the gross and the operating margins.

But sometimes we forget to talk about the technology business and where that fits. Technology business is very important for this Company. It has historically been the cash generator for the Company and the margin generator for the Company. One of the things I think we have done a good job of, and Tarek El-Sadany, who came in last June to lead that team and the whole technology team has really done a good job of looking at the business and creating a really exciting roadmap for the ClearPath Forward line of products.

We've gone in that line of products from -- not only to an x86 Intel system, but to a software-only system and we released our very first version of software-only products earlier this year and we're continuing to release more. So we are really bringing that into a cloud environment. What software-only means is that system can operate on top of a private cloud environment and, frankly, we have tested it on bare metal.

We're really moving that into the next generation of cloud data center environments. As we continue to bring the rest of the products at there, we expect to really extend the utility of that system much longer than perhaps we did before. In fact, when you think of that system as the only system that has never been successfully hacked, it never had data come out of it that anybody has ever found, we think that in a cloud environment with cloud economics, that gets pretty exciting.

I think we are doing a better job of making our technology business more fundamentally healthy for a longer period of time. We used to talk in terms of percentage of clients leaving the platform. If you go back a number of years, there was double digits. If you go back only two years, in fact if you go back the last four or five years, it was like 7%.

It is now down to 2.6%. So we are really doing a terrific job and the team is doing a terrific job really stabilizing the business. So the thesis here is you stabilize that business, you continue to have some run off but then you have the other technology products coming online, like Stealth. That continues to provide a healthy source of cash flow, a healthy source of revenue, and gives you time to really get the services business where we want it to be. That is what we're doing.

Good, good, good. Thank you. Peter, another question regarding the investments that you guys are making right now. That margin in the near term? I'm just wondering is it a way to measure the progress of those investments in terms of revenue growth and margin expansion? Just want to get some color there? I also have a follow-up on the charges and just want to make sure I get it right?

Yes, well, the answer is I think there is -- it's probably not anything I have sought out Joan to give you or even Inder and Janet on this call. When I mentioned it on the last call with respect to some of those initiatives and investments -- its ramping up on our advisory consulting skills which are the point of th spear for our new sales. It is ramping up on our subject matter experts in the specific identified verticals.

Its new offerings, such as the omni channel offering in financial services, such as the offerings we are bringing online in life sciences around the regulatory requirements for those companies with respect to shipping of pharmaceuticals. So there is a whole series of very specific offerings that we are bringing online in addition to the people skills of the advisory and consultative world. You might say, it sounds like a lot of stuff. It's actually a lot less stuff.

Actually, as we have gone to the inventory of services we offer and the inventory of technology products we offer. We are cutting them down and making tough choices to say what we're going to do we're going to be the best at. So actually we're doing less but hopefully we're doing it better.

One of the areas we don't always talk about but is really important our Company is the end user workspace area. At represents a little over 30% of our revenue as a Company and we are making significant investments going forward in modernizing that offering and we are excited about this. So how do we get all of that into measuring ROI for you? We will work on that.

Okay. All right. Thank you for the color. Janet, related to the charge, the cash charges that you talked about over the next couple years? I just want to understand the thought process behind that - like incurring more charges?

It just seems to me that the cost saving -- additional cost savings is an extra $30 million? But then you are looking to maybe spend an extra $80 million to $100 million in cash charges? So I just want to understand the thought process behind this. Is it because you guys are doing a little bit better on cash flow. You guys actually can afford to do that. You might as well get it all done and set yourself up for the next couple of years?

So Joan, let me just confirm that the amounts of the overall charge of $300 million over the program is the exact same amount that we had outlined at the beginning of the program when we launched it in April. Additionally, the $280 million in cash usage is exactly the same amount of cash usage that we had estimated at the announcement of the program back in 2015.

The $30 million of these additional savings that we've talked about on prior calls that represent $80 million of the charge and almost a similar amount of cash related to our, predominantly to our EMEA area, where we said that we're going to continue to work to try to find the most cost-effective ways to do that. But we believe, based upon where we are performing and where we are performing against cash that we can and we did -- we started, we began, two steps with regard to that additional $30 million in savings.

One is a smaller element to it, its the divestiture of our Italian SAP practice. That has 70 employees and about $8.5 million of annual revenue. But the second one that Peter covered was to start the discussions in France with regards to getting our cost base down in France and improving the overall EMEA profitability from doing that.

We believe for what we acted on, which was a portion of this $30 million in savings and the portion of that $80 million in costs that the return is there. It is right for us from a momentum standpoint, and important to take at this time.

Okay. Thank you.

Joan. Thank you very much.

Frank Atkins, SunTrust

Thanks for taking my questions. Congratulations to Janet as well. I wanted to ask first about capital structure? What gives you confidence as you have flexibility as you look forward to the next year to meet obligations, both debt and pension? Can you give is more granularity in terms of what changes you are making to effect the capital intensity of the model?

Frank, thanks for the question. I will start and then hand over to Janet for that one. One of the things we did earlier this year was do a convertible offering and the reason for that was that we did not want to put ourselves in a position where we had 2017s coming due without making sure we had adequate provision for liquidity on that.

That was a very important thing that we did. That does give us confidence around the 2017s. As I said on other calls, and Janet has said on other calls, going out long-term on a multi-year basis, we are continuing to look at what is the right capital structure for us, what should be the right mix and what should be the components we have.

We will continue to do that. Continue to look at making sure that we do that at the right terms and in the right time with the Company. With that I will hand it over to Janet.

I would say that in addition to what Peter mentioned with regard to having raised the proceeds to help and to provide the funding for us to address the maturities in 2017, we do have $443 million in cash. We expect to improve that balance over the next couple quarters before that maturity comes due. And I would say secondarily, the item that we mentioned around the delay in the adoption of the mortality table by the IRS, has moved the pension -- has reduced the near-term pension requirement.

We have considered all of that, and in looking at the capital structures as Peter mentioned there are longer term capital needs for the Company that need to be addressed, but in the near-term we have the positive benefit of the reduced pension contribution. We have the positive benefit that we demonstrated this quarter and reducing the amount of CapEx intensity of the business -- we were originally guiding to $200 million, we've brought that number down.

And we think that is a number that could potentially stay down for the future. And having raised the funds and having a cash balance of $443 million, we think that puts us in a good position going forward in the near-term.

Okay great. That's helpful. I wanted to drill down into some of the components of the services side? Can you give us any color? I know there a couple different buckets in the cloud and infrastructure group? Any different dynamics you're seeing there would be helpful?

Sure. In the cloud and infrastructure area as we've talked about before, it's the largest component of that is in the end user area. The next area is data center, which we've talked about it predominantly in the government and public sector. In the comments we made today we said that the two sectors of that we've seen in decline and the client and cloud infrastructure within the financial services and then secondarily in public sector.

In financial services area those are due to client renewals at lower rates than what we have had before. In the public sector, we think that is just renewal timing that we need to continue to build a pipeline to get the return to growth in those areas. Fundamentally, it is in the end user area in the financial services and in the data center area in the public sector space.

Okay great. That's helpful. Quickly on the BPO side? What are you seeing on that? Is that driven by a specific region or exposure there?

Frank, BPO for us is about 7% of revenue and it has been for a while in that range. As we have -- the current set of BPO offerings are -- is good business for us we like those businesses geographically. They are in the UK, in the Netherlands, Malaysia, Philippines. They are in Taiwan and they are largely either in financial services or in government practice.

The largest of those actually in the Philippines deal that we renewed this year -- or this quarter. But as we evolve and as we go to more of this vertical industry-led offering mix, those BPO offerings really began to slide into our core offering mix. And what you are going to see from us going forward is really a focus on BPO that is strategic. It's really going to be strategic to our financial services go to market.

It's going to be strategic to our life sciences and is going to be strategic to the law, justice and border protection initiatives. So you will see the BPO business evolve over time. But it is sitting at about 7%. I would not expect it to be dramatically different over time.

The one area that is going to change we think over time will be our 51% interest in our UK BPO subsidiary called IPSL. Only because that subsidiary -- the majority of its work is check processing. And although it has moved into optical or digital check processing, you know paper check processing is still a more labor-intensive, higher revenue-generating business.

That venture by the way, has 70% market share in the UK. We have wonderful partners -- some of the largest banks in the world. But at the end of the day, even us and our largest bank partners cannot make check processing grow. We think that ultimately over time that will decline. So that is part of the BPO business we expect to be reduced over time.

Okay great. Last one for me. Can you talk a little bit about the people side of the business, in terms of what you are doing to make sure you are tracking and keeping the right people as well as getting the skill sets you need for some of the work that you are doing in some of these growth areas?

Yes, absolutely. Perhaps to get the numbers first, our low-cost headcount as a percentage for the Company actually tracked up this quarter to about 38% but it was at 37% the quarter before so that is demonstrably different. It is lower for us in you will see in some of our competitors, and that is because of the higher proportion of government work that we do, both for the US Federal government at 20% of revenues and for other governments around the world which represent another 27% of our business.

That is one of the reasons why you see a slightly lower number there in terms of the onshore - offshore mix. In terms of what we're doing to both attract and retain great people, we have launched a number of programs around training and a career development here that frankly I think are leading edge. Our leadership program, which we're continuing to expand, is something that there's just a line out the door for people to attend.

So I get an opportunity to speak to pretty much every one of those classes and it is terrific to see the enthusiasm we're seeing around training and development. In addition to that, we're just beginning to do more fun stuff. We have got a competition in India now where our Australian team has been doing a 10K run. They have been doing it in Australia with the Australian team.

They have now invited the Indian team to send their best to that competition next year in Australia. We're going to go head-to-head between the Aussies and the Indian nationals in that. That's just great. As you are seeing the team work on a leverage basis, and really an integrated basis, around the world, you're seeing interaction between Australia, India and other places.

We're doing a heart walk in the next several weeks in the Philadelphia area and we are really excited about that. We are working really hard to make this a more compelling place to work. At the end of the day, things like the heart walk and things like the 10K runs are interesting. What will be most compelling is the fact that our work is getting more interesting.

The fact that we're doing really leading, cutting edge work in India around Azure and AWS. The fact that our teams around the world that are doing the technology processing and the technology software development, we're migrating that ClearPath Forward to a software-only system. That is an incredible engineering feat.

The folks that are doing that, I think more than anything are getting really excited about what they're seeing. So, I hope that answers your question. Happy to give you, Frank, more deal details but turnover rates, et cetera. But I think all that is pretty stable. We're now in the let's make this more fun and interesting.

Okay. Great. Thanks so much.

You're welcome. With that, I want to thank everyone for their questions. Reiterate that this has been a very busy quarter. In fact it has been a very busy nine months to date.

We look forward to having all of you on our next quarterly call. We will find, as we continue to post more and more information on our investor relations site. We hope that is of more interest to you. We hope you like our new site in general.

The entire website has been refreshed in the past quarter. So we hope you spend a little more time there. And Courtney and our investor relations function is also very happy to go into more detail with you on any of the subjects we have talked about today.

With that, thank you. Look forward to speaking with you on our next call.

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