Unisys Corp (UIS) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to the Unisys Corporation First Quarter 2018 Earnings Conference Call.

(Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Courtney Holben, Vice President of Investor Relations.

Please go ahead.

Thank you, operator.

Good afternoon, everyone.

This is Courtney Holben, Vice President of Investor Relations.

Thank you for joining us.

Earlier today, Unisys released its first quarter 2018 financial results.

I am joined this afternoon to discuss those results by: Peter Altabef, our Chairman, President and CEO; and Inder Singh, our CFO.

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 the presentation slides that we will be using this afternoon to guide our discussion as well as other information relating to our full year and fourth quarter performance on our Investor website, which we encourage you to visit.

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 the related GAAP measures, and we've provided reconciliations 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 operations and that can make its profitability and liquidity results difficult to compare to prior periods, anticipated future periods or to its competitor's results.

These items consist of pension and cost reduction and other expense.

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 use of supplemental presentation of its results that exclude 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 to other companies in our industry, non-GAAP operating profit, non-GAAP diluted earnings per share, free cash flow and adjusted free cash flow, EBITDA and adjusted EBITDA in constant currency.

In addition, this year, we will be reporting non-GAAP adjusted revenue and related measures as a result of the adoption of the new revenue recognition rules under ASC 606 to exclude revenue that had previously been recorded in 2017 under ASC 605.

For more information regarding these adjustments, please see our earnings release and our Form 10-Q for the quarter.

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 FD.

And finally, I'd like to remind you that all forward-looking statements made during this conference call are subject to various risks and uncertainties that could cause 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 along with other materials I mentioned earlier on the Investor website.

And now, I'd like to turn the call over to Peter.

Thank you, Courtney, and thank you all for joining us today to discuss our first quarter financial results.

We had a strong start to the year.

I'll begin by highlighting some of our key accomplishments and will provide more detail throughout my remarks.

Total revenue grew 6.6% year-over-year for the first quarter.

This was helped by some required accounting changes that Inder will describe in more detail.

Adjusting to remove the onetime benefit of previously recorded revenue required under the accounting changes, total company non-GAAP adjusted revenue was down 1.4% year-over-year.

I would remind you that we face a difficult year-over-year compare due to a contract renegotiation that helped revenue and profitability in the first quarter last year.

We also continue to see momentum within TCV, or total contract value, and ACV, or annual contract value.

Focus industry revenue grew approximately 1% year-over-year, and services revenue within those industries grew 3.6% year-over-year.

We believe all this marks continued progress in support of using our industry go-to-market strategy.

Another goal has been to improve the consistency in our annual technology revenue.

In the first quarter, this business saw revenue up 76.6% year-over-year, helped by changes related to the new required accounting policies I mentioned.

Non-GAAP adjusted technology revenue, which removes the impact of those accounting changes, was up 9.7% year-over-year, marking the third consecutive quarter of growth in this segment.

Our go-to-market efforts continue to benefit from our focus on security as a differentiator, which helped us win several key contracts this quarter.

With respect to Stealth specifically, TCV and ACV in the first quarter were up more than 200% versus the prior-year period, and we saw a strong increase in win rate.

As you know, Stealth is just one component of our security offerings, and we saw 63% year-over-year growth in the pipeline for security overall.

With respect to our ongoing efforts to improve profitability, non-GAAP operating margin expanded 60 basis points year-over-year to 7.2%.

Adjusted EBITDA margins expanded 130 basis points year-over-year to 14.2%.

This quarter was -- oh, excuse me.

To further illustrate our go-to-market progress, please turn to Slide 5. In the first quarter, total TCV more than doubled year-over-year to $1.4 billion.

A new business TCV, which includes new scope and new logo, also more than doubled year-over-year to $641 million.

During the quarter, we signed the largest new logo contract in over a decade.

Even excluding that contract, TCV still would have been up more than 75% year-over-year.

Total company ACV was $418 million for the first quarter, up 136% year-over-year.

New business ACV was $121 million, up 99% year-over-year.

This quarter was an especially strong one for TCV and ACV, and we don't expect to repeat this performance.

However, we do expect to see continued services backlog momentum over the rest of the year.

Our total pipeline grew 30% year-over-year to $13.8 billion at the end of the first quarter, and our new business pipeline grew 47.5% year-over-year to $11.9 billion.

As I noted, our security pipeline grew 63% year-over-year to over $640 million.

Of course, as we said in the past, not all opportunities in our pipeline will translate into revenue, but pipeline is a leading indicator that we look to for growth.

In connection with this, we also look to win rate, which was up 18 points year-over-year in the first quarter for the company overall.

Our pipeline for our newly launched or refreshed industry application products, such as Digital Investigator and Elevate and those related services, is approximately $685 million as of the first quarter.

And as I mentioned, we saw continued growth of focus area -- focus industry revenue which accounted for 47% of total revenue in the first quarter.

I noted in the Q&A portion of our last earnings call that social services would be added to our focus industries in 2018.

And these numbers, including the 2017 numbers used for comparison purposes, are reflective of that.

Based on all of this, we believe we're off to a strong start to the year.

As a result, we are reaffirming our full year guidance.

Inder will provide more color on this as well as on our financial results generally in a few minutes.

At the segment level, starting first with Services, we continue to see progress.

Last year, we began to discuss with you improvements to our ratio of full-time equivalents, or FTEs, to managed devices in our cloud and infrastructure services business.

In the first quarter of this year, we improved this ratio by 27% year-over-year.

This was achieved through standardization based on implementing automation and process and productivity improvements by our staff.

During 2018, we continue to evolve our approach with respect to automation and artificial intelligence and have programs in place to implement new software applications in our digital workplace services, including field engineering and service desk solutions, and we expect those to continue to show improvements throughout 2018.

We believe this advanced intelligent automation will allow us to improve our clients' experience, service quality and our competitive position, while also improving our cost to serve.

We have begun to see our various efficiency initiatives within services have an impact, and we wanted to share with you a new metric related to these initiatives.

In the first quarter of this year, our Unisys labor as a percent of revenue improved 70 basis points year-over-year to 39.5%.

We expect to see continued year-over-year improvement in this metric over the coming quarters.

We also saw strength in the first quarter in ClearPath Forward Services, with low double-digit annual revenue growth and gross margins roughly double those for services overall.

These offerings continue to account for a mid-single-digit percent of services revenue.

Leveraging our security and services expertise, we have developed new advisory services and solutions to help companies operationalize their security.

In the first quarter, we launched our advanced endpoint protection solution, which helps organizations protect against cyber threats using AI threat prevention tools to prevent malware attacks on endpoints.

The solution incorporates Unisys' consulting and managed security services as well as Cylance advanced threat prevention technology.

Moving to our Technology segment.

As I mentioned, revenue grew in the first quarter year-over-year as reported and on a non-GAAP adjusted basis in the first quarter.

Earlier in these remarks, I provided color on the progress we made on Stealth, with respect to new client wins, TCV and ACV.

We recently launched a new version of Stealth that extends micro-segmentation technology protection to purpose-built IoT devices.

We have also been using Stealth to differentiate our broader set of offerings.

This was the case with a recent contract win which we put out a press release on yesterday with TSA, or the Transportation Safety Administration in the United States, to secure, operate, maintain and protect screening equipment.

Stealth provided a differentiated cybersecurity solution and significantly lower cost to the client.

I'll now provide some color on our various sectors, beginning with U.S. Federal.

Our U.S. Federal sector saw revenue decline 2.6% for the quarter.

However, this was largely due to late budget appropriations, timing delays and inclement weather impacting cost-plus contracts.

These factors accounted for approximately 4 points of year-over-year revenue decline in the quarter.

Services backlog for this sector was up 20% year-over-year, which we believe is indicative of continuing momentum, and we feel good about growing our U.S. Federal business this year.

We recently signed a significant renewal and expansion contract with the U.S. Customs and Border Protection Agency to advance -- to utilize advanced targeting analytics to automatically identify and differentiate shipments or travelers that present a low risk appropriate for low-touch automated clearance and those that present a higher risk, requiring additional investigation or inspection.

Additionally, we signed a contract for Stealth with a defense agency to conduct a proof of concept in their production environment to enable mission users to securely share information with partners.

Our year-over-year revenue compare for the public sector was impacted by that contract renegotiation that helped Q1 last year.

However, even in light of that, non-GAAP adjusted revenue was down less than 2%.

During the quarter, we launched LineSight, marking the completion of our base tier of industry application products.

LineSight draws on our domain expertise and technology that we have developed over more than 15 years of helping protect borders around the world.

We are already in early discussions to implement the solution with governments in Asia Pacific, EMEA and Latin America.

We also had a substantial win with Australia's Department of Home Affairs, adding Stealth to help secure Australia's borders and facilitate the flow of legitimate travelers.

The solution uses advanced biometrics for travelers wishing to enter Australia to identify potential threats and accelerate the processing of nonthreatening travelers.

Our Commercial sector had a solid first quarter with year-over-year non-GAAP adjusted revenue growth of 2%.

We continue to expand previously launched industry application products such as the Digi-Pet module in our Digistics cargo solution.

This is a new solution designed to take the stress out of transporting pets in aircraft cargo holds by providing pet owners with the ability to monitor their pets via their personal devices such as smartphones.

We're already in talks with several air carriers to implement Digi-Pet.

Our Financial Services sector non-GAAP adjusted revenue was down 4% year-over-year due in part to the technology renewal cycle.

We continue to see positive receptivity to our Elevate omnichannel banking platform, including signing a contract during the quarter with a leading bank in Argentina to migrate to Elevate.

This solution includes a suite of applications supporting real-time transactions across all channels, including online, mobile and in-branch.

The solution will also help the bank to support and meet local regulatory needs.

Again, we feel good about the start of the quarter.

And with that, I'll turn things over to Inder.

Thanks, Peter.

Hello, everyone, and thank you for joining us today.

We're pleased with our results for the first quarter, which I'll discuss in detail shortly.

In my comments, I'll discuss both GAAP and non-GAAP adjusted results.

Moving now to the results for the first quarter, I'll begin by covering some key financial takeaways on Slide 7 and will then provide additional detail.

As Slide 7 shows, we executed strongly across multiple fronts on a GAAP and non-GAAP basis.

At the company level, Q1 revenue grew by 6.6% year-over-year.

Non-GAAP adjusted revenue was $655 million compared to $665 million a year ago, a decline of about 1.4% year-over-year.

As you will recall from our prior disclosure, our results a year ago were helped by a large services contract renegotiation that took place in the first quarter of 2017, making for a tougher comparison this quarter.

Operating margin was up 14.4%, up from 3.3% in Q1 last year.

Non-GAAP operating profit margin was 7.2%, up 60 basis points year-over-year.

Adjusted EBITDA margin was 14.2%, up 130 basis points year-over-year.

We are pleased that our prior cost reduction actions continue to contribute to ongoing profitability improvements.

Our backlog grew strongly to $4.7 billion, up 26% year-over-year and 10% sequentially.

This marks the second consecutive quarter now that we have seen year-over-year growth in services backlog.

It is also the third consecutive quarter of sequential growth in backlog.

Our Technology segment also had a strong start to the year.

Technology revenue was $139.9 million, up 76.6% year-over-year.

Non-GAAP adjusted technology revenue in Q1 was $86.9 million, up 9.7% year-over-year.

Technology operating profit margin was 54.7%, up nearly 40 percentage points year-over-year from 15% -- 15.4% in the first quarter of last year.

Non-GAAP adjusted technology operating margin more than doubled year-over-year to 29.9% from 15.4% last year.

Turning now to Slide 8. I already covered the revenue and margin trends, so I won't repeat those, although I will note that our total revenue was helped by currency this quarter.

Our GAAP net income was $40.6 million in the first quarter compared to a net loss of $32.7 million in the first quarter of last year.

Our Q1 earnings per share on a diluted basis was a positive $0.62 compared to a negative $0.65 last year.

You can also see on the slide that non-GAAP EPS was $0.19 versus $0.32 in the prior-year period.

Turning now to Slide 9. This shows trends by geography and by sector.

Please note that all revenue growth rates shown are based on non-GAAP adjusted revenue for the first quarter 2018 to allow you to make year-over-year comparisons.

I will start on the left side of the page on revenue by geography.

As you can see, we saw growth in all regions, supported by services and technology growth, with the exception of U.S. and Canada.

In the first quarter of '17, our U.S. and Canada region is the one that had benefited from that contract renegotiation that we had mentioned previously.

We also had one large contract in the U.S. that did not close at the end of Q1, but has since closed now in Q2.

On the right side of the page, you see the sector performance, which Peter has already discussed.

Please turn to Slide 10 for our segment results.

As we have said, our Q1 faced a difficult year-over-year compare.

As a result, on a year-over-year basis, services revenue was down 2.9% and operating margin was 170 basis points lower year-over-year.

I already noted our strong services backlog growth of 26% year-over-year to $4.7 billion.

Of this amount, we expect approximately $527 million to convert into revenue in the second quarter of 2018.

Technology operating profit margin was 54.7% versus 15.4% a year ago.

Non-GAAP adjusted technology operating profit more than doubled with an increase in operating margin from 15.4% to 29.9%.

This reflects a stronger first quarter than we had anticipated for technology, and so we expect that the second quarter as compared to the first quarter this year will be down about $5 million versus the $87 million we just reported for Q1.

Although we don't guide on a quarterly basis, we think that the consensus estimate for non-GAAP operating margin that we have seen on Capital IQ may be high by about 70 basis points.

We expect our total company non-GAAP operating margin to be more like 6%, largely due to the Q2 expectations I just noted on technology revenue and the high margins that are associated with our technology business.

Slide 11 provides more detail on cash flow.

Operating cash flow for the quarter was negative $50.2 million.

Adjusted free cash flow for the quarter was negative $50.8 million, slightly better than our expectations.

The principal reasons for the year-over-year differences in this quarter were largely the timing of working capital needs and the increasing CapEx due to the investments we have discussed at iPSL, our joint venture for check processing systems in the U.K. Again, we get reimbursed for this spending by our JV partners.

As you all are aware and as many other companies have had to do as well, we were required to adopt new revenue recognition requirements known as ASC 606 on January 1, 2018.

Our non-GAAP adjusted numbers exclude the benefit we gained from ASC 606.

You can see further detail of the impact of ASC 606 on Slide 17 of our presentation as well as further detail in our Form 10-Q to be filed this week.

Also, consistent with the required accounting changes, the majority of our postretirement expense now falls below the operating profit line.

As Peter noted, we are reaffirming full year 2018 financial guidance that we previously provided.

We are reaffirming our guidance of 7.75% to 8.75% for operating margin.

On a GAAP basis, this range would be 9.5% to 10.5%.

Our guidance for adjusted EBITDA margin remains 13.7% to 14.9%.

For non-GAAP adjusted revenue, our guidance range remains $2.7 billion to $2.825 billion, representing a minus 2% to plus 3% year-over-year growth rate.

Although it's still early in the year and we can't foresee macro events that could play out over time, based on what we see in the business so far, we believe that there is a good chance we will be in positive growth territory for non-GAAP adjusted revenue for the full year.

Our range for GAAP revenue remains $2.75 billion to $2.875 billion, representing flat to 5% year-over-year growth.

We are pleased with our results for the first quarter and how they position us relative to these full year goals, and we look forward to continuing to execute during the second quarter.

With that, I'll turn the call back to Peter.

Thank you, Inder.

Operator, we're now ready to open the line for questions.

(Operator Instructions) Our first question comes from Frank Atkins of SunTrust.

I wanted to ask first about the Cloud and Infrastructure Services component of the business.

Can you highlight any areas of strength or weakness within that?

Yes, Frank.

Thanks for the question.

We tend to divide Cloud and Infrastructure between what we call our global workplace, and then the more, if you will, cloud initiatives.

So it's really between those 2. The -- if you look at the entire number, or if you segregate the 2, the biggest change quarter-on-quarter is really that contract we referred to.

So from an operating margin standpoint, that was really kind of the big difference between the 2 quarters.

And from a revenue standpoint, that was the driver between the 2 quarters as well.

So if you take that out, I would tell you we feel good about the progress we're feeling -- we're receiving there.

As I mentioned, from an efficiency standpoint, we're really beginning to build up and we'll get to what I would call market norms for the efficiency of the CIS business outside of global workspace.

In global workspace, we have an enormous effort underway to really become a leader in efficiency.

We're already a leader in the market.

I mean, we are considered by Gartner the most effective executer in the entire space.

But from an efficiency standpoint, we still have had a ways to go to get profitability.

With respect to CIS, in general, we expect the profitability to grow and the margin to grow over the course of the year.

So I would say all good news with the very, very difficult compare to that onetime contract last year.

Okay, great.

And my second question was going to be about the people side of the business.

Can you give us some update in terms of total headcount or headcount by geography?

And some commentary on utilization or attrition trends?

Yes, I can.

So if we look at the headcount during the quarter, we started the quarter with about 20,466.

We ended the quarter with 20,742, which is a bit of a change from our headcount in the past, which has kind of gone down.

And part of the reason you see headcount going up is because of all of the new business that we largely signed in the back half of last year as we begin to staff to that, and now we will be adding to that the new business we signed in the first quarter of this year.

So as we look at headcount over the course of the year, we really have 2 things going on.

We will continue to drive headcount down, if you will, on the base business, continue to get more effective on the base business, but all of the new business we have signed, which as Inder mentioned, we expect to result in positive revenue over the year, will actually drive net headcount slightly up for the year.

Now that said, as you also saw, we're giving you metrics on revenue per associate, or per -- and we expect that revenue to go up.

So we're really managing the line between who's a contractor, who's not a contractor, how do we make sure that we're acting more effectively by having more efficiency per FTE.

But this is going to be a little bit of an inflection point for us and that we do expect net headcount to go up over the course of the year, but that's for a good reason, that's because we're signing all this new business.

Okay.

And last one for me, from Inder, maybe.

If you could talk a little bit about the relationship between cash flow from operations and EBITDA.

We had a little bit of a swing in payables this quarter.

What are some of the factors driving that timing?

Yes, most of the numbers this year, if you can think about it is, working capital related, and as we begin most years and especially as we're starting to accelerate here in terms of momentum, revenue, backlog and all the metrics that Peter talked about, you can imagine that we're going to be putting a little more into our working capital as we try to drive the growth of the business.

As I look at it though, the working capital efficiency project that I've discussed with you in prior quarters continues to play out for us and we expect it to continue to play out, improve working capital efficiency for us for the rest of the year, Frank.

I do believe that we've made really good headway on, call it cash conversion cycle.

That was down from 38 to 34 days this year.

So as I look at the way we are utilizing our AR inventory and payables spread, I think we're being very efficient.

But in the quarter, what you saw was a reflection of the investment for the growth of the business.

Our next question comes from Joseph Vafi of Loop Capital.

I thought perhaps maybe I had a question on your 12% debt.

And given the momentum in the business, I was wondering if that's something that you could potentially think about, perhaps refinancing earlier rather than later.

And then on your new logo win, I'd love to get a little bit more color on the process there and the kind of overall competitive environment and why you think that, that may be a repeatable go to market for you.

Yes, thank you very much for that question, Joe.

I think -- I just want to clarify something you said.

We actually don't have 12% debt.

We have 10.75% debt.

I wish it was single digit.

No worries, but as I look at that, we took on $440 million of capital last year.

We felt that we needed that for our 5-year window.

It's not something we needed today, tomorrow or the day after, but it's something that, as we build the strategy and execute the strategy that Peter and the team have been driving, we felt that we would need to have the capital that we need over that 5-year period for things like working capital, things like use of investments in the business and R&D.

As you know, we continue to invest in R&D.

In fact, we're investing quite a bit of money this year and as well in driving the innovation across our ClearPath Forward to make it even more cloud-based, to drive our Stealth cybersecurity solution and then also the 9 offers that we've rolled out now.

So what we have here, I think, is a stronger balance sheet, is the way I look at it.

Would I want to finance it down at some point?

That's always possible sometime in the future.

I don't expect that we would be necessarily thinking of that in the next 12 months or so.

But that said, it's good to be as we ended last year and as we ended this quarter, in a very strong financial position with more than enough capital and to be candid, I think having that very strong balance sheet enables us to be even more attractive as a provider of services to many of our clients.

So I feel good about where we are.

Would love to get that 10.75% rate down one day.

I don't expect that will happen tomorrow unless you have some suggestions for me, Joe.

I will always listen.

But to your point, that strong capital structure is what's allowing us to now win new logos, and I'll let Peter answer the new logo question.

Yes, well, thank you, Inder.

And Joe, you begin -- look, you didn't begin, you saw pretty clearly in the back half of last year a pretty dramatic increase in new logos, in sales, in generals, obviously in new business, which includes both new logos and new scope.

And when you look at the first quarter performance, it really is a continuation of what you saw toward the back half of last year.

Obviously the compares are going to get harder because you had such strong effort in the back half of last year.

But I would tell you, we feel very good about -- the stuff is going to be lumpy quarter-to-quarter, but we're -- we feel very good about our increasing competitiveness and increasing relevancy.

This idea of building differentiated security into our solutions is really kind of taking hold.

The TSA contract that I discussed was absolutely one.

You may recall a contract at the end of last year with the European Central Bank, similar.

Obviously, we won a large Stealth contract with Australia and Department of Defense and Immigration this year.

And so it really is -- Stealth is becoming something that we kind of -- are very, very capable now of inserting in these deals, and it is really helping us win large deals.

Now we had 2 very large deals in the quarter.

One was an expansion and renewal with Customs and Border Protection here in the United States.

That deal alone would've been one of the largest deals we have signed in a very, very long time, but for the new logo deal, which was even larger.

Customs and Border Protection is an agency we are extraordinarily proud of our work for.

And we continue not only to sign renewals with them, but to expand our footprint with them.

That was one of the, kind of leading indicators last year.

It resulted in a very high ACV number last year.

Because of that, the ACV compares will be difficult this year, especially as we moved from project work there to longer-term contracts this year.

With respect to the new logo contract win, it was interesting, Joe.

It was a full RFP approach, as you would expect, and the competition was very significant, as you would expect.

I will tell you, our approach to the relationship was somewhat different.

Even though it was an RFP, we very much approached it as a consultative sale, and we were willing to really kind of go out of the ordinary kind of boxes, although we conformed to the RFP, we went out of the boxes in terms of really trying to get the client's mindshare around the deal.

And I will tell you that was very, very effective.

You've heard Eric Hutto speak about more of a consultative approach.

That's clearly helping us with the smaller deals as we're increasing the number of smaller deal new logos.

It's interesting that we're actually seeing that work with the larger deals, even deals that are in an RFP context, and that's what you saw here.

So yes, it was due to capabilities.

Yes, it was due to some of the security we could put into these contracts, but in the case of that very large deal, I would actually make it more important, the kind of changing sales dynamics about being more consultative.

So yes, we do think it is not only sustainable, but we think we can win more deals of its kind going forward.

Great.

That's helpful and congrats on that.

Is there any further updates on the pension side of the business at this point?

I know last quarter we had a nice positive amount of news there.

I was wondering if there's anything else that you may want to share with us.

Yes.

Thank you for that question, Joe.

We talk about our pensions and we update our pension calculations, as you know, on an annual basis effective the end of the year.

So 12/31 of each year is when we actually go through a recalculation of what the obligations are, both from a GAAP deficit standpoint as well as from a 10-year standpoint.

And to your point, we were actually very pleased to see those go down by 18% at the end of last year.

And a lot of that, frankly, was through actions that the leadership team took, to help manage them in a proactive way and make sure that we were striking the right balance for our pensioners for sure.

We continue to act very thoughtfully in terms of how we manage those.

As we noted at the call for the fourth quarter earnings, we are looking at other things that we can do by way of helping manage the volatility of the assets and liabilities in that portfolio and there are certain investment strategies that you can follow.

I'm sure you're familiar with areas like LDI and other strategies that other companies have done as well.

So we're trying to be very thoughtful and proactive and leaning forward into managing those obligations.

At the end of this year, of course, we'll update you one more time on how the pensions behaved over the course of this year.

But the entire team is focused on making sure we remain focused on the GAAP deficit as we calculate it, and of course, that is interest-rate sensitive, but also frankly, the cash obligations which depend on a number of other things, including actuarial assumptions and so on.

So long answer to your short question, but it was a thoughtful question, and I thought I wanted to give a fulsome answer.

Our next question comes from Jamie Friedman of SIG.

Hi , it's Jamie at Susquehanna.

I'll just ask my 2 upfront, then drop back in the queue.

But Peter, in your prepared remarks, you had mentioned the labor-related metric.

Thank you for that.

I was just wondering if you could help us apply it, like how we should think of it, about that from a financial and analytical point of view?

That's the first one.

And then Inder, any seasonal callouts that you should make us aware of as we're building the model going forward?

So one, about the labor and two, about the seasonality.

Great.

So, Jamie, on the labor, as I pointed out, that's actually at a continuation and expansion of something we started, actually when we started reporting on last year's numbers.

You can expect to see us get more granular and more numeric.

As the company is now building new sales, as the revenue, which you've heard from Inder, we expect to turn into positive for the year; as profitability continues to grow and it's grown in the past, each of the past 2 years.

So as all of that kind of comes into play, the metrics that are driving that get a bit crisper because you're working off growth as opposed to working off kind of getting to your foundation from which to grow.

So we started with a metric that you saw last year about FTEs per managed device.

That's a very important part of our business.

We're continuing to report on that metric.

And now we've added a new metric to that, which is the, kind of the badged labor as a percent of revenue.

There's kind of 2 ways to deal with why that's important to us.

One is, at an absolute level, and the other is at a relative level.

So at an absolute level, we're working very hard to create kind of pure efficiencies on that badged labor as a percent of revenue.

And what I mean by that is, whether it is field engineers making calls, whether it is code that people is writing, et cetera, et cetera, we simply are working at getting more efficient at doing what we're doing.

That's the absolute.

The relative is our efficiency at the mix.

So that is not only do you get absolutely better, but you also get better at blending between who is a badged hire and who is a contractor.

And we're giving you the number at a corporate level.

It's interesting, when you look at it underneath the covers at enterprise solutions, that number is moving a little -- even more powerfully than you see, while the Federal number doesn't necessarily work that way, because the Federal business is so tied to heads that really have to be part of our team, you don't really get the opportunity to mix and match quite as much.

But it is really, really an area of focus for us.

So I do expect that percentage to continue to improve kind of over the course of the entire year.

Those are 2 metrics we're putting in front of you guys now, Jamie.

You can expect us to add more as the year goes by.

So just as a preview.

And just on the seasonality part of your question, I think that what I wanted to make sure that you heard, and we were clear with, was that, as we looked at our full year, obviously we're reaffirming our guidance for operating margin, 7.75% to 8.75% on a non-GAAP adjusted operating margin basis.

So we feel good about that range.

The seasonality aspect of it is always the one that we want to make sure that we stay ahead of where you are thinking of it as well.

So that was a very specific -- numbers that I shared with you about our Q2.

We had a very strong revenue quarter for technology in Q1.

We're pleased to see the $87 million.

In fact, it was higher than we thought it would be.

Q2, as we look at it, I told you, it was about $5 million down from that in a total volume standpoint, so call it $82-ish million.

And what does that mean?

That just means that our operating margin, blended operating margin for the quarter, is around 6%.

That is services and technology combined.

And that was off like 70 basis points from where we saw the Street numbers.

We just thought we would point that out to you, that we're thinking 6%.

As we look at the full year, it's still the same range, but the seasonality is what we wanted to highlight for you.

Yes, and I'd add to that, Jamie, and again, we've done some analysis in this area, particularly when we talk about the technology business, obviously is, when we talk about getting a little more consistent about that, it is a seasonal business in the sense that if you plot our numbers over the past several years, you could pretty clearly see the range in which we operate in the first quarter, the second quarter, the third quarter and the fourth quarter.

And I think we've just gotten much better under Inder's leadership and the finance team in general, at really kind of understanding the inherent seasonality and where we expect that seasonality to be a little off from year to year.

And so you see a little bit of a swing into the first quarter, above where we ordinarily would be and it comes out of the second quarter, but it's actually much better understood than it has been here in a long time.

Our next question comes from Matthew Galinko of Sidoti.

You highlighted growth in the Stealth win rates.

I was hoping you could expand a little bit on that, especially in the context of, I think you mentioned you're injecting Stealth into more of your deals now, so just kind of how do you drill down into a win rate for Stealth individually, and then what's driving the expansion there?

Yes, so we're really using Stealth in 3 pretty discrete ways.

So -- and keep in mind, Stealth itself has evolved, right?

So if you think of that a few years ago, it was really a micro-segmentation product that really worked inside a private cloud data center, right?

And it has now evolved from inside that private cloud data center to also in the public cloud and moving data between public and private.

And that evolved into biometrics and advanced identity as well as that micro-segmentation.

And then finally, now this past month, it has really become very robust in an Internet of Things context, right?

So Stealth itself is evolving, but we use it 3 ways.

One way is as a pure license.

So if somebody wants to put Stealth into their environment, whether it's a data center or whether it's into certain applications, we are happy to license it and put Stealth in there.

The second is part of that broader security services offering.

So you heard today about several of our offerings.

We have partnerships with Cylance, we have partnerships with LogRhythm, and we are using Stealth as one of our contributions into those offerings.

So Stealth becomes kind of inherent in our managed security offering as well.

And then the third, and I've got to tell you, I think the law of large numbers, at least initially, right now, we're seeing probably the most significant advances for us in the third, which is where Stealth is used as a differentiator in larger contracts, such as the TSA contract, such as the European Central Bank, where they're not pure security deals, right?

So whether it's global workspace, whether it's managed infrastructure, whether it's network, whether it's data center, whether it's cloud migration work, Stealth has a relatively modest part of the revenue equation there, but it's actually helping differentiate on a much larger deal.

So while the revenue numbers for Stealth are still pretty small, we see a very good clip of expansion of clients, and in part, that's because the business with those clients is expanding not only for Stealth, but for things that go in as part of that package.

So the win rate number is actually quite substantial for us, that 18-point win rate is a big deal because what we're really seeing is, and of course, that's based off value, because what we're seeing is that it is really beginning to drive much larger value.

And I'll just piggyback on that.

I think you're right to focus on our Stealth product in terms of the differentiation it brings to us, and frankly, allows us to differentiate $3 billion of revenue potentially as we go to market.

So yes, a strong cybersecurity solution, but as we think about our security business, it's in 3 aspects.

One is cybersecurity, which obviously Stealth is the tip of the spear and now Stealth is a portfolio of things, not just the original Stealth product, but there's a core version, there's a mobile version, there's a cloud version and so on.

We also have logical security, which is very high-end analytics.

And Peter talked about that in his remarks, and some of the wins that we had in that.

And so while we were very, very strong in U.S. and Canada in deploying much of our analytics capability, we've now productized that and started to offer it to other clients around the world.

You already saw where we were able to win a deal in Australia and a long-term contract there.

We were also, with our LineSight product, now able to bring this capability to other geographies around the world.

So logical security, and then I would just add physical security, which is, as I would call it, advanced and involves IoT as many of our other capabilities.

So when you look at that basket of things, I would -- and by the way, it's not the way we necessarily manage the business on a day-to-day basis, but that basket of capabilities is what's driving and helping drive many of the win rate outcomes and many of the TCV win outcomes that we talked about.

Yes, no, I agree, Inder.

Obviously, we talked this quarter about the new contract with CBP in the U.S. and about the new contract in Australia.

But our ability to really help governments now around the world, and there are governments that we haven't discussed with respect to border security, is we believe leading edge and we believe it's coming at the right time for the market.

LineSight has been in development for a long time and has just been released in the past 6 weeks.

It will take a while for governments to adopt it, but we're getting very significant, very welcome interest, very quickly on that.

So that is a whole element of security, and some of that might touch some of Stealth, but it's also quite independent of Stealth.

And honestly, the revenue numbers are larger than Stealth.

So we are not a one-trick pony when it comes to security, and we are really, truly building security throughout our portfolio.

This concludes our question-and-answer session.

I would like to turn the conference back over to Peter Altabef for any closing remarks.

Thank you, operator.

I'd like to thank each of our questioners during the call.

We greatly appreciate your time and focus on us.

We're excited about the momentum we're seeing throughout the business and look forward to speaking with you next quarter.

And Inder and I, Courtney and the team remain available to you to answer questions throughout the quarter.

You will also continue to see more detail in our Investor Relations website, and we urge you to take a look at that detail as well.

So thanks very much.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.