Unisys Corporation
Q4 2018 Earnings Call Transcript

Published: 13 Feb 2019

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the Unisys Corporation Fourth Quarter and Full-Year 2018 Earnings Conference Call. All participants will be in listen only mode. [Operator Instructions] Please note 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.

[Courtney Holben:]

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 full-year and fourth quarter 2018 financial results. I'm 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. These 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 competitors' 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 and constant currency. In addition, this year, we have been 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, in addition to other minor adjustments. For more information regarding these adjustments, please see our earnings release and our Form 10-K for the quarter and for the year. 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 the other materials I mentioned earlier, on the Unisys Investor website. And now, I'd like to turn the call over to Peter.

[Peter Altabef:]

Thank you, Courtney, and thank you all for joining us to review our fourth quarter and full year financial results. Over the last few years, our go-to-market strategy has been to target industries where we have deep expertise and leverage-able IP and related solutions, while also using security to differentiate our offering. We are excited that this strategy has resulted in the first full year of revenue growth for the Company, since 2003, and for services, since 2006. We achieved or exceeded guidance on all of the metrics for the third consecutive year, since we reinstituted the process of providing it. Full-year non-GAAP adjusted revenue grew 80 basis points year-over-year. Non-GAAP operating profit margin grew 20 basis points year-over-year to 8.9% and adjusted EBITDA margin grew 50 basis points year-over-year to 15.3%. These results reflect progress against another key element of our strategy, which has been to improve profitability. 2018 total contract value, or TCV and new business TCV grew 27% and 51% respectively. This growth was supported by our public sector, with a number of large to managed services contracts signed during the year with U.S. state governments. As you may recall, we saw significant growth in ACV metrics in 2017 that we indicated is not necessarily representative of future expectations. With ACV growing 22% in 2017, a new business ACV growing 93% in 2017. Even with those difficult compares 2018, ACV was roughly flat year-over-year and new business ACV was down only 7%. I would remind you that in the fourth quarter of 2018, we signed a large contract that drove significant year-over-year growth in TCV that we do not expect to repeat in the first quarter of 2019. Our goal for the year ahead is to capitalize on our momentum by continuing to execute against our strategy. Inder will provide our formal guidance ranges and more color on the financial performance of the Company shortly. But first, I'll give some more insight into how our strategy is driving results, so I start with services. At the segment level, full-year services revenue was up 2.5% year-over-year supported by growth in our U.S. federal and commercial sectors. We also saw an increase in new managed services contracts, including within our public sector, as I said before. We continue to increase the efficiency of our services delivery engine. Our ratio of full-time equivalents, or FTEs, to manage devices in our cloud and infrastructure services business improved by 4% year-over-year for the fourth quarter, putting the full year improvement for 2018 at 30%. During 2018, we further refined our vertical go-to-market strategy by focusing on a second complementary level to our overall approach. As we have done with our technology and security offerings, we are leveraging scalable and repeated solutions within services that can be sold in any of the industries that we target. Similar to productizing technology solutions, such as Stealth during 2018, we also continued productizing a number of services offerings including Unisys InteliServe, CloudForte and TrustCheck to offer new solutions and to streamline the selling process. Last week, we announced that CloudForte our comprehensive managed service offerings that automates and accelerates secure digital transformation and cloud operations is now available for Microsoft Azure in addition to previously being available for Amazon Web Services. This will allow us to better help our clients digitally transform their business, reduce operational cost and hybrid cloud deployments, and create an environment for innovation to scale to secure and reliable technology. Moving to our technology segment non-GAAP adjusted technology revenue for the full year of 2018 was 386 million, down 6.7% year-over-year. As expected due to the clear path forward renewal cycle. However, due to strong margins 2018 non-GAAP adjusted technology operating profit actually increased 8.3% year-over-year. Technology is a core part of our strategy, as we enable digital transformation. For clear path forward, our strategy is to enable our customers to take advantage of its high transaction throughput and security while also enabling customers to seamlessly integrate clear path forward with other elements of their infrastructure. Security is a critical element of our strategy in both services and technology, providing standalone revenue opportunities and helping differentiate our broader offerings. Our Stealth portfolio is expanding, so it can support the entire digital enterprise including desktops, servers, cloud, IoT devices and mobile devices. We expect two key new releases for Stealth early this year, which will leverage artificial intelligence and biometrics. Two additional examples of our focus on Unisys security solutions are TrustCheck, which I mentioned earlier, that helps clients, quantifies cyber risk in dollars and cents based on objective breach data and are zero trust implementation offering, which we will launch at next month's RSA Conference. We're also continuing our Augusta Georgia security operating center expansion, increasing our analyst capacity in support of our growing managed security services business. At the same time, we announced an apprenticeship program with the U.S. Department of Labor in conjunction with the United States Department of Veterans Affairs, providing veterans exiting the military with the means to transition to a civilian career in cybersecurity, with estimates of the shortage of cybersecurity professionals reaching 3 million worldwide by the year 2021 per cybersecurity ventures. These types of programs are essential for building and scaling our diverse delivery team to enable our clients' success. We are also investing in the Unisys security integration platform that will integrate our security offerings with those from our partners to enable a full lifecycle approach to security. The first integration is with Stealth LogRhythm and our own managed services team to enable dynamic isolation that allows enterprises to detect and isolate threats more rapidly. With respect to Stealth, 2018 revenue grew 94% year-over-year. 2018 Stealth TCV also grew 94% year-over-year, and in the fourth quarter, a large U.S. Department of Defense agency rented Stealth product authorization to operate within its production environment, in this production environment Stealth will provide secure and trusted zones to process and store sensitive government information. Additionally, a large U.S. state government awarded us a contract for Stealth software and comprehensive security services to implement uniform security across its newly integrated datacenter environment. We also signed an agreement for a Canadian government agency to implement Unisys Stealth for identity management and credentialing, and importantly Stealth continues to differentiate our broader offerings and our pipeline of deals that include Stealth as a component grew 112% year-over-year to over 1.8 billion. We also made significant progress with our marketing efforts during 2018. During the year, we focused on increasing brand awareness and saw significant improvement with an increase in media coverage and targeted website traffic driven by our Securing Your Tomorrow advertising campaign. Global media coverage increased by 30% year-over-year in 2018. This included a 34% increase in business coverage, 16% increase in industry coverage, and a 58% increase in security coverage including a significant increase in TV coverage. Stealth products and services specifically saw a year-over-year traffic increase of over 1500%. During 2018, Unisys was named a top 10 provider of infrastructure and enterprise cloud services and a leader in the blueprint for ServiceNow Services by HfS. Unisys was also named a leader by NelsonHall in Cloud Advisory, Assessment and Migration Services. And so far in 2019, the Company has been named a leader in Gartner's Magic Quadrant for Managed Workplace Services in North America and was ranked highest of all firms profiled for our ability to execute. ISG also named us as a global leader in Managed Digital Services in 2019. During the fourth quarter, we were awarded best supply chain architecture for one of the modules within our logistics, cargo logistics solution and best software architecture in IT products for AirCore at the ICMG Global Enterprise Architecture Excellence Awards. I'll now provide some color on our various sectors. Our U.S. federal sector non-GAAP adjusted revenue was up 9% year-over-year in the fourth quarter and 1% in 2018 overall. Momentum is high for us in the sector heading into 2019, with services backlog up 19% year-over-year and TCV up a 111% -- excuse me 117% helped in part by several large renewals. During the fourth quarter of 2018, Unisys was awarded a contract vehicle by the United States Mint for digital enterprise services covering a variety of potential services and supports, including agile application development, moving digitally secured applications to the cloud, service desk and enterprise architecture operations. Moving to the public sector, 2018 public sector non-GAAP adjusted revenue was down 5% year-over-year. However, as we've discussed, we signed a number of large contracts with U.S. state governments during the year, which drove 2018 public sector TCV up 31% year-over-year. We expect the sector to grow in 2019. And during the fourth quarter, Unisys extended its contract with an Australian state government agency to provide biometric solutions including facial image capture, facial recognition identity authentication, and a case management system to verify the identity of citizens to prevent fraud. Unisys is also working with the European government agency to trial the use of real-time predictive analytics and machine learning in a mission-critical application. Our commercial sector saw a non-GAAP adjusted revenue growth of 9% year-over-year in 2018, held by a large contract with the technology company that we signed early in the year. We also signed a new logo agreement in Latin America in the fourth quarter with a global beverage company to support their digital transformation with a wide range of secure digital workplace services including Unisys InteliServe. This was the largest new logo contracts we have signed in Latin America in 10 years. MASkargo, the cargo division of Malaysia Airlines also signed a contract in the fourth quarter to implement two secured cloud-based Unisys Digistics solutions to drive further digital transformation of its business. And finally, financial services non-GAAP adjusted revenue declined 4% year-over-year due to a lighter technology renewal schedule than prior year as expected. During the fourth quarter Unisys renewed its agreement with a major Brazilian bank to provide application services which supports 70% of the total mortgage market in Brazil. In conclusion we are excited to have completed our first full year of revenue growth in recent history and to see our strategy bearing fruit. We are focused on strong execution in 2019 to help sustain our momentum including enhancing our services operating efficiency. I'll now turn the call over to Inder to provide more color.

[Inder Singh:]

Thank you, Peter. Good afternoon everyone and thank you for joining us today. We are excited about our results for 2018, which I'll discuss in detail. In my comments I'll discuss both GAAP and non-GAAP results and provide color for our key business drivers. As previously discussed in 2018, we adopted ASC 606 and 2018 revenue for us benefited from this adoption as well as from the reimbursement of restructuring expenses associated with our check processing JV as we had discussed previously in the third quarter. These two benefits are excluded from our non-GAAP results that I'll discuss today. Please turn to Slide 7, which shows some of the key financial takeaways and I'll provide additional details throughout the rest of the discussion. We achieved or exceeded guidance on all three metrics that we had guided for in 2018, marking the third year in a row that we have either met or exceeded the annual guidance that we provide. Our 2018 total company revenue grew by 3% on a year-over-year basis to $2.83 billion. 2018 non-GAAP adjusted revenue was up by 80 basis points year-over-year, above the midpoint of our revenue guidance range of negative 2% to positive 3% growth. I'm especially pleased to note that this marks the first full year of growth for Unisys in 15 years. Our 2018 results had minimal impact from currency. Our 2018 operating margin reached 10.1%, up 660 basis points year-over-year. Non-GAAP operating profit margin for the full year of 2018 was 8.9%, which exceeded the high-end of our guidance range of 7.75% to 8.75%. Likewise 2018 adjusted EBITDA margin of 15.3% exceeded our guidance range of 13.7% to 14.9%. Our 2018 services revenue grew 2.5% year-over-year. Non-GAAP adjusted services revenue grew 2.1% for the full year 2018, driven by growth in our cloud infrastructure and BPO businesses. Consistent with the color we provided at the beginning of 2018, non-GAAP adjusted technology revenue for 2018 was down year-over-year by 6.7%. GAAP technology revenue grew 6% year-over-year. We were especially pleased that our profitability of the segment exceeded our expectation with non-GAAP adjusted technology operating profit margin expanding 620 basis points to 45%, and with non-GAAP adjusted technology operating profit dollars also growing 8.3% year-over-year to $185 million. For the fourth quarter, total company revenue grew by 2.2% year-over-year to $761 million 4.8% growth on a constant currency basis representing the fifth consecutive quarter of growth. Fourth quarter services revenue grew 5.6% year-over-year, and on a constant currency basis it grew 8.3% year-over-year. Fourth quarter non-GAAP adjusted services revenue grew 4.5% year-over-year, and fourth quarter non-GAAP adjusted total revenue was up 1.3% year-over-year. In addition to the revenue growth in our services business, we saw continued momentum in our services backlog with growth of 13% on a year-over-year basis, reaching $4.8 billion as of year-end. These results reflect the differentiation of our go-to-market strategy through the focus on industry expertise, and cyber physical and logical securities. Turning now to Slide 8 and 9. I already covered much of the material that shown on here, but let me highlight a few items. You can also see that diluted EPS for 2018 was up significantly year-over-year to $1.30 versus the $1.30 loss per share, last year. Non-GAAP diluted EPS was a $1.95 versus 249 in 2017, and we see the fact that consensus for this metric as well for this year. I would remind you that full-year 2017 results were helped by a windfall tax benefit of $50.4 million or $0.69 per diluted share, which we had discussed at that time, which was principally from the new tax rules that were put in place. You can also see again on this chart that we have achieved or exceeded the guidance range on all guided metrics for the third year in a row. I would also note that we saw a limited revenue impact from the U.S. federal government shutdown during the fourth quarter with less than $1 million of revenue being affected. We did see some delayed cash collections caused by the furloughed federal workers, who were unable to process payments during our shutdown period which owe to us. But I'm happy to report that we have since then collected all those amounts for this quarter. Turning to Slide 10, you can see that 2018 marks another year of progress in executing on the transformation of our business and were pleased that the progress that we have made and improving the revenue trajectory of the business, while also continually improving non-GAAP operating profit margin and adjusted EBITDA margin. Please turn to Slide 11 and 12, for a more detail on our segment results. As we noted, GAAP and non-GAAP adjusted technology operating margins were up year-over-year in the fourth quarter and the year. This was due to an improved mix of higher margin software sales, and as expected we continue to see the impact of new managed services contracts and implementation stages on margins in our service area during the fourth quarter. As we highlighted in previous quarters, new managed services contracts can impact margins, especially in the early stages including as we incurred cost before were able to recognize the associated revenue. This impacted 2018 services non-GAAP adjusted gross margin by 130 basis points and fourth quarter services non-GAAP adjusted gross margins by 210 basis points. We expect this trend to moderate in 2019. We continue to maintain a sharp focus on expanding our margins over the longer term. Specifically through improving the cost of delivery in our services business where there remains a significant opportunity to make improvements. In 2019, we expect to see the continued implementation of automation and continued right shoring of our labor force for example with more labor being sourced in areas and hubs such as in Eastern Europe and India. We also continue to focus on driving further improvements in our real estate portfolio. As you know, we undertook a large restructuring program in 2015, the actions for which were largely complete as of the end of 2017. We do not currently plan to implement another program of that size and scope, but consistent with our broader strategy to improve profitability, we will continue to look for opportunities to make our cost structure more efficient wherever possible. During the fourth quarter, we identified several such opportunities, including the items I just mentioned, which resulted in $28 million of restructuring charges in the quarter, and these are expected to yield annualized savings of approximately $30 million. The associated cash expenditures are expected to be principally paid off in 2019 and 2020. I already noted our backlog growth of 13% year-over-year to 4.8 billion. Of this amount, we expect approximately 568 million to convert into services revenue in the first quarter of this year. As we look to 2019 we currently expect technology non-GAAP revenue to be stable on a year-over-year basis. Although, we are expecting more revenue from our newer software offerings, which have not yet reached mature margins. Our largest scheduled overall renewals this year are expected in the second half of the year, including several large financial services contracts coming up for renewal at that point, and others. So for modeling purposes you would assume approximately a 30-70 split between the first half of the year and the second half of the year for technology revenue. I would also remind you that in prior years our third quarter is normally the weak and seasonally quarter, but with these planned large renewals in the third and fourth quarters this year, you should assume that for modeling our first quarter would be the weakest of the year not the third. As our services business has begun to improve and grow, we still expect to see an in year distribution of revenue in 2019 that is roughly consistent with what we have seen in the past. Once again for modeling purposes, you may wish to use a 49%, 51% first half to the second half split. However, given the impact of new business in implementation stage, we expect our newer deals to contribute more to margin as the year unfolds. Turning now to Slide 13, which provides more detail on EBITDA and cash flow. Adjusted EBITDA margin exceeded the guidance range, as I mentioned earlier for 2018 coming in at 15.3%, and adjusted EBITDA grew 4.3% from $405 million last year to $423 million in 2018. $151 million of operating cash flow and $124 million of adjusted free cash flow was generated in our fourth quarter. As a result, operating cash flow for the year was 74 million and adjusted free cash flow was 62 million. As we have mentioned previously, we continue to target a CapEx light model overtime, although in 2018 our very large public sector wins required us to use more capital than our target. Our target for CapEx intensity remains in the 5.5% to 6.5% range as a percent of revenue, and our plan for 2019 is to be more in line with that range at approximately $170 million of CapEx. I already mentioned the delay in the collections, which were caused by the U.S. federal government shutdown, and we also had higher working capital needs at our UK check processing JV due to some regulatory requirements and implementing the newly upgraded systems. As we transition to the systems, we expect operating expenses to come down for this JV this year. We expect to see total company working capital usage of approximately $40 to $60 million in 2019, driven in part by the expected growth of revenue and as the Company scales. Turning now to Slide 14, I'll provide an update on the status of our pension obligations as of the end of 2018. Our unfunded liability improved by $40 million year-over-year, as compared to 2017, lowering the total unfunded amount of $1.74 billion. This improvement was largely driven by an increase in the discount rates used to value these obligations. As you know, there are a number of drivers that impact the future required cash contributions to the pension plan. In addition to the funding, discount rates asset returns can also have a meaningful impact. Given the market volatility that we all saw in the fourth quarter of last year, and the fact that we have to value our pension obligations on December 31st each year, the negative market performance at that point in time impacted our asset return calculations As a result, estimated future cash contributions have increased by approximately $75 million from 2019 to 2027, and by $129 million from 2019 to 2023 versus the amount that we showed you at the end of 2017. We continue to look for ways that we can proactively improve our position with respect to the pension both on a GAAP and a cash basis. Moving to Slide 17, we still have $1.6 billion in tax assets, as you can see. For modeling purposes in 2019, Unisys does incur some taxes in certain foreign jurisdictions especially for withholding and income taxes. Historically, this foreign tax expense has been between approximately 3% to 5% of international revenues. The associated cash tax has been somewhat less driven primarily by our ability to utilize the tax assets I referred to in certain jurisdictions. We expect net cash taxes in 2019 to be in the $25 million $30 million range due to anticipated U.S. tax refunds. As we look to 2019 we are pleased with the momentum we built in 2018. Please turn to Slide 18 for the comments I'm making, and we expect momentum that we saw in 2018 to continue into 2019. For the full-year non-GAAP adjusted revenue, we are guiding to a range of $2.8 billion to $2.875 million, which represents a range of 1% growth to 4% top line growth year-over-year. For non-GAAP operating profit, our guidance range is 8.25% to 9.25%. We expect GAAP operating profit margin to be relatively consistent with this range. And lastly, our guidance for adjusted EBITDA margin is 14.4% to 16%. We believe achieving revenue growth for the full year 2018 was a great beginning for returning this company to growth. We are pleased that we are guiding for accelerated growth in 2019. Importantly, we are encouraged by the revenue momentum we have seen in our services business and continue to focus on improving the efficiency within that business. We look forward to the opportunity as we see for the New Year, but also remain disciplined about how we will pursue them. With that, I'll turn the call back to Peter.

[Peter Altabef:]

Thank you, Inder. Operator, we will now open the call for questions.

[Operator:]

Thank you, sir. We will begin the question-and-answer session. [Operator Instructions] And your first question will be from Frank Atkins of SunTrust. Please go ahead.

[Frank Atkins:]

I wanted to ask first on the margin side in terms of guidance. Can you talk a little bit about the impact of some of these ramps on the margin side? And as you think about the guided number on margins, how much of that is coming from SG&A? How much of that is coming from normalization of the technology margins and services margins?

[Peter Altabef:]

This is Peter. I'll take first view of your question and let Inder provide some more detail. With respect to the new contracts that are coming online, first of all as you see from our TCV and ACV numbers, we signed a lot of new business in 2018, and a fair percentage of that was in the public sector, and a fair percentage of that was in U.S. state and local contracts. So, there are a couple of implications to that, the first implication is while we really practice a capital light approach to the business. The one area that is lease to capital light is in U.S. state and local public markets and those markets still demand a large expenditure of capital for deals. These are good deals were proud of them, but as you seeing in some of our reported numbers cash flow in particular, they require a significantly enhanced CapEx framework for really about two years. So, you see a higher CapEx in 2018, you see it somewhat elevated CapEx in 2019. With those deals to get back to your specific margin question really come kind of three things. The first is while you're in an implementation stage you commonly have expenses outrunning revenue that just happened. Inder will talk a little bit about that, he said it in his comments. The second is even once you get beyond the implementation stage to way you typically model these deals is that, as you get more effective and efficient overtime, your margin goes up overtime, and clients typically want more savings faster. So, the way we typically model these deals is to ramp margins overtime. And then the third element about these deals is especially in those four new states that we sold in 2018. We very much have a land and expand philosophy, so these are new states for us. We got substantive big contracts but we expect to do more overtime, and we expect to increase revenue and increase margins overtime that of course hasn't been booked yet. So there is a lot of things going on with those contracts in particular that affect margins both last year and will affect margins to somewhat lesser extent that also affect margins this year. Finally, just as a comment Frank, given the TCV sales and given the fact that we got substantive sales last year. I would expect a somewhat more modest, TCV and ACV year for us in 2019, especially as we focus less on some of those large contracts and more on smaller contracts that will have higher margins faster.

[Inder Singh:]

So I'm just going to piggy back on what Peter said Frank and thank you for the question. As I noted in the comments and Peter did it well, and we also noted in prior quarters, the new deals that we have signed particularly in the public sector. And let me say that a lot of our backlog, perhaps the majority of the backlog has come from two sectors. One is public and one is commercial. The commercial sector for us every time we get a win there and we're delighted to see the momentum that we're getting in our business is not capital-intensive. In fact, sometimes it is headcount intensive and sometimes it requires different kinds of investment, but it doesn't require the kind of heavy-duty upfront CapEx that the public sector can require. So as the management team our focus remains on ensuring that were able to drive the margins higher quickly on the public sector deals for which we have put cash in terms of CapEx upfront. Now, that in total, this basket of new business for us in 2018 weighs on margins as we noted about 130 basis points, I expect that impact in 2019 to moderate as I have said in the comments. It's difficult to say how quickly volumes ramp et cetera to give you a precise number but we expect that to improve. We are working in fact to improve it. The commercial wins that we saw. We are delighted that the volumes are starting to pick up because really that’s the principal driver of the fixed cost base associated with some of those deals that we think to deal with. So that combination of momentum in the commercial deals one in particular comes to mind, which we signed relatively early in the year and that was really one deal that was I think we mentioned one of the largest deal signed in recent memory in this company. We're very happy to get that win. It was signed in the first quarter of 2018, and we are really happy with the execution that we are seeing in our delivery organization now on driving the volumes and maintain the discipline around cost. That is serving almost as a -- remember, it is the Company that hasn’t grown in 15 years right, and we are growing. So that’s serving as a good learning tool for frankly, for many of our delivery efforts to make sure that as we win more and more of these types of deals, we are able to get them in at the right margin even more quickly. On the public sector ones, as Peter noted those are usually two year commitments when it comes to the CapEx side of things. So, yes, 2019 the CapEx guidance was already factored into what I shared with you in terms of 170-ish million numbers. But we are now keenly focused on ensuring that we use those wins as a land and expand strategy. And I don't think that when we started 2018, anyone around our senior leadership team thought, we could win four out of four states and we did. And so, we are delighted to have that volume ahead of us, we are delighted to win these states that we didn’t have really any meaningful footprint in before, and we are now able to leverage that presence to win additional deals. So, the margin expansion will come not only from executing on these deals that we won, but more importantly from the opportunity that these deals unlock for us. So, yes, it weighs on margin as you would expect, you have to invest to get a return on investment, and that's the part that that I think we ran in 2018, even without investment you saw that we delivered 8.9% operating margins I'm very pleased with that. But at the end of the day, these are land and expand opportunities that hopefully we will be able to leverage for many years to come.

[Frank Atkins:]

And it seems like you're getting some good traction and Stealth, I think you said it some bookings numbers up 94% year-over-year. Can you talk about the win rate impact there? And where exactly are you differentiated in that Stealth project? And how do you separate that from the other security options out there for clients?

[Peter Altabef:]

It has been an evolution. When stealth first came on the scene for us, it was really a solution that was baked in the micro-segmentation space which is a very important space. We were new to -- that was a new space for the industry. It is still a new space so it's in the advanced part of the Gartner hype curve if you will. The micro-segmentation is while it takes critical element it’s a difficult solution to sell as a one-off. So, it's very important that we have learned that it would be part of a larger ecosystem of solutions. And so, we have really approached these three ways. The first thing we did was we look at Stealth itself as a solution, and it continues to be one of only a hand filled like a number of digits on one hand, our robust solutions in that space. However, we have expanded that space from an initial focus on servers to now covering laptops, desktops, mobile devices, the network and so it has a much broader applicability than it did when first imagined. Secondly, we've gone beyond looking at it as only an infrastructure play and expanded to Stealth identity, which is a whole suite of biometrics. So that is what I would categorize as our first evolution of Stealth. The second evolution of Stealth was really to say, yes, we can sell it as a one-off licensing opportunity and we do, but it is also as you can see that revenue for us process basically doubled year-on-year, but we can also sell it as part of a larger offering and we can leverage Stealth in our managed services accounts. And literally hundreds and hundreds of millions of dollars of deals far in excess of Stealth revenue itself has been sold with leveraging Stealth as the distinguishing factor in that solution. And as you can see from our pipeline we have broader solutions now that have over a $1billion of Stealth included in them, so that would be I would think the second way we have evolved Stealth. The third way we have evolved Stealth is saying, why is it only have to be us and that is a two-parter, why is it only have to be us in the sense of our solution simply isn't -- doesn't have to be the entire breath of the solution. So, we were brought in partners like LogRhythm, which I mentioned in my comments. We brought in partners like Cylance, and we have other security partners as well. They were actually integrating our solution with their ecosystems. And the second way is not only technically integrating our solutions with their ecosystems, but using those companies as a distribution channel for us. So that it's not just our sales team selling Stealth, but Stealth being sold by broader Stealth teams around the world. So, it really has over the last five years Frank, it really has been an evolution, yes revenues are up, yes TCV numbers are up, they are still relatively small compared to our entire revenue. But you are really seeing Stealth now make a difference, companywide, especially in its impact in getting us larger contracts, and I think in the future now that we're recruiting it in these larger ecosystems, I think it's future is very bright.

[Frank Atkins:]

And last one from me to be a quick numbers question. Can you give us the year-over-year growth in annual contract value and new business ACV?

[Peter Altabef:]

Yes, in annual contract value in new business ACV. Yes, I can -- maybe one second. Courtney, what's the number? Hold on Frank?

[Courtney Holben:]

So for the quarter Frank, total ACV and keep in mind that these were against pretty tough comparisons from last year, down 36%, new business ACV around 40%, fairly flat for the year though, but basically flat on total ACV and 7% down on new business ACV. But again if you keep in mind the comparisons that we had last year for that and we talked about that at this time that we didn’t necessarily expect to be able to replicate those levels, so being flat for the year it was a positive thing based on those difficult comparisons.

[Peter Altabef:]

And Frank, our numbers are very lumpy quarter to quarter, which is why the annual ACV TC numbers are better.

[Inder Singh:]

As you know, Frank, we have been winning some very, very large deals in the quarter in which you win them you get these very large numbers of SKU in the quarter. I would point you to the metric that I consider even more important perhaps which is backlog, and backlog is what turns in for future revenue for us. TCV helps build backlog [Technical Difficulty] but as you know part of that backlog also had to support any attrition that you have. So, the backlog sort of missed out the new business new sign on any attrition in the business. That move is 30% for us for the year. All of these metrics face very tough comps as you know. At the end of '17 we had backlog grow 11% approximately and then in the first and second quarter of this year continue to grow in fact the peak the 26% growth and then 33% growth. So, we are delighted to see the 13% overall growth for the year. And that’s what gives us confidence for the growth continuing for us in revenue in 2019. And we are looking for a greater proportion of revenue now being able to come from backlog that we have built over the course of the last four or five quarters. So, yes, TCV and ACV are always very important metrics to me backlog and I guess to you as well. It should be one that you should really focus on.

[Courtney Holben:]

And Frank, the last piece of information I'll give you just how to compare at your fingertips. In 2017, ACV grew 22% in new business TCV grew 93% so just for the terms of comparison.

[Peter Altabef:]

And Frank similar to the TCV story given where we have been the last couple of years and the mix that we intend to evolve to this year in '19, we expect ACV and TCV numbers to be down slightly from last year.

[Operator:]

And the next question will be from Joe Vafi of Loop Capital. Please go ahead.

[Joe Vafi:]

First on the guide on the revenue line, is there some more color you might provide on what that maybe constant currency? I know you have got a lot of international revenue or at least what you think the FX headwind is built into the guide? And then I have a couple more.

[Inder Singh:]

Joe, FX prediction is also a very difficult art as you know. However, in 2018, as I noted we didn't see any material impact from foreign exchange. And you saw currency sort of waiver all over the place over the course of the year, but when you netted it out for the year for us, it was de minimis. In prior years, if it's had an impact it's been a point or two in recent years in either direction, helping or hurting. 2018 was relatively neutral. From planning purposes, we are assuming no impact from foreign exchange for our 1% to 4% growth guidance. If currency is going in our favor of course it could be lifted, but we are guiding in for a neutral environment at this point in time.

[Joe Vafi:]

And then I know you mentioned that you did a little bit more restructuring here in Q4 and that you expect to see that start to kind of show some material cost benefits. Is that cost benefit getting applied back in the growth? Or do you think that we may see that trickle down to the bottom line or a combination I guess?

[Inder Singh:]

Yes, it's reflected in our numbers for '19 right so. As I think about that gifts that keeps on giving that really what that is. I mean so, yes, it's in our guidance number already for '19 potentially was up 20 and beyond as well. I mean we are not doing this to say running for the short-term. When you're putting in things like automation when you're putting in the event and taking the advantage of creating hubs and which we’ve done a couple of years ago and now shifting resources into those even more, those are recurring savings that pay off over a multiple years. And you know this Joe from following the industry, it's pretty normal for our industry to go and do fine-tuning here and there. I would look at this almost in that realm, but I think the good news for us is. There are other ideas that we could also implement. And as the numbers that I shared would tell you, we're being very smart about looking for those types of savings opportunities where the payback is quite quick. And that's the way -- this was film was designed by Katie Ebrahimi who runs our HR organization, Eric Hutto who runs our Enterprise Solutions Business. The two of them really and Harvey and others on their team, they looked at where the opportunities were. They sort of did a Pareto analysis of which ones to go after, first, second, and third. And this has for us the highest return for the least amount of upfront commitments. So, we're pleased by getting a plan from them that we can go execute.

[Peter Altabef:]

And Joe, this is Peter. Thanks again for the question. We do expect as I said as Inder went through, there is real focus on this to make it very specific and very long-lasting. We will not --Inder gave the full benefit numbers in his talk, we want to see those full benefits in the year, but those who will be the run rate and we expect to get those quickly.

[Joe Vafi:]

So would it fair to say that exiting, we get to kind of cash neutral on the cash restructuring versus the benefits our year end to this endeavor? Would that be about the right time we kind of get to breakeven on the cash?

[Inder Singh:]

Yes, I mean we're talking about somewhere between one the two year sort of breakeven payback period, but whether it's a year or year and a half, I mean I'm pleased to see those types of restructurings that delivered to the bottom line quickly. It also depends on when you execute it whether it's in the beginning of the year or at the end of the year. So a number of factors have been plan to it. For purposes of what I said on the comments and what Peter said as well, these are exit run rate savings that we expect to achieve as we exit our year. The cash contributions will be predominantly in '18 and '19 probably more in the first year than the second year, but that's the way I would sort of model it out. I think it really depends on those velocity of execution.

[Joe Vafi:]

And then, if we could move over back to that Slide 14 on the pension just a couple of questions here. Maybe Inder, could you remind us on the projected obligation that is down about 800 million from the end of '17 to the end of '18? Could you remind us how much of that was a result of discount rate change versus some of the actions that you took during the year more proactively, if I know there was some to bring that obligation down?

[Inder Singh:]

Look, we have been working on managing the pension obligation for a couple of years and probably even before that. But in the last couple of years, we've done a number of things that have been quite proactive. In '16, we began with a lump sum buyout as you know some of the participants were willing to accept the lump sums. In '17, we began to restructure some of the U.S. pension obligations, which allowed us to limit some of administrative cost. In a material way, bring down some of the premiums that we were paying just for ensuring some of those policies. And as we went into '18, we continued the efforts that we could. And in '19, we talked about the fact that some of our international pension obligations we were able to negotiate as well in a favorable way. Now that said, there are things you can control with your actions you take and things that you can do to restructure and so on. And there are things you can't control, things like what happened with the stock market in the fourth quarter of last year. So I just wanted to make sure that you all kept that in mind, because when we do these calculations yearend on 12/31 whatever the markets are doing at that point in time or the few months and the run-ups with that are going to influence that calculation as well. And that's all we saw. So yes, even with that, we did see the deficit come down overall principally because of discount rates beginning to move up. But we probably had some of the savings, we could have had offset by poor performance of equity markets. So you have to live with that and specifically you as walking in your shoes and the shoes of our shareholders that I think that they understand that, the market performance is a key driver, not only of our pension, but frankly a return on assets for all investors.

[Joe Vafi:]

So, it sounds like if I hear that correctly and most to the benefit obligation reduction was discount related as it looks like we have moved the discount rate about -- on the U.S. plan, is that right about 70 basis points or 60 basis points something like that?

[Inder Singh:]

Yes, as you saw the 10 year treasury start to rise, as you saw the fed begin to act, that is highly correlated with the basket of corporate bonds of use to determine our discount rates. So, yes, those began to help us, if markets that kept performing then those would have helped us all.

[Joe Vafi:]

And that was the next question. If I look at the basket of assets that you have that's invested in pension assets, how is that -- I mean because obviously that was kind of a down trough in the market as we exited 2018. Is it fair to say that your asset baskets recovered meaningfully at this point? And if it did I know you are not providing it now, but kind of on a real-time basis it sounds like the deficit would be materially lower than where it was exiting '18, is that a fair statement?

[Inder Singh:]

It's fair to say that both return on assets and interest rates drive that deficit and also the cash contribution as we've been saying in the past as well. I would say that what hurt us is the return on assets and remember were playing the long ball here right, we are talking about a 10 year obligation investing for that 10 year obligation, and we disclosed it in our K every year. And frankly, it's in earnings materials as well and to put a note our average rate of refund assumes for a four asset performance is 6.8% over that 10 year period. So there will be years that will be stronger. Hopefully and years when it could be weaker, but we're playing for the long ball on this and making that we're able to retire those obligations overtime.

[Joe Vafi:]

And then it sounded like you're a little you said kind of over the peak cash outflows on your large state contracts. Could you just give that final updates then on the iPSL joint venture and cash obligations there? Is that normalizing out this year now to and that's kind of how were landing towards getting to your long-term cash flow guidance performance in 2019?

[Inder Singh:]

Yes, look I think that -- so two things. One, I just want to sort of like put a bow around the comments I just made on the pension. I think you asked me about the markets are recovered in January and if we had to value that those same obligations in January, but we're in a better position and I know I didn't directly answer that, so let me address. Stock markets have returned, have recovered off their across. I haven't gone out and ask our outside advisors to go to a formal valuation, so I can't tell you exactly what that would be. But on the yields of stronger market performance in January, let's hope it continues into February and beyond, we would have a smaller deficit and we would have lower cash contribution obligation. So just to be very direct about it because we had to calculated on 1231, it was like almost the worse state tax have to calculate it, and we have seen markets recovered helpfully. So that's one, so I'm pleased with that. On the iPSL sales joint venture, yes, this is the year we're going to be pursuing a couple of things. One, obviously, operationalizing and taking advantage of the IT infrastructure that’s now in place. What does that means? That means that lowering frankly the operating cost of that joint venture. And therefore, the cash require to run that joint venture be more efficient in running and hopefully we will reap the rewards of that but somewhere our banking partners, the three banks that are 49% shareholders which are HSBC, Lloyds and Barclays. So, yes, the good news is, we're doing this for them. They've reimbursed for it. We're hoping that the cost and therefore the cash need and the CapEx need and all of those things are largely deployed, and now it's time to start seeing, I think you call that a normal year but something of more of an earlier this year continuing into to next year.

[Operator:]

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back over to Peter Altabef for any closing remarks.

[Peter Altabef:]

Operator, thank you very much. I know we did run a little longer than expected on the call, but really seriously thank you for some very good questions. We are very excited about what we did in 2018 and we are looking forward to continuing to execute in 2019 for what you can see base of our guidance numbers. So, the team is enthusiastic and we enthusiastically welcome the opportunity to meet with you on calls and in road shows throughout the year. So Courtney and Dan and team are really at your service as we continue to do Investor Relations throughout the year. With that, thank you very much.

[Operator:]

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.