Unisys Corporation
Q1 2016 Earnings Call Transcript

Published: 22 Apr 2016

[Operator:]

Please stand by. Good day and welcome to the Unisys First Quarter 2016 Results Conference Call. At this time, I’d like to turn the call over to Mr. Niels Christensen, Vice President of Investor Relations at Unisys Corporation. Please go ahead, sir.

[Niels Christensen:]

Thank you, operator. Good afternoon, everyone, and thank you for joining us. Earlier today, Unisys released its first quarter 2016 financial results. With us this afternoon to discuss our results are Peter Altabef, our President and CEO; and Janet Haugen, our CFO. We are also joined today by Inder Singh, Chief Marketing and Strategy Officer, who leads our global marketing and communications organization and Investor Relations, joined the company at the end of the first quarter. So we’re very pleased to have him with us. Before we begin, I’d like to cover a few details. First, today’s conference call and the Q&A session are being webcast via the Unisys Investor website. Second, you can find the earnings press release and the presentation slides that we will be using this afternoon to guide our discussion on our Investor website. Third, today’s presentation, which is complementary to the earnings press release, includes some non-GAAP financial measures. These have been provided in an effort to give the investors additional information. The non-GAAP measures have been reconciled to the related GAAP measures and we provided reconciliations within the presentation. From time to time, Unisys may provide specific guidance regarding its expected future financial performance. Such guidance is effective only on the 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 from the Unisys Investor website. And now I’d like to turn the call over to Peter.

[Peter Altabef:]

Thank you, Niels. And thank you all for joining us today to discuss our first quarter financial performance and the progress we are making to improve the company’s profitability and increase our competitiveness and market differentiation. Our first quarter results demonstrated progress toward our objectives of improved profitability and cash flow. We had a non-GAAP operating profit margin of 2.9%, which was up from negative 0.3% or 320 basis points year over year. Our adjusted cash flow in the quarter was up $100 million year over year. Our continued progress in improving our cost structure was a key driver behind the improved profitability and cash flow. In the first quarter of 2016, we achieved $25 million in incremental annualized savings, building on the $100 million in net annualized run rate savings we achieved exiting 2015. This was a significant milestone and we remain on target with respect to our cost reduction initiatives. In the first quarter of 2016, our revenue declined 3% on a constant currency basis, which was consistent with the guidance we provided. Services revenue declined 2%, also consistent with our expectations on the current currency basis. We are very pleased by the strong performance of our U.S. Federal business, which drove its sixth consecutive quarter of year over year services revenue growth. Federal team continues to perform very well and distinguish Unisys in that market. Services order bookings in the first quarter were down compared to the first quarter of 2015 and it was our second consecutive quarter of year-over-year declines. We have a strong pipeline for the remainder of 2016, and are aligning our sales and client executives to capitalize on the opportunities to drive bookings and grow backlog. Our technology business is lumpy quarter-to-quarter, and as expected included fewer ClearPath Forward license renewals in the first quarter of 2016 than in the prior year. First quarter 2016 technology revenue was down 10% on a constant currency year over year basis, which was also in line with our guidance. We also completed a convertible note offering in March. While Janet will speak to the transaction in more detail, I am pleased that we were able to strengthen our balance sheet, provide the company with greater flexibility to meet our requirements and expand our ability to invest in opportunities that can help build our business. As much as our cost reduction efforts are an important element and improving our competitive position and enhancing the efficiency of our delivery engine, so too does a strong capital structure. The combination of a stronger balance sheet and cost structure creates a solid base for growth and enhances our go-to-market efforts. I believe we made significant progress with each of these foundational elements in the first quarter. We worked aggressively throughout the quarter to strengthen our industry vertical go-to-market initiatives, and to integrate our expanding and enhanced leveraged solutions into those initiatives. In the quarter, we had success in extensions, expansions and new logos. Within the government sector, our public business includes all government clients outside the U.S. Federal Government and accounted for 26% of our first quarter revenue. During the quarter, we had a number of client wins. In Asia Pacific, the Australian Department of Immigration and Border Protection selected Unisys as its systems integration partner for the first phase of a new traveler border clearance platform that is designed to speed and automate the processing of lower risk travelers to focus resources on those of higher risk. In EMEA, building on our expertise in justice and law enforcement, Unisys was selected by The Netherlands Ministry of Safety and Justice to implement and manage a new jail management solution for penitentiaries across the country. Unisys will use the Unisys Law Enforcement Application Framework or U-LEAF, to help provide high quality modern jail management services to custodial institutions throughout The Netherlands. In Latin America, Prodesp, the government-owned provider of IT services to the State of São Paulo renewed on our ClearPath Forward platform which supports multiple applications, registration, records and identification systems for that State’s more than 27 million citizens. In the U.S., the Washington State Department of Social and Health Services awarded Unisys a five year $20 million contract to provide a private cloud solution. Unisys ClearPath Forward services are a core part of this as-a-service solution providing streamlined and cost effective management to the cloud infrastructure and associated application environment. The federal business, which represented 21% of our first quarter revenue, had several impressive wins in the quarter as well. NASAs Langley Research Center renewed its simulation and aircraft services contract, through which Unisys provides analysis, design, development, testing, operations and maintenance for NASAs flight simulation facilities and research aircraft systems. We also won an application support contract with a law enforcement agency to support its detention services applications, which provide prisoner designation, housing, transportation, medical care and detention information and analysis. And we expanded an application services contract with an agency responsible for domestic security to provide new analytics, visualization and common framework capabilities for passenger systems and redesign of cargo trade entity programs. Moving on to the commercial sector, it was also an active quarter in the commercial sector which represents 32% of our revenue. Air Canada in our travel and transportation industry extended and expanded its utilization of our cloud-based air cargo application. In Asia Pacific, HubSky Network Company, a new client, appointed Unisys to provide end-to-end design and consulting activities including data center planning, design implementation and management services for HubSky’s new cloud-based data center in Beijing. Riverbed technology a leading provider of application performance infrastructure selected Unisys as its partner in EMEA to provide onsite installation and maintenance services for key Riverbed products, including converged infrastructure platforms for cloud-enabled server virtualization, storage management and wide area network optimization. And Eli Lilly extended and expanded our long-standing global managed services relationship in support of its global IT operations and critical business functions. Within the financial services sector, which represented 21% of our revenue in the first quarter, some key wins included

[Janet Haugen:]

Thanks, Peter. Hello, everyone, and thank you for joining us this afternoon. In my comments today, I will provide comparisons on a GAAP and Non-GAAP basis. The Non-GAAP results exclude our pension and cost reduction charges. Unless otherwise mentioned any comparisons are on a GAAP basis. Please turn to Slide 3 for a discussion of our first quarter 2016 financial results. We reported revenue of $667 million in the quarter, which was down 8% year over year, 3% on a constant currency basis. The overall decline in revenue reflected a 2% constant currency decline in services revenue and a 10% decrease in technology revenue. I will discuss our segment results in more detail shortly. The success of our operating cost reduction actions was evident as operating expenses declined $21 million or 14%. Non-GAAP operating expenses declined 25%. Our Non-GAAP operating margin was 2.9%, rose 320 basis points year over year reflecting the benefit of the cost reduction actions taken by the company. In the quarter, we continue to execute against our cost reduction program. Our actions in the quarter generated approximately $25 million in annualized run rate saving, which raised our program-to-date savings to $125 million, against the target of $200 million as we exit 2016. We remain on track. Our first quarter 2016 diluted loss per common share was $0.80, which included $0.49 for cost reduction charges and $0.42 for pension expense. This compares to a diluted loss per share of $0.87 in the year-ago quarter, which included $0.55 for pension expense. Non-gap diluted earnings per common share was $0.11 in the first quarter of 2016 versus a loss of $0.32 in the year-ago quarter. In the first quarter, we recorded a tax provision despite recording a pretax loss. As I have said previously, our effective tax rate varies significantly quarter to quarter based on the geographic distribution of our income in that quarter. Based on our current tax position, future quarterly results with the comparable geographic distribution of income would likely include a tax provision even in periods with a pretax loss. Adjusted EBITDA for the first quarter of 2016 was $60 million versus $43 million in the prior-year quarter. Adjusted free cash flow improved $100 million year over year to $38 million in the first quarter of 2016. Moving to Slide 4, which shows our first quarter 2016 revenue by segment, geography, industry and revenue type. From a segment view, services represented 89% of our first quarter 2016 revenue. Looking at some of the services revenue in more detail, cloud and infrastructure services revenue was 50% of our overall revenue and decreased 7% on a constant currency basis, reflecting lower contract volumes on public sector accounts in the U.S. Application services were 32% of our overall revenue and increased 10% on a constant currency basis on the strength of justice, law enforcement and border security work, particularly in our U.S. Federal business. BPO revenue was 7% of our overall revenue. All of which is delivered outside the U.S. Half of the year-over-year decline was due to currency, with the other half a result of lower revenue from our iPSL joint venture in the UK. Moving to a geographic view, revenue from the U.S. and Canada, which represented 51% of our first quarter revenue, declined 3% in constant currency, principally reflecting lower year-over-year technology revenue. Incremental project work in our U.S. Federal business drove the sixth consecutive quarter of year-over-year US Federal services revenue growth. But we do not expect to see that level of project work to extend into the second quarter of 2016. Our EMEA region reported an 8% constant currency revenue decline due largely to the lower BPO revenue I mentioned a moment ago. Asia Pacific and Latin America regions reported constant currency growth of 9% and 8% respectively. In Asia Pacific, services revenue growth, which largely reflected the benefit of the recent New South Wales government contract win and higher BPO volume, offset lower technology revenue in the quarter. In Latin America, we saw growth both in services and technology revenue. To discuss our first quarter segment results in more detail, please turn to Slide 5. Services revenue declined 2% in constant currency as declines in cloud and infrastructure, and BPO, offset the growth in application services. Services gross profit margin rose 10 basis points year over year to 14.2%. We continue to pursue higher-margin services to improve the aggregate margin profile of our services business. Our services operating margin of 0.7% in the first quarter of 2016 rose 200 basis points year over year reflecting the benefit of the operating cost reductions we have taken over the past 12 months. Technology revenue decreased 10% in constant currency, reflecting reduced ClearPath Forward revenue, which can vary significantly from quarter to quarter based on the timing of license renewal. Technology operating margin percent more than tripled year over year to 18.1% due to the benefit of the operating cost reduction. For some comments on services order bookings and backlog, please turn to Slide 6. The first quarter of 2016 was a soft bookings quarter overall, with orders of approximately $300 million. From an industry vertical perspective, the financial and U.S. federal sectors had order growth, while commercial and public sector declined. As Peter mentioned, we have a strong pipeline for the balance of 2016 and are focused on executing against the opportunities we have to improve our order bookings and build backlog. We ended the first quarter with $4.1 billion in services backlog. Of that services backlog approximately $545 million is expected to convert into second quarter 2016 services revenue. Moving to cash flow, please turn to Slide 7 for an overview of our performance in the quarter. Our cash flow performance improved year over year. We generated cash flow from operations of $24 million in the first quarter of 2016, compared to cash usage of $43 million in the first quarter of 2015. Free cash flow improved by $89 million year over year, as a result of the increased operating cash flow and lower capital expenditures. Adjusted free cash flow improved by $100 million year over year, to $38 million in the first quarter of 2016. And at the end of the first quarter, the company had $514 million in cash. The debt balance at March 31, 2016 was $465 million. Please turn to Slide 8, for a discussion of our recent convertible notes offering. On March 15, we issued $190 million of five-year 5.5% coupon unsecured convertible senior notes with approximately $160 million in net proceeds after fees associated with the transaction and the cost of the capped call transaction. About a week ago, we issued an additional $23.5 million of the notes with the exercise of a portion of the underwriters’ overallotment. These notes have the same terms and conditions as the notes we issued in March. In the connection with the issuance of these additional notes, we entered into further capped call transactions at a cost of $3 million, which raised the total cost of the capped call transactions to about $27 million. The total value of the offering was $213.5 million dollars and Unisys received net proceeds of $180 million in total. The proceeds of the offering are for general corporate purpose. This additional liquidity provides the company with more flexibility to address future capital requirements, including the August 2017 maturity of $210 million of 6.25% senior notes. In light of the uncertainty within the high-yield debt market and our valuation of other financing alternatives available to us, we felt it was in the best long-term interest of the company to secure financing, which provides Unisys with a stronger balance sheet to address the near-term maturity support our business and enhance our ability to invest in the company as we execute against our business strategy. With respect to our pension obligations, there has been no change to our previous estimates on pension expense or contribution for 2016. Returns on the assets associated with the U.S. plan were approximately 1% for the first quarter 2016. On our fourth quarter 2015 earnings call in late January, we provided financial guidance for 2016. We continue to expect overall 2016 revenue in the range of $2.775 billion to $2.875 billion. We anticipate a non-GAAP operating profit margin of between 7% and 8% in 2016 and we anticipated our adjusted free cash flow for the year will be in the range of $160 million to $200 million. During the first quarter, we demonstrated significant progress toward our objective of improving our cost structure to increase our profitability and strengthen our cash flow generation. Our cost reduction actions are tracking in line with our plan to create a more competitive cost structure and rebalance the company’s global skill-set. We continue to focus on enhancing the competitiveness of our offering and building the go-to-market and delivery capabilities that will enable us to generate sustainable revenue growth in the future. Thank you for your time. And now, I’d like to turn call back over to Peter.

[Peter Altabef:]

Thank you, Janet, very much. With that, operator, we’ll open up the call to questions.

[Operator:]

Well, thank you. [Operator Instructions] And the first question comes from Jonathan Lee with Susquehanna Financial Group.

[James Friedman:]

Good morning.

[Peter Altabef:]

Jonathan, thanks for being on the call.

[James Friedman:]

Thanks, Peter. It’s actually, Jamie Friedman. So congratulations on these numbers. I just had a couple of questions. On Slide 6, if you could revisit some of the math in terms of the sell and bill contributions, so specifically if you look at the $545 million of services backlog that’s expected to turn to services revenue in 2Q. Yes, if you could kind of revisit the ratio that comes intra-quarter that would help me. Thank you.

[Janet Haugen:]

Good, Jamie, thanks for joining the call. There is a $545 million of services backlog - of the backlog is what’s expected to turn into the second quarter 2016 revenue. That generally represents between 90% and 95% of the quarter’s revenue. In the first quarter of 2016, the opening backlog represented 94% of the services revenue in the quarter.

[James Friedman:]

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

[Janet Haugen:]

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

[James Friedman:]

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

[Peter Altabef:]

So, Jamie, this is Peter. That’s a great question. And it’s one of the questions that I will tell you over the past couple of weeks with Inder now in the shop, we really all kind of been talking about that. So the way I have been looking at security for a while now, but I think I kind of enunciated it a little more clearly in the remarks is really through this kind of three layers. So the first part of this company as I think of Unisys and I think of how we will distinguish ourselves in the market going forward, in every element of our business, whether it’s end-user, whether it’s cloud, whether it applications or BPO, and obviously in the technology segment, we are building into every single one of our offerings advanced security. Now, that doesn’t mean we’re building Stealth into every one of our offerings. It is not necessarily applicable. But security itself is going to be something we are going to be discussing and showing our clients in everything we do. We think that not only is Stealth kind of a leading edge product for us, but in reality this company has been in the security business for decades. And as you and I know, because we’ve discussed it, and I think as most of the people on the call, products like ClearPath Forward are absolutely leading edge in security. There is not been a single known instance of data forcibly extracted from that operating system which is unique among operating systems in the known world. So we just - we’re just going to go very deliberately and take security as a core differentiator in the whole company. Now that said, that second element, with the second peeling away of the onion, is this idea of discrete security business. So you know we have a managed security offering, you know we have security consulting. I think, I mentioned on the last call that we were integral in the technology consulting for the 50th anniversary Super Bowl earlier this year. So all of that - and we do firewall security. We do a whole host cloud and infrastructure. I have to tell you, we haven’t always thought about those revenues discretely. And so, one of the challenges that we are working on is how do we describe for you guys clearly kind of the extent of that second part of the onion, which is our broader security services, which does include Stealth but is a lot bigger than Stealth. In fact, we think multiple times the size of Stealth’s current revenues. So we are working hard to figure out how to really kind of define that for you guys. And then the third element is Stealth. And Stealth, as I mentioned, includes not only software licensing, but includes as-a-service provision; it includes services; it includes implementation work and maintenance. So when you look at the second two layers of that onion, what you find is security all over the place. So you find consulting services and managed services which are in both the cloud and the application space. You find some security work in some of the BPO offerings we do, specifically around identity management. And obviously, you find security in technology. So when we have - one of the challenges we have is when we provide numbers, there are only so many ways we want to provide it or we will confuse you and ourselves. And right now, I thank you for congratulating us on the slide. We are working to figure out how do we do a better job in the future of trying to isolate for you our security business as a whole as well as Stealth. Keeping in mind, the short answer to your question is, you find bits of that revenue throughout the stacks that we’re currently showing.

[James Friedman:]

Got it. Thank you very much.

[Operator:]

And our next question comes from Joan Tong with Sidoti & company.

[Joan Tong:]

Good afternoon. A couple of questions here, first off, Peter you mentioned the pipeline is very strong. And obviously the booking number has been down two quarters in a row and so as the backlog number. So I’m just wondering what gave you the confidence that like things going to improve going forward. And maybe give some color about the pipeline that you have at this point?

[Peter Altabef:]

Yes, Joan, thank you for the question. And it’s certainly a good question. And as I alluded to in my remarks, I don’t believe we have had a strong - the last two quarters have been particularly strong for us. And we need to do better on that. I think I referred to our pipeline as strong as opposed to very strong. Maybe that’s just kind of parsing words. Let me try to quantify it for you. Our pipeline for the next nine months, and we really focus right now in 2016, is slightly larger than our pipeline for the same nine months was in 2015. So if we look at the last two quarters of signings and say, well, we have not done as well quarter on quarter in the last two quarters. We are expecting to do - if we do what we expect to do - we’re expecting to do slightly better in the next nine months than we did in the same period a year ago. Sales are not guaranteed, pipeline is not guaranteed. You win some, you lose some. But we do look at that pipeline and say we are encouraged by that. So that’s one reason why I mentioned the subject in my remarks. The other is, of course, we’re spending a huge amount of energy and focus in advancing our solutions. So we believe that our solutions are going to be stronger than they have been in the company and stronger relative to the market than we have had in the past. So we would expect our win rates to begin to increase. The countervailing piece of that is we’re getting more selective. So part of the - part of - and you’ve seen us be very open that we’re really not too interested in empty calories. So we are really focused on building this company and signing contracts that we don’t think are in our long-term best interest from a profitability standpoint, would just give us a boat anchor going forward. Now that said, we have to do both jobs, right? So we have to both increase sales as well as increase the margins for those deals. So we are not going to be dogmatic and go off any of these in too rigorous a fashion. But we are looking hard at both margin, quality of the deals and pipeline. But in whole, we like what we see over the next nine months and we believe that we are going to be able to ramp sales.

[Joan Tong:]

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

[Peter Altabef:]

Sure. Again - I hope I’ve done a good job, and hopefully we’ll do even better in future calls when talking kind of about these three layers of security. With respect to Stealth in particular and Stealth related sales, Joan, I listed several of those in the call. And so I encourage you to go back and look. What you’ll find, which you did not see an earlier quarters, is a geographic breadth in Stealth. You see Stealth used in Latin America. You see Stealth used in Asia Pacific. You see Stealth used in North America. I can’t remember whether I have a particular instance of stealth in EMEA, but I think that we do. And you certainly will in the future. So what we have really done now as those offerings are maturing is what really started as a North American base is really going global. Now, that’s true with our direct sales force. It’s going to be even more true with our partners. So, AWS, Microsoft, Mitel, all of these are very global organizations. And we have now got the capability of using Stealth all across the planet. So I think you’re seeing a lot of activity there and you are seeing it kind of throughout our business. Now, with respect to your specific question of, hey, how does it help you, perhaps with a bigger deal? I would mention the - I would go back to the deal I talked about in Australia. So that’s not a Stealth situation per se, although Stealth might wind up as part of the offering solution, but that’s a situation we are using our justice, law enforcement and border protection suite of products, specifically about border protection. And really taking some of the learning we have in the United States and elsewhere in the world and taking that to Australia. That’s going to result in work that will go beyond simply security software or identity management software and will get us larger work.

[Joan Tong:]

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

[Peter Altabef:]

I will. And then, Janet, you please feel free to add to my comments. When we talk about Europe really the first thing you go to, I wish it wasn’t the case but it is, and the first thing you talk about is the cost programs that we have put in place, because it really is important to Europe. So as Janet and I mentioned on the last call, when you think about our initial cost or what we call go-forward program, initially that was to take out about $200 million of annual run rate cost. We expected to get $100 million last year, a $100 million this year and we are on track to do that. But we actually have expanded that program to $230 million as a potential. And what we did was we actually took $30 million of the original $200 million and we moved it to 2017. And then we put a new $30 million into 2016, all without increasing the overall anticipated cost of $300 million. The piece we moved out, that $30 million, we moved out was $30 million of the roughly $100 million of annual run rate cost savings in Europe. We moved out that $30 million, because frankly it’s simply very expensive. And from a cash standpoint, we wanted to do the quick hits first. And from a return on investment standpoint, while we think it is still a good return on investment, it’s not as powerful as some of the others. So what I would tell you is we’re still on track to do $70 million of the initial $100 million of go-forward cost savings in Europe by the end of this year. And what Janet and I said last call is, yes, we kind of think we are going to get that $30 million next year, but we’re going to look at it more carefully. It will just make sure we’re on board when we do that.

[Joan Tong:]

Okay, Peter. That’s good - I’m sorry to interrupt. Can you just remind us what are the charges related to or the charges and also the cash laid out related to that $30 million that you might and might not want to deal?

[Janet Haugen:]

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

[Joan Tong:]

I see and those are - that piece that you might not want to do at this point, but you haven’t really disclosed the definite answer that you might want to move forward or not.

[Janet Haugen:]

Yes. So, Joan, as Peter mentioned, it’s clearly part of the plan that we want to accomplish to the cost reductions there. We look at the timeline for executing that. We look at the amount of cash usage for it and what we need to do from a workforce standpoint. And as Peter said, we looked at the $30 million of savings with the requirement of $80 million roughly of cash out. We’re continuing to look is there a better way to do it, is there an alternative way to do it, can we accomplish that in a slightly different fashion that perhaps might use less cash. But right now, based on all we know that would be the estimated time of the charge, time of the cash expense, expenditure and the savings that would come from that Joan.

[Joan Tong:]

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

[Janet Haugen:]

Thanks, Joan.

[Operator:]

And our next question comes from Ned Davis with William Smith & Co.

[Ned Davis:]

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

[Janet Haugen:]

So, Ned, it really does depend upon the level of net income as to whether they were anti-dilutive or dilutive. For the full year, you would be adding 17,200,000 shares to the share base. So the estimate for the year would be 67,105 on the diluted share base. For the second quarter, you’re going to add roughly - to the current share base of $50 million you’re going to add roughly 21.6 to get you to 71.6 for the total share average in the second quarter.

[Ned Davis:]

All right, I…

[Janet Haugen:]

If it’s dilutive, right - Ned, if it’s dilutive. With anti-dilutive, we’ll be back in the basic shares.

[Ned Davis:]

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

[Janet Haugen:]

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

[Ned Davis:]

Right.

[Janet Haugen:]

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

[Ned Davis:]

That’s my next question.

[Janet Haugen:]

Okay. So I mentioned in my comment that the tax provision that we had in this quarter, even though we had a loss, if we have that same level of income and geographic mix, you’re still going to have that type of provision going forward, any to the respective quarters. So I would…

[Ned Davis:]

So how would that translated into a share count then? We just assume that - make the assumption you still have that weird situation of paying taxes against a GAAP loss, what would be…

[Janet Haugen:]

Well, let me clear that, that’s tax expense, not cash taxes out of the company. The way the GAAP is coming…

[Ned Davis:]

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

[Janet Haugen:]

Yes. The share-count, Ned, would be the same, depends by quarter by quarter. As I mentioned, the annual share count on the dilutive basis is 67,105,000 and the basic is roughly 50 million even.

[Ned Davis:]

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

[Janet Haugen:]

No, it’s what it cost out of pocket. It is not something that amortizes it. So if you look at the total amount of capital that we issued which is the $214 million of notes. If you reduce that by the fees and you reduce that by the cost of the capped call, which is what get you down to the $180 million.

[Ned Davis:]

Right, and then, so for bookkeeping purposes, if we were trying to model this we would expense the interest based on the gross amount of the debt, isn’t it…

[Janet Haugen:]

That’s correct, to the 5.5% coupon.

[Ned Davis:]

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

[Janet Haugen:]

So two things…

[Ned Davis:]

What’s causing that, yes?

[Janet Haugen:]

Okay. So two things, first, from a cash tax expense, as a company that does business in more than 35 countries on a global basis, we do have income tax expenditures globally. It has ranged between $50 million and $60 million. It’s pretty consistent that’s generally the cost of the overall infrastructure. When it comes to the tax expense, we are in accounting where all of our tax attributes have - for the most part, have valuation reserves against that. So in countries, which represent about 50% of our countries, where we are profitable have been profitable, we recognize the normal tax provision. In countries where we have incurred losses, as we were talking earlier about the challenge particularly in Continental Europe, we do not get the benefit of those tax losses. And so, as a result, what generally happens to us in any given quarter is that we don’t have the benefit from some of loss position in those countries, where we had longtime challenges. But we are paying tax in those legal entities, in those countries where we have been and continue to generate profitability.

[Ned Davis:]

Okay.

[Peter Altabef:]

So, Ned, this is Peter. I want to thank you for each of those questions. And, I guess, I want to add my support to Janet in what she is trying to do, and what Inder will do now that he is coming on board. So we started last quarter to provide guidance as you know for the first time in 10 years, and part of the rationale, first, I think that’s the right thing for this company to do at this time. And I think our job as a management team is to make your job simpler and easier. And our numbers get a little complicated. And so, what we’re trying to do by providing guidance is make it more easier to model and more easier to understand. It’s pretty clear, and this conversation helps, but it’s been clear even before this conversation that while we have taken several steps, including the revenue, the profit, the cash flow, there are couple more steps that would be helpful for you and others, and those are around our taxes and around guidance around share count. So one of the things Inder is going to do working with Janet and Niels in our team is really see how we can take this to the next level, continue to expand our disclosure and analysis to you to keep trying to make this easier and easier and easier. So that’s on us and it’s one of the things we will be working on in the months to come.

[Ned Davis:]

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

[Peter Altabef:]

You’re welcome and thank you, Ned.

[Operator:]

[Operator Instructions] The next question comes from Ana Goshko with Bank of America.

[Ana Goshko:]

Hi, thanks very much, and thank you for the details on the progress on the cost reduction plan, because that’s really what I wanted to focus on. So you did preempt some of my questions. But, Janet, for the rest of 2016 can you give us some kind of guideposts on how we should think about the cost reductions that we should see sort of quarter by quarter and where those will break out within the various cost line items in COGS or SG&A.

[Janet Haugen:]

Sure, Ana. So as we have talked about previously that the cost reduction program is roughly 60% in the operating expenses and 40% in the cost of services delivery line. The upfront activities in the program have really been weighted towards the operating expense line and you can see that in our run rate for operating expenses. As we go forward, we’re looking to see more of that benefit continue in the services gross margin show up in the services gross margin. And that’s more weighted into the third and fourth quarter actions that we would have taken. We said that we were going to generate another $100 million worth of savings in 2016. We’ve added $25 million to that in the first quarter. As it rolls out, I would expect the remaining $75 million to be weighted to the third and the fourth quarter as opposed to it being even through each quarter. And that as we’re looking into the third and fourth quarter, those cost savings will start to show up in the services gross margin and services operating margin line.

[Peter Altabef:]

And, Ana, what I would say is our confidence that we’re able to execute that is strengthened by the arrival of Andy Stafford. So Andy is a long tenured veteran of Unisys, having joined the company on Monday - Tuesday actually. So he is really brand-new to the company. He is not at all new to our industry. So, Andy has a long track record of success most recently at Accenture. He led their global delivery team of over 100,000 professionals at Accenture. He personally lived in India for five years as an integral part of the Accenture leadership team there. So he is no stranger to operating efficiencies, not only taking cost out, but increasing discipline and methodology. So we have, as I mentioned in my comments, we really welcome Andy’s arrival. And we think he’s going to do great things for our services delivery capability on a global basis.

[Ana Goshko:]

Okay. Great. That’s great to hear. And secondly just an accounting question, if I look at Slide 7, and then, Janet, we have $18 million of the cost reduction payments. Is that something that was expense this quarter or was that only a cash outflow in the quarter and it had been expensed…?

[Janet Haugen:]

So if you are - sorry, Anna. If you’re on Page 7, that cost reduction will be the payment. If you look on Slide 16 and you’ll see it in a number of places, the Schedule E, the GAAP to the Non-GAAP Reconciliation, you’ll see that there were $26.9 million of cost reduction charges that went through the P&L in the first quarter. So we are trying to show on Slide 7 the cash and in the additional information as shown on Page - Slide 16, what went through the P&L on a GAAP basis.

[Ana Goshko:]

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

[Janet Haugen:]

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

[Ana Goshko:]

Okay, that’s great. Thank you. Because, if you can imagine, I’m trying to get some more of what the ongoing normalized costs are.

[Janet Haugen:]

Sure.

[Ana Goshko:]

Okay, great. And then, secondly, on the capital markets financing that you are able to complete, just wondering how you think about your cash balance right now and your comfort with your liquidity levels. I think you still have about $80 million of cash restructuring payment to make this year as well as some pension obligations. But I want to understand how you feel about your ability to end the year with a comfortable cash balance, especially as you look into 2017 with the…

[Janet Haugen:]

Sure, Ana. So we have ended the quarter with $514 million into cash balance. And as we look out through the year, we have considered both the cost reduction actions that we still have to take and as well considering the fact that the - we have the $210 million of debt maturing in 2017. And so the importance of having done the convertible note transaction to strengthen our capital position was to enable us to continue through the cost reduction actions in the planned activity that we have, but equally important and probably coming up before some of the 2017 cash payments, is the majority of the 2017 note.

[Ana Goshko:]

Okay. Okay. Well, thank you very much.

[Janet Haugen:]

Thanks, Ana, for joining the call.

[Operator:]

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

[Peter Altabef:]

This is Peter. Thank you, Janet, for helping on the call. I hope there as I mentioned in response to Ned’s comment, Janet and I are both continuing to provide more and more color both as to the business and as to the finances. We expect to continue to do that and to expand that in future quarters. We are also on the road, so we expect to be meeting with investors and analysts on a more proactive basis going forward. Niels and Inder are both working diligently to set those up. And we extend a welcome and request to anyone on this call, as we are setting up our travel schedules, to please let us know if you’d like us to include you in those schedules. So with that, I want to thank everyone for joining us and look forward to the next call.

[Operator:]

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