Unisys Corporation reported second-quarter and first-half 2017 financial results. The company's Services segment saw year-to-date gross and operating margin expansion of 70 basis points and 20 basis points, respectively, year over year. Services revenue for the first half was down 4 percent year over year (3 percent on a constant-currency basis), an improvement of 300 basis points versus the prior-year period. Total TCV, which includes renewals and extensions that can vary period to period, was down 12 percent year over year for the first half. However, excluding U.S. Federal (which faced a difficult year-over-year comparison due to a large renewal in the second quarter 2016) TCV was up 7 percent year over year for the first half. New business TCV was up 65 percent year over year for the first half. For the second quarter 2017, total TCV was down 31 percent year over year, impacted by the U.S. Federal renewal and Technology renewal timing. Excluding these impacts, TCV was up 5 percent year over year in the second quarter. New business TCV was up 74 percent year over year in the second quarter. The entirety of the year-over-year decline in U.S. Federal TCV for the first half was due to a single large renewal in the prior-year period, which also was almost entirely responsible for the year-over-year decline in the second quarter 2017 U.S. Federal TCV. Services backlog was roughly flat sequentially at $3.7 billion.

"For our first half, our results continued to indicate progress against our key strategic and financial goals," said Unisys President and CEO Peter Altabef. "While we saw some year-over-year variability during the second quarter, in part due to a very difficult compare for our Technology segment, we continue to see improvement in our go-to-market efforts."

Summary of First-Half 2017 Business Results

Company:

As expected, results for the second quarter and first half of 2017 were impacted in part by a difficult year-over-year comparison in the second quarter 2017 in the Technology segment. That segment saw growth of 31 percent in the second quarter 2016, and was down 32 percent in the second quarter 2017, which impacted total company revenue and margin year-over-year compares, both for the second quarter and first half.

Revenue year to date of $1,331 million was down 6 percent versus the first half 2016, down 5 percent year over year on a constant-currency basis. First-half 2017 operating profit margin was (2) percent, which includes cost-reduction and other charges and pension expense, relative to 2 percent in the prior-year period. Non-GAAP operating profit margin was 5 percent, versus 7 percent in the first half 2016. Both revenue and margin year-over-year comparisons were impacted by the difficult second quarter Technology compare.

Net loss attributable to Unisys Corporation common shareholders for the first half was $75 million, relative to a loss of $18 million in the prior-year period. Adjusted EBITDA⁽⁵⁾ for the first half was $150 million, versus $184 million in the first half of 2016. Adjusted EBITDA margin for the first half was 11 percent, relative to 13 percent in the prior-year period.

In the first half 2017, operating cash flow was $(90) million, relative to $57 million in the prior-year period. The company saw free cash flow⁽³⁾ of $(172) million year to date, versus $(13) million in the first half of 2016. Adjusted free cash flow⁽⁶⁾ year to date was $(72) million versus $90 million in the prior-year period. Reductions in cash flow year over year were largely due to payment timing, including related to technology invoices sent at the end of the second quarter 2017 which are expected to be collected in early third quarter 2017 (including a $35 million invoice related to a single contract that was signed and expected to be collected in the second quarter 2017 but was received in the first week of July), in addition to the lower operating profit noted above.

At June 30, 2017, the company had $571 million in cash and cash equivalents.

Services:

Services revenue, which represented 87 percent of first-half total revenue, declined at a more modest rate than during the prior-year period, with a decline of 4 percent year over year as reported (a 300 basis point improvement relative to the prior year) and a decline of 3 percent in constant currency to $1,160 million for the first half of 2017. Services backlog ended the first half at $3.7 billion, relatively flat sequentially. Services gross margin was up 70 basis points year to date versus the first half 2016 to 16 percent. Services operating profit margin was up 20 basis points to 2 percent. Margins in the Services segment were helped by a particularly profitable transaction in the first quarter, as previously disclosed.

Technology:

Technology year-to-date revenue, which represented 13 percent of total first-half revenue, was down 18 percent year over year to $171 million, down 17 percent in constant currency. Technology gross margin for the first half was 53 percent, versus 60 percent in the prior-year period, and Technology operating profit margin was 26 percent, relative to 37 percent in the prior-year period. These comparisons were impacted by the difficult second-quarter comparison for this segment, as mentioned above.

Summary of Second-Quarter 2017 Business Results

Company:

Revenue for the second quarter of $666 million was down 11 percent relative to the second quarter 2016, down 10 percent year over year on a constant-currency basis. Second-quarter 2017 operating profit margin was (4) percent, which includes cost-reduction and other charges and pension expense, versus 7 percent in the prior-year period. Non-GAAP operating profit margin was 4 percent, versus 11 percent in the second quarter 2016. Both revenue and margin comparisons were impacted by the difficult year-over-year comparison in the Technology segment for the quarter.

Net loss attributable to Unisys Corporation common shareholders for the quarter was $42 million, relative to earnings of $22 million in the prior-year period. Adjusted EBITDA for the quarter was $66 million, relative to $124 million in the second quarter 2016. Adjusted EBITDA margin for the quarter was 10 percent, versus 17 percent in the prior-year period.

In the second quarter 2017, operating cash flow was $(49) million, versus $31 million in the second quarter 2016. The company saw free cash flow of $(96) million for the quarter, relative to $(3) million in the prior-year period. Adjusted free cash flow for the quarter was $(46) million, versus $51 million in the second quarter last year. Reductions in cash flow year over year were largely due to the timing of payments, in addition to the lower operating profit, both noted above.

During the second quarter, the company successfully closed a $440 million Senior Secured Notes offering, the net proceeds of which are reflected in the closing cash balance for the quarter.

Services:

Services revenue, which represented 86 percent of second-quarter total revenue, declined by 6 percent as reported and 5 percent in constant currency to $575 million. Services gross margin was 14 percent versus 17 percent in the second quarter 2016, in part due to ongoing investments in the Services business, consistent with our go-to-market strategy. Services operating profit margin was (2) percent, versus 2 percent in the prior-year period.

Technology:

Technology revenue, which represented 14 percent of total revenue, was down 32 percent year over year to $91 million, down 30 percent in constant currency. Technology revenue was up 31 percent year over year in the second quarter of 2016, creating a very difficult compare. Technology gross margin was 59 percent, versus 67 percent in the prior-year period. Technology operating profit margin was 36 percent, relative to 48 percent in the prior-year period. Both gross and operating profit margin for Technology were impacted by lower revenues, given the fixed-cost nature of the business.

Continued Execution on Business Strategy

The company in the second quarter entered into several key contracts in each of its sectors:

• U.S. Federal: Unisys signed a contract with a U.S. government agency to provide a biometrics-based identity and access management solution critical to the agency's operations.

• Public: Unisys signed a contract with The California State University -- the largest four-year university system in the U.S. -- for an analytics-based hybrid-cloud solution to transform system-wide delivery of educational and administrative services to over half a million CSU students, faculty and staff.

• Commercial: Unisys expanded its long-standing relationship with Starbucks, signing new multi-year agreements for infrastructure and end user support services in both Europe and China.

• Financial Services: Signed an agreement with a leading European private-banking institution to implement cloud-based Unisys ClearPath Forward software supporting the bank's digital transformation and omni-channel banking initiatives.