UIS earnings call analysis

NYSE:UIS Q1 2026 Earnings Call Transcript Generated on 6/6/2026 Operator | Conference Operator: Good morning and welcome to the Unisys Corporation first quarter 2026 earnings call. All participants will be in a listen only mode. Should you need assistance, please signal an operator by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star and then two. Please note, this event is being recorded. I would now like to turn the conference over to Michaela Paworski, Vice President, Investor Relations.

Please go ahead. Michaela Paworski | Vice President, Investor Relations

Thank you, Operator. Good morning, everyone. Thank you for joining us. Yesterday afternoon, Unisys released its first quarter 2026 financial results. Joining me to discuss those results are Mike Thompson, our CEO and President, and Deb McCann, our Chief Financial Officer. As a reminder, Today's call contains estimates and other forward-looking statements within the meaning of the securities laws. We caution listeners that these statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed on this call. These items can be found in the forward-looking statement section of yesterday's earnings release furnished on Form 8K and in our most recent Form 10K and 10Q filed with the SEC. We do not assume any obligation to review or revise any forward-looking statements in light of future events. We will also refer to certain non-GAAP financial measures, such as non-GAAP operating profit, that exclude certain unusual or non-recurring items, such as post-retirement expense, cost reduction activities, and other expenses that the company believes are not indicative of its ongoing operations. While we believe these measures provide a more complete understanding of our financial performance, they are not intended to be a substitute for GAAP. Reconciliations for non-GAAP measures are provided in the slides for today's call, which are available on our investor website. With that, I'd like to turn the call over to Mike.

Mike Thompson | CEO and President

Thank you, Michaela. Good morning, everyone, and thank you for joining us to discuss the company's first quarter 2026 results. We're off to a good start in 2026. Both growth and profitability were modestly ahead of the expectations we provided, keeping us on track to achieve our full-year guidance ranges. Strong new business signings improved our trailing 12-month book-to-bill ratios and will contribute to in-year revenue. While geopolitical events have introduced new uncertainties in the markets, Client budget seems to be loosening a bit, and especially in the commercial sector and in Europe. Project volumes are beginning to materialize on the back of last year's renewal with solid pipeline in place for the remainder of the year. First quarter profit improvement keeps us on track to achieve our full-year free cash flow expectations and reflects our focus on adopting AI and continued workforce optimizations. As expected, our pension deficit and estimates for future cash contributions remain stable due to the actions we took last year to remove the majority of the pension contribution volatility, allowing us to focus on strategic growth and efficiency initiatives. Looking more closely at the first quarter, revenue was up 1% year over year and 3% in our XLNS solutions. Volumes with existing clients were better than anticipated, including a modest pickup in the PC refresh cycle. This helped offset some of the top-line effects from client attrition and modest price pressures created through sharing AI cost savings with clients, which we discussed last quarter. While AI efficiency gains reset market pricing last year, they're benefiting gross margins, which improved 80 basis points in the first quarter, including 170 basis points of XLNS gross margin expansions. During the client signings, our first quarter wins increased confidence in achieving our 2026 performance goals, and we continue to have a higher portion of guided revenue contracted and in backlog compared to a year ago. The first quarter new business TCB was $158 million, up 16% sequentially and 45% year over year. This was our strongest quarter of new business signings since the fourth quarter of 2024, with growth from both new logos and the existing base. Several multi-year contract wins illustrate our ability to gain market share when leading with innovation. For example, we had several notable signings for our agentic service desk powered by our service experience accelerator capabilities. During the quarter, we won a large new scope contract to provide our agentic service desk with one of the world's premier quick service restaurants expanding our existing support to the entirety of their nearly 14,000 restaurants in the United States, with additional growth opportunities around the world. We also signed a new logo on Australia, which will be our first deployment of our agentic service desk in the Asia-Pacific region, where we've landed several recent wins. As a part of this engagement, we will provide elevated IT support to approximately 11,000 employees in Australia's Department of Health, Disability, and Aging, where we now support numerous regulatory functions. This is a multi-year contract which has options extending to 10 years and is structured on delivering against automation and service experience outcomes rather than ticket volumes. The value behind our service experience accelerator is proving to be a compelling point-of-the-sphere solution for new businesses. delivering measurable results and quickly orienting us as an experienced AI partner in moving enterprise AI from concept to reality. Our device subscription service, or DSS, continues to resonate with another first quarter win at a large financial client in the United States. Clients are grappling with evaluating OEMs and hardware costs, understanding device AI capabilities, and forecasting headcount fluctuations, all of which makes our clients more open to our intelligent refresh offering, which simplifies the process and helps offset cost pressures. We have recently expanded our intelligent offering to encompass certain IoT devices through a deeper partnership with Dell. Several key engagements for application development and management also contributed to strong first quarter new business TCB. For example, we expanded our existing services relationships with Nair, Bain's air traffic controller, a client of 30 years. The renewal included a sizable new scope, which involves managing more than 100 of our clients' existing applications across numerous functions, with additional funds budgeted for future projects to design, test, and deploy new applications. Our application capabilities also opened the door at the largest community college system in the United States, with UNICEF signing a new logo agreement to modernize and manage an important student-facing applications that provides their approximately 2 million students with resources and tailored education pathways for more efficient incoming transfers, graduations, and entry into the workforce. This engagement established a solid foundation, which is already leading to additional work expected beginning in the second quarter. We also made progress on our initiatives to cross-sell CA&I application services into our ECS client base. In the first quarter, we signed a renewal with a large Colombian retailer for existing ClearPass Forward managed services that integrated new scope application development work supporting the client's core commercial and inventory applications. Across our segments, TCB renewal rates were strong and above 95% for the total company. We are also seeing some unexpected extensions from attrited clients stemming from the lack of readiness from the new service provider. At one such client, we were awarded a large new scope in the first quarter for infrastructure modernization services. We believe this win demonstrates the desire of some of these clients to remain engaged with us, which we attribute to the deep relationships we've established, our delivery track record, and the broadening awareness of our capabilities. Looking at our go-to-market and pipeline, we've seen a modest pickup in client demand over the past few months and a stronger pickup with new logos where qualified pipeline increased sequentially in XLNS solutions. A number of these opportunities originated from a new initiative within our direct sales organization, which is the development of rapid value assessments for our key AI-enabled solutions. These repeatable assessments help quantify time to value inclusive of estimated timelines and outcome-based pricing scenarios, easing friction associated with returns on AI investments, especially in the mid-market. We're currently utilizing rapid value assessments for our agentic service desk, intelligent operations, and security operations with assessments for agentic application transformation and management and intelligent device refresh in the works. We're also generating more leads by collaborating with alliance partners on development and marketing around a narrower set of solutions which identified overlapping priorities and strong value propositions. These efforts have led some partners to place Unisys more prominently on their roadmaps and using us as their primary and preferred implementation and managed service partner for their technology. And they're directly handing off leads in areas such as enterprise service management, unified endpoint management, and field services to implement technology for smart reading rooms, kiosks, and digital signage. I want to shift the focus to discuss our investments in the business. much of which is concentrated on leveraging artificial intelligence to move into higher valued services and penetrate emerging market opportunities stemming from AI. Our approach towards enterprise AI has been to avoid simply rebranding existing solutions as AI enabled, but instead to use AI to fundamentally transform the outcomes we deliver to our clients, and that positions us well for future-proofing our client relationships. In our XLNS IT services, this involves thoughtfully choosing partnerships to strengthen, enhancing the skills of our workforce, expanding our operational accelerators, and constructing agentic workflows and governance frameworks to deliver secure, reliable results. We have also been proactive about rolling out delivery innovation in our existing base to create measurable results increasing our relevance and thought leadership with clients, prospects, and industry analysts. We're working to maximize that momentum by investing more deeply in our talent. We're expanding our forward-deployed engineering capabilities to increase capability in areas such as agentic application services. We view agentic AI as a major opportunity for organizations to close the modernization gap, especially in public sector and higher education. Expanding our forward-deployed engineering capabilities positions us to take a more prominent role in designing and managing agentic workflows, whether they enhance software applications or replace elements of their functionality. In some cases, we're seeing client interest in expanding these services beyond central IT to reshape business as usual and functions such as HR and finance. As we think about upscaling for AI more broadly, the skills in demand are rapidly evolving almost on a daily basis with the one constant being the pace of change coming from frontier models, hyperscalers, software, and OEM providers. We're committed to maintaining a platform and model agnostic approach that best addresses a given use case within a specific industry for a specific client. At the same time, Significant existing technical debt within IT estates will require subject matter expertise to meet clients where they are today and help them transform and transition their technical debt over time. To do that successfully, we're aligning certain technical resources around key models and platforms to provide specialized consulting to both our external and internal delivery teams. Physical AI infrastructure is another emerging growth vector for Unisys. stemming from demand for AI compute and the rapid build-out of data center capability that's occurring. Data center builds are expanding the need for field technicians knowledgeable in the installation and maintenance of complex AI-focused IT infrastructure. Our large, globally scaled field services organization with cutting-edge training and delivery experience connects humans, data, and AI agents on one trusted platform. In the first quarter, we signed a new business engagement with the leading global OEM to support the build-out of a large US-based data center. While the initial scope is small, it lends credibility to our specialized capabilities for the installation and support of AI infrastructure. AI infrastructure is just one element of our overarching strategy to expand our field service revenue streams. We're continuing to grow hybrid infrastructure volumes and focus on generating opportunities in network equipment and enterprise storage. We're also broadening field services capability in a variety of hardware, most notably within offices, restaurants, retail, and manufacturing facilities. In L&S Solutions, we're approaching AI from both ends, infusing AI functionality directly into the ClearPass Forward ecosystem, while also making it easier to extend ClearPass Forward data and applications to fuel AI in other parts of the enterprise. During the quarter, we put out a new release of AB Suite, which is our low-code development environment for building applications on top of ClearPath. The updates speed development, enhance data encryption, and simplify integration of data with external environments without disruption of mission-critical operations. The release also adds capabilities for generating AI-based synthetic test data allowing developers to rapidly test new functionality while reducing the risk of exposing sensitive data, strengthening security and compliance. In addition to AB Suite release, we launched a new AI developer toolkit with practical guidance for building AI data models within the ClearPath Forward ecosystem. This is the first in a series of targeted client AI-enabled initiatives aimed at reinforcing ClearPath's value proposition and role as a long-term AI-ready platform that clients can rely on for decades. Taking a step back across all our segments, we're seeing AI disrupt the status of the industry and push clients to rethink their solutions and IT providers. This has given us an opportunity to show our agility and step into a more prominent role with clients and partners and accelerate the shift in our brand perceptions. We also hear it in our conversations with and recognition from the industry analysts and advisors that influence client decision making. In the first quarter, Unisys was again named a leader in reports on end-user computing services and mid-market digital workplace solutions by Avasant and Everest. We are also newly included in the HFS report on next-generation IT infrastructure services. which includes providers able to help enterprise reimagine infrastructure specifically for AI-native operations and distributed digital environments. These acknowledgments follow Gartner's elevating unisys to a global leader in digital workplace services. With that, I'll turn the call over to Deb to discuss our results in more detail.

Deb McCann | Chief Financial Officer

Thank you, Mike, and good morning, everyone. As a reminder, my discussion today will reference slides from the supplemental presentation posted on our website. I will discuss total revenue growth both as reported and in constant currency and segment growth in constant currency only. I will also provide information excluding license and support for XLNS to allow investors to assess our performance outside the portion of ECS where revenue and profit recognition can be uneven between periods due to license renewal timing. Looking at our results in more detail, As Mike mentioned, the year is off to a good start. As you can see on slide six, first quarter revenue was $438 million, up 1.3% year over year, which included an approximate 600 basis point benefit from foreign exchange relative to the prior year period. In constant currency, revenue declined 4.5%, with the largest declines in LNS solutions due to renewal timing and anticipated volume declines in our XLNS solutions. Excluding license and support, First quarter revenue was $372 million, up 3.1% year-over-year, and down 2.9% in constant currency. I will now discuss segment revenue performance in constant currency terms shown on slide six. First quarter digital workplace solutions revenue of $118 million was down 6.5% year-over-year. This decline was better than we had anticipated and reflected the factors we have discussed in previous quarters such as client attrition, pricing dynamics in the industry, and lower base levels of PC field services volumes that are stabilized but down year over year. At the same time, growth in areas such as higher value field services and better than expected volumes help to mitigate some of those effects. For example, our volumes and revenue from high-end enterprise storage have nearly doubled on a year-over-year basis. And as Mike mentioned, we continue to see significant market opportunities across a more diverse set of higher margin field services, including AI infrastructure and IoT devices. We are also pleased with our DWS pipeline, which is up sequentially. First quarter cloud applications and infrastructure solutions revenue was $182 million, representing a 2.4% year-over-year decline. The decrease primarily reflected lower volumes, especially at certain U.S. public sector clients and client attrition. As you may recall, we began seeing public sector clients pull back in the first quarter of 2025 due to uncertainties related to federal funding levels, and those year-over-year headwinds should lessen as we lap declines in subsequent quarters. Within the Enterprise Computing Solutions segment, or ECS, our license and support solutions revenue was $66 million, down 12.4% year-over-year due to the timing of the renewal schedule. There is no change to our expected weighting of 30% of full-year L&S revenue in the first half and approximately 70% in the second half. And we continue to expect $400 million of average annual L&S revenue in 2027 and 2028. Artificial intelligence has been and continues to be a driver of L&S consumption and in turn revenue. And we are evolving our ecosystem with innovations that facilitate enterprise AI both on our platforms and external AI-enabled client environments that can utilize valuable data generated by our systems. We continue to detect no change in client commitment to the ClearPass Forward ecosystem resulting from AI and code refactoring. On the contrary, there are some signs that our ecosystem evolution is leading to certain clients with migration plans re-evaluating specific workloads to retain an outsource management to Unisys, which we attribute to consistent investments in platform modernization and sustainability of our skilled workforce. In our specialized services and next-generation compute solutions, the XLNS portion of the ECS segment, first quarter revenue was $50 million, down 2.5% year over year. This was ahead of our expectations due to improved volumes and additional scope in some of our business process solutions, which partially offset declines from the phasing of project work. Total company TCV was $274 million for the quarter, up 33% year-over-year. New business TCV totaled $158 million, up 16% sequentially and 45% year-over-year. This is the highest level of new business TCV we have had in four quarters. Trailing 12-month book-to-bill was 1.2 times for both total company and Accelina Solutions. We ended the year with backlog of $2.96 billion, up 2.4% from the prior year end. Moving to slide eight, first quarter growth profit was $113 million, and growth margin was 25.7%, up 80 basis points from the prior year. XLNS growth profit was $73 million, and XLNS growth margin was 19.5% in the first quarter, up 170 basis points year over year. Improvement was primarily driven by expanded use of intelligent automation and ongoing workforce optimization. During the first quarter of 2026, a transaction within the company's UK business process outsourcing consolidated joint venture generated $3 million of non-segment revenue and gross margin benefit with no net cash impact. Total company and Exxon S gross margin benefited by 50 and 70 basis points, respectively. The transaction is expected to generate $12 million of gross margin benefit for 2026 evenly among the four quarters. We remain on track to deliver our targeted 150 basis points of annual XLNS growth margin improvement amid a challenging growth backdrop, although our path may not be a straight line. I will now touch briefly on segment growth profit shown on slide eight. EWS segment growth margin was 13.5% in the first quarter compared to 14.2% in the prior year period. Contraction primarily reflects impacts from exited clients and growth in lower margin device subscription service revenue in the quarter, which can have larger components of hardware, but offer a strong entry point for expansion into higher value offerings. DWS margins are expected to improve as we move through the year and benefit from the implementation of delivery initiatives. CA&I segment gross margin was 21.8% in the first quarter, up 230 basis points year over year. The improvement was driven by continued workforce and labor market optimization, along with higher productivity supported by greater use of intelligent automation, especially within our central application capabilities. The segment also benefited from increased project volumes and higher margin solutions relative to exited contracts, as we see continued traction in high-value application services and multi-cloud management. which leveraged more of the latest AI models and tools for delivery. ECS segment growth margins was 46.9% in the first quarter, down 80 basis points year over year. This was driven by lower L&S growth margin due to the timing of license renewals, partially offset by nearly 70 basis points of improvement in SS&C solutions, which was helped by improved utilization in business process solutions. Across our segments, we are providing our associates career pathways and upskilling in emerging technologies, which is supporting our workforce optimization and internal staffing and our low trailing 12-month voluntary attrition of 11.1%. Turning to slide nine, first quarter non-GAAP operating profit margin was 4.5%, up 170 basis points year over year. This was modestly better than the slightly positive margin outlook we provided last quarter, primarily due to execution against our operational efficiency objectives and increased L&S volume. SG&A was $92 million, down $5 million, or 5% year-over-year, keeping us on track to reduce SG&A by $10 to $20 million in 2026. As a reminder, these savings are concentrated in streamlining corporate functions outside of sales and marketing, and most of the restructuring costs to achieve have already been recognized. Adjusted EBITDA was $46 million in the quarter, representing a 10.6% margin, up 130 basis points year-over-year. Gap net loss was $36 million, or a diluted loss of 50 cents per share, while non-gap net loss was $10 million, or a loss of 14 cents per share. Turning to slide 10, capital expenditures totaled approximately $21 million in the first quarter, relatively flat on a year-over-year basis and consistent with our capital light strategy. As a reminder, a significant portion of capital expenditure relates to development for our ClearPath Forward ecosystem, comprising our L&S solutions. Free cash flow was negative $26 million compared to positive $13 million in the prior year period. The decline was driven by the timing of interest payments on our 2031 senior secured notes, with payments now occurring in the first and third quarters. In addition, the first quarter interest payment included interest related to an 18-day stub period. Pre-pension pre-cash flow was $2.9 million in the first quarter, net of $28.2 million of pension and $0.2 million of post-retirement contributions. The quarter included approximately $12 million of contributions to our U.K. pension scheme that are incremental to our previous full-year forecast. our joint venture partners funded these contributions, resulting in no cash impact to Unisys. For the remainder of 2026, we expect cash contributions to all global pension plans of approximately $69 million. Our cash balance is $380 million as of March 31st, compared to $414 million at the end of 2025. Our liquidity position remains strong, supported by significant cash balances, an undrawn $125 million ABL facility, with an accordion feature up to $155 million and no significant debt maturities until 2031. Our net leverage ratio inclusive of pension is 2.9 times down from 3.2 times a year ago. Turning to our global pension plans, based on market conditions, we estimate that as of March 31st, both gap deficit and aggregate expected contributions through 2029 are essentially unchanged from year end. As a reminder, We provide more detailed projections for estimated cash pension contributions and gap deficit at year end. Quarterly updates reflect estimated impacts of asset returns, market conditions, and assumed deficit reduction from contributions. Following our capital structure transformation in mid-2025, which included a $250 million discretionary contribution to our U.S. qualified defined benefit plans, we took actions that removed substantially all volatility from our expected U.S. contributions. This increased stability, along with the existing stability in international contributions set through trusting negotiation, has significantly increased certainty for investors as to our future cash needs and trajectory of deficit reduction. Turning to slide 12, I will now discuss our financial guidance for the full year and the additional color we provide. We are reaffirming our full-year guidance range and expect total company revenue to decline between 6.5% and 4.5% in constant currency, which based on April 30th foreign exchange rates equates to a reported revenue decline of negative 3.5% to negative 1.5%. Guidance assumes ex-LNS revenue constant currency decline of 7% to 4.5% and full-year LNS revenue of $415 million. As a reminder, the timing and exact amount of LNS revenue can be difficult to forecast with precision, as it depends on renewal timing, term, and client consumption levels, among other factors. We are reaffirming guidance for full-year non-GAAP operating profit margin of 9 to 11 percent, which assumes a slight year-over-year increase in L&S gross margin, targeted ex-L&S gross margin improvement of 100 to 200 basis points, and 10 to 20 million reduction in operating expenses. Looking specifically at the second quarter, we expect approximately $450 million of total company revenue on a reported basis, which assumes approximately $70 million of licensed support revenue. Based on these assumptions, we expect second quarter non-GAAP operating margin of approximately 5%. We expect second quarter items impacting GAAP net income of approximately $30 million, primarily related to pension expense. We expect a number of elevated non-cash expenses impacting gap net income and earnings per share later in 2026 related to pension annuity purchases and streamlining certain legal entities, which we will guide on a quarterly basis. Also, as a reminder, in 2025, we removed hedges on our intercompany balances, which could create non-cash FX gains as the U.S. dollar strengthens or losses as the U.S. dollar weakens. These are difficult to guide due to constantly changing rates, but will impact quarterly gap net income. There is no change to our expectation for full year free cash flow of approximately negative $25 million, which translates to positive $72 million of pre-pension free cash flow. This assumes approximate payments of $85 million in capital expenditures, $70 million of cash taxes, $70 million of net interest payments, $30 million in aggregate environmental, legal, and restructuring payments, and $102 million of post-retirement contributions. with approximately $29 million of which is expected in the second quarter. We are focused on continuing to increase our efficiency and profitability during this period to maximize our underlying cash generation levels for investment and capital return. Before we open the line for questions, Mike has a few additional remarks.

Mike Thompson | CEO and President

Thank you, Deb. I want to reinforce three key points we hope came through in our commentary today. First, our confidence in the guidance ranges we've reaffirmed today is reinforced by our first quarter financial performance, as well as the strength of our client signings, book-to-bill, and backlog position. Second, our L&S solutions are durable, and we are continuing to make investments to modernize our ClearPass Forward ecosystem and solidify our platforms as a key enabler of enterprise AI. Third, artificial intelligence is not only allowing us to provide more cost-effective solutions for our clients, but creates opportunities for us to help enhance our clients' business processes and end-user experience, which creates a variety of new outlets for Unisys. We hope you'll join us on June 2nd to discuss these opportunities and more at our upcoming Investor Day, which you can RSVP for on our investor websites. Operator, you may now open up the line for questions.

Operator | Conference Operator

Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the star keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then 2. Again, if you would like to ask a question, please press star and then one now. The first question that we have comes from Rod Bourgeois of Deep Dive Equity Research.

Please go ahead. Rod Bourgeois | Analyst, Deep Dive Equity Research

Hey, guys. Hey, so it was helpful to hear some of your AI initiatives across your different segments and the accelerator work and the service experience work and so on. I wondered if you could just take us through quickly each of your segments and how AI is, what are the headwinds and the tailwinds from AI and maybe the net effect when you look across how AI is affecting you across your key segments?

Thanks. Mike Thompson | CEO and President

Great. Hey, Ron, thanks for the question. Good to hear from you. Yeah, look, I think as we've stated in previous calls, We see AI in general as a significant tailwind for not only for us, but I think for the industry in general, but specifically embedded in our segments. And I apologize, I'm fighting a little cold here, so... when we think about the impact in DWS. So we've already talked a little bit around some of the headwinds, which is really just a renewal cycle and the reestablishment and cost sharing of applying AI to that renewal. But moreover, I think we've been able to mitigate a lot of that headwind. Clearly, we've embedded AI into our solutions. We've seen the industry analyst reports on how that's set. So, you know, we think there's some real opportunity there, not only to have that in our solutions, but in our skill sets that we're bringing to market. So we mentioned in our prepared remarks, many opportunities inside of DWS, whether that's infrastructure AI and the build out from a field services perspective, all of the work that we're doing with agent force embedded in Salesforce opportunity and application of AI with our teaming there. And most prominently in DWS would be embedded in our solution experience accelerator and our agentic service desk. So, you know, we're seeing that really resonate, seeing some, you know, nice uplifts in pipeline, et cetera, in that particular business segment. So really happy there. And, you know, clearly we think it's – net-net a positive long-term statement for the industry and for Unisys. From CA&I, you've heard in the prepared remarks in general across the board that the benefit there is clearly around AI application as it applies to modernization, the adoption of AIOps in our intelligent operations framework. and the work we're doing around the agentic build of what we consider to be the action layer or the application or even above the application layer, that's been really growing across the board for us. And we think it's something that will continue to grow and actually probably opens up TAM for us for areas where we can really penetrate with that agentic layer that historically we may not have played in. So really pretty bullish on the application transformation layer embedded in CA&I. And then in ECS, I mean, it's been a powerful story for the last several years. We've talked roughly around 40 million of increase per year over the prior three years of consumption. The work that we've done to continue to embed technology enablement from an AI point of view into the ClearPath Forward ecosystem. We mentioned in particular the developer toolkit for AI that really allows for testing and utilization and I'll say bimodal data transfer has been really important. And we continue to develop the AV Suite to, again, allow for innovation and flexible deployment. So we see the technology continue to enhance the utilization of various aspects of AI in ClearPath. And, again, we've seen that result over the course of the last several years from enhanced consumption, and we see that trend continuing. So really happy with how it's shaping up. Starting to see a little bit of relief, I think, from the macros, which is, again, giving us confidence in our guidance as we said it.

Rod Bourgeois | Analyst, Deep Dive Equity Research

Just to follow up on AI in your ClearPath Forward business, you've rolled out these new AI releases. Can you talk a little bit about the impetus to develop those AI releases and what the early client reaction is and even to the extent that you're partnering with the AI models on that? Just a little more color on the development of those releases and the reaction in the ecosystem.

Thanks. Mike Thompson | CEO and President

Sure. Great question. Thanks, Rod. So, look, this is not something that we've picked up in the last three months in reaction to, you know, what's going on in the market. These AB suite releases have happened over the course of the last couple years. This is just the latest release that's going out there. You know, clearly there is an ask and roadmap discussions that we're having with clients, and it's really about, access to data, portability of data, continued consumption of data, and our ability to continue to build out above the, I'll say, the ecosystem layer or what you would consider the hypervisor layer or core layer of data and usage. I'll say the issue du jour there is really about maintaining the support and steady run of the base and utilizing the emerging technology. You know, you talk about frontier models as an example. being able to extract this valuable data that's embedded in the ecosystem and marry that to frontier models to really help our clients continue to take advantage of that data set and do that in a manner so that they're not putting at risk anything in the ecosystem, their run, the resiliency, the security, et cetera. So we see this as, you know, just a continuation of our ClearPath 2050 strategy and it happens to be the emerging technology that's there today, but we do a little bit and continue to work with kind of joint roadmapping on, you know, some of these providers. And it extends beyond Frontier, right? It's also OEM providers, you know, as well as some SaaS applications that sit on top of that ecosystem. So this, again, has been multi-years in the making. And I think from a client perspective, aligned to the expectations that we've set with our clients over the course of managing their roadmaps.

Rod Bourgeois | Analyst, Deep Dive Equity Research

Thank you very much. Thanks, Rob.

Operator | Conference Operator

Thank you. The next question we have comes from Mayak Tundin of Needham & Co.

Please go ahead. Mayak Tundin | Analyst, Needham & Co.

Hi, guys. This is Brandon on from Mayak. And I'm just wondering, given a strong quarter, can you talk a little bit more about the reaffirmed guidance? Is that taking into account some macro uncertainty or buffer? And what are the levers that gets you to the high or low end of the guidance?

Mike Thompson | CEO and President

Yeah, hey, Brandon, how are you? Thank you for the question. Look, I think, you know, obviously we've reaffirmed guidance. We talked about Q1 being a little stronger than expectations. Kind of early in the year to be thinking about the impact of that. Obviously our guides, constant currency, Deb mentioned in her prepared remarks some of the movement in FX. embedded in that. So we'll have more color in Investor Day around how that relates to whether we're maybe moving towards the higher end of that or where we sit from a guidance perspective. I guess the message that I would want to leave you with is we feel good about Q1. It's a little better than we expected. We assumed in our guidance, as we talked about when we said it, that no real changes in the macroeconomic environment, although it's maybe moving a little more favorably from a macros perspective, I wouldn't consider one quarter to be indicative of the full year. So when we get a little bit more visibility through Q2, clearly at investor day, and then obviously if not investor day at our Q2 earnings, we'll talk about what you know, kind of how we feel about that guidance range.

Deb McCann | Chief Financial Officer

And to answer as far as some of the levers, I mean, it'll really, you know, the signing momentum, if that continues, and kind of the conversion timing. of that revenue and then, you know, field services volumes, those are probably drivers, you know, we'd be looking for.

Mike Thompson | CEO and President

Yeah, and just to tie into that, I mean, as we've continued to enhance and improve our gross margin, you know, that we have a lot more control over, obviously, and continue to work our programs and execute against those programs. And then to Deb's point, as these things become revenue recognition in the year and we get to run rate on things that we've already sold and have started to implement. Uh, we're expecting some pull through on margin there as well.

Mayak Tundin | Analyst, Needham & Co.

Um, great. Great. Thanks. And then you guys also mentioned some cross sale moments. I'm in the quarter. I'm just wondering how big of an opportunity that is for you guys and the dynamics of the cross sales, um, especially with current clients, upgrading it and infrastructure for these AI initiatives.

Mike Thompson | CEO and President

Yeah, look, I think, look, in general, and I mentioned in my prepared remarks, one specific client where they had 100 applications sitting, you know, kind of on top of our ClearPath Forward ecosystem, and we're helping modernize those applications. And there's a great example of kind of that agentic action layer to modernize that. So we see that biggest cross-sell opportunity embedded in application modernization and and specifically agentic, I'll say agentic AI applied to that action layer, the more of that we see, the more of that we're able to accomplish. And, you know, I think the market's knee-jerk reaction a little bit on SaaS providers, et cetera, you know, we're not a SaaS provider per se, but we certainly, play in the area of supporting SaaS application as solution implementers on a SaaS side. And the ability to use that agentic layer, I think, opens up TAM for us to lean in more heavily in that arena. And the ClearPath Forward ecosystem application construct is really a great proof point of that. We've seen a couple instances of that recently, and we expect that that will continue.

Mayak Tundin | Analyst, Needham & Co.

Great. Great. Thanks, guys. Thanks, Brandon.

Operator | Conference Operator

The next question we have comes from Matt Desert of William Blair.

Please go ahead. Mayak Tundin | Analyst, Needham & Co.

Hi, team. This is Matt on for Maggie Nolan. Congrats on the good results. Can I ask about the strong new business TCV? I think it was up 45% year over year. Strong backlog, too. I guess it's Doug, you touched on it a little bit, but how should we think about conversion timing and ramp periods as well as margin profile of these new wins and your ability to continue to win work at these improved margin levels going forward?

Great. Mike Thompson | CEO and President

Thanks, Matt, for the question. So, yeah, super happy with the year-on-year uptick there. You know, we mentioned in our prepared remarks about these rapid value assessments Part of our strategy that we implemented at the tail end of last year and have carried through to Q1 this year is really looking at these point-of-spear opportunities and how emerging technology really avails itself not only in the AI embedded in our solutions, but the skills that we've got around that AI implementation and the conversion of technical debt. happy with that uplift. We're seeing some real success, you know, in the top end of the funnel as well. Clearly, the solutions are resonating with clients. Now, these RVAs or rapid value assessments are typically more point of the spear things and are typically a little smaller engagement as a means to open the door. So, we expect that, you know, the transition time will be faster. We also expect that much of that work is really more kind of time and material or outcome-based pricing so that we don't have the typical 18-month transition on some of those. And then it's really about the expansion post that RVA adoption is kind of what our focus is on top of that. So we think it'll be more volume, perhaps a little smaller value, right, of the actual deal because it's point-of-sphere oriented, but gives us a real jump-off point to expand to other aspects of the business. So, again, strong year-over-year TCV growth in that, as well as top of the funnel, you know, pretty happy and aligned to what our expectations were when we made those changes at the tail end of last year.

Deb McCann | Chief Financial Officer

Yeah, you also asked about margin, and I just think, you know, it's mixed depending on kind of the solutions, you know, that we're signing. You know, I think we mentioned there are some DSFs have lower margins, right, but still are really good entryway into the client.

Mike Thompson | CEO and President

Yeah, that's a great point, Deb. Thanks for chiming in there. Mix is exactly right, and if the TCD is coming from the RDAs, then they're probably – already at our accelerated margin profile, but as Deb mentioned, you know, a good chunk of that pipeline aligns as we talked about our DSS solution, which have a hardware mix in the solution itself, which kind of impacts the total margin of the contract, but not the services piece of our margin. Really, it's more the pass-through component of the hardware. But all in all, good line of sight, good progress. and feel like the strategy is taking hold.

Mayak Tundin | Analyst, Needham & Co.

Got it. Thanks for that color. As a follow-up, can I ask about pricing and just consumption pricing? I think IBM discussed the evolution they're seeing in their mainframe platforms to account for MIPS and AI and additional consumption parameters. Are you doing something similar with your pricing in CPF, and how are you maintaining that? your deserved premium here while adapting to these changing market dynamics?

Thanks. Sure. Mike Thompson | CEO and President

So great question. Look, the pricing discussions that we've had over the last probably four quarters were really pricing discussions as it pertains to XLNS. Your question obviously is LNS pricing. We have not really had pricing pressure on the L&S side. It is a premium service. Our clients view it as a premium service. We continue to get increased consumption out of that business, and most of that consumption increases really based on the comments that I made earlier around enabling the data sharing and testing and the like embedded in what's going on in L&S. Typically from an L&S renewal, as you know, Matt, the revenue recognition and that costing or pricing happens at deal signing, and it's usually for the entire duration of that deal, and it's up front from a perspective of usage or consumption. And we've been able to, over the course of the last five years, and don't expect this to change, get price increases on those licenses, as well as the support of that environment. So it's not really been pricing pressure at all on the L&S side of the business, and we're quite confident that that's going to continue.

Mayak Tundin | Analyst, Needham & Co.

Great.

Thank you. Operator | Conference Operator

Thank you. The next question we have comes from Anya Soderstrom of Siddhati.

Please go ahead. Hi. Anya Soderstrom | Analyst, Siddhati

Thank you for taking my question. So AI seems to be a strong driver for you, but what kind of margin impact do you expect that to have?

Mike Thompson | CEO and President

Hey, Anya. Thanks for the question. Look, I think we've been pretty consistent that The AI that we've embedded into enabling our solutions continues to have margin expansion and improvement. I think we were probably, what, Deb, almost 600 basis points over the last three years in XLNS. That is a byproduct of embedding that into our into our solutions clearly when we have a new logo and And they're utilizing the new solution immediately we get that impact immediately Through and and and we've talked about last quarter there as an example pushing our agentic service desk into the the entire legacy base of clients we should be about 40% of that base of using our agentic service desk by the end of the year. So we still have some improvements that we expect on margin beyond this year for the existing base, and we expect that we'll continue to offer this solution at an enhanced margin profile. So, you know, if I look at kind of where we are in the adoption of AI into our solutions, We're probably about halfway there in the existing base. And so, again, we're talking about, from our guidance, another 100 to 200 basis points of potential improvement on the XLNS side. And there should still be more in 27 as we continue to deploy our authentic offerings into our existing base.

Anya Soderstrom | Analyst, Siddhati

Okay, thank you. And then can we just double-click on the opportunities you see with the field services?

Mike Thompson | CEO and President

Yeah, so that's one we've been continually bullish on, as you know. And it really comes in three flavors. The embedding AI in the way we actually deliver our services from a field service point of view, i.e., location of the technicians, sending data to the technicians on the site, with next best case cause of issues, looking and using data to understand how to do preventive things while on site, et cetera. So that's kind of a base use case of traditional elements and how AI is enhancing that. The second and third I think are actually more exciting, right? One is around the different types of field service deployments. We talked about the work we've been doing on infrastructure and high-end storage and kind of moving up stack from a field service technician perspective. We talked in the prepared remarks around the data center work for installation and maintenance of things like liquid cooling for GPU chip configuration in a data center in general. And we also talked about the expansion of field services to other areas. In general, if you think about conference rooms, kiosks, office environments, et cetera, and the data telemetry around IoT devices and how that ultimately aligns to having a field service orientation. As you know, we're one of the few companies with the kind of global scale and reach from a field services point of view. And we think that that's a differentiator from our perspective. And the alignment of that to our agentic service desk, knowledge management, et cetera, and the skills that we've got globally in field service. We've been investing in that area for several years when I think you've seen a lot of the market kind of curtail some of their investment in that space. we're pretty excited about the opportunity it brings to us.

Anya Soderstrom | Analyst, Siddhati

Okay, thank you. That was all for me.

Rod Bourgeois | Analyst, Deep Dive Equity Research

Great. Thanks, Anya.

Operator | Conference Operator

Thank you. The next question we have comes from Matthew Galenko of Maxim.

Please go ahead. Matthew Galenko | Analyst, Maxim Group

Thanks for taking my question. I was just hoping you could expand a little bit more on the pipeline for field services around data centers and AI data centers.

Thank you. Mike Thompson | CEO and President

Hey, Matt, thanks for the question. You know, I mentioned on my prepared remarks that we had won an engagement there. We've been in the hunt for a couple others as well. You know, there's billions of dollars being spent in that space, and our goal is to really have our associate base totally prepared to handle a significant volume as it pertains to data center construct, installation of, you know, racking in there, and obviously the component pieces around immersion cooling, liquid cooling, et cetera. So the pipeline has been, I would say, fairly strong. Our discussions with clients or prospective clients in that pipeline is going – I think, incredibly well. And we're happy about the fact that we are in the hunt for a whole host of opportunities there with some pretty significant players. So, you know, clearly the market awareness of our abilities and skills in that space is out there. And, you know, again, these deals take a little bit of time to materialize, but I guess what I would say to you is that we're certainly getting significant invites and that we've got really good opportunities in the pipeline to expand that opportunity for the company.

Matthew Galenko | Analyst, Maxim Group

Thank you.

Mike Thompson | CEO and President

Thanks, Matt.

Operator | Conference Operator

The next question we have comes from Anna Goschko of Bank of America.

Please go ahead. Anna Goschko | Analyst, Bank of America

Hi, thanks very much. I have a pension question. So Deb, you mentioned some charges to come later this year related to pension annuity purchases. And I know those purchases help to reduce the overall liability and then in the medium to long term also help to reduce the amount it's going to take to reduce the pension deficit. But it wasn't clear to me that you had already agreed to do the annuity purchases this year. I know those are cashless. So is that kind of a done deal, or is it still something that you're considering?

Deb McCann | Chief Financial Officer

Yeah, no, it's not a done deal. It's still in our plans. As we laid out last year, we were going to do some annuity purchases. We did some last year. at the end of the year, and our plan was to do more this year, but it's not locked in. And that's why we don't know the exact amount of the charge. It'll depend on the timing. And so that's why, you know, as the year goes on and we get closer to locking that in, we'll give a sense of what that non-cash charge would be.

Mike Thompson | CEO and President

Yeah. It's Mike. So when we talked about, even when we did the debt, we talked about roughly $600 million worth of pensions, annuities. I think we did debt like $375, something like that. And so this would kind of be the other half of that. You're right that it's cashless to us. As you know, we've done about six of these already. And so when we do them, you make an offer and then you get bids. And there has been high interest in those bids. Normally we get maybe four to seven folks bidding on that, and then it's really a matter of does the bid come through at a rate that we think is worth it from our perspective. So you're right, it is still a little bit market oriented, but our availability to do another one starts in Q3. And so we fully expect to put that offer out in Q3, and we fully expect that we'll get the same level of demand that we've gotten historically, and it really comes down to the economics of the rate.

Anna Goschko | Analyst, Bank of America

Okay. Okay, great. Understood. And then secondly, I think I asked the same question last quarter, but the debt market has been just very messy for decades. software-related companies and IT-related companies generally. So that's kind of created an opportunity potentially for you to buy back bonds at an attractive rate. I know you've got uses for your liquidity, but you do have a strong liquidity position, so I think you bought back just a tiny bit of bonds in the quarter. and about $2 million, and just wondering if that's something that has continued after quarter end, or just, you know, kind of what your view is on basically tapping that opportunity.

Deb McCann | Chief Financial Officer

Yeah, so we have, you know, windows where we can purchase, and you're right, we did in Q1 purchase, you know, an immaterial amount and, you know, at an opportunistic value, we feel, and so we'll continue to look at our liquidity, our cash, and you know, assess that as time goes on and as the windows open, you know, that allow us to do that. So we'll continue to keep an eye on that and see, you know, when the price is opportunistic, look at the overall liquidity picture and make that determination.

Anna Goschko | Analyst, Bank of America

Okay. Okay, great. Well, thank you.

Deb McCann | Chief Financial Officer

Great.

Operator | Conference Operator

Thank you. The final question we have is a follow-up from Rod Bourgeois.

Please go ahead. Rod Bourgeois | Analyst, Deep Dive Equity Research

Yeah, hey, I thought I would just ask, in the public services, you had some delays with the government shutdown and some other decision challenges there. The question is, is that starting to turn? And then similarly on PC refresh, is that also at a point where you should see some upside there as well, or is there still a little bit of a wait and watch going on? Just those updates would be helpful.

Thanks. Mike Thompson | CEO and President

Sure. Thanks, Rod, for joining back in here. Look, I would say in general, public sector has been more favorable than it has in previous quarters. And I would throw higher ed in that same viewpoint. I think some of the noise has started to settle down and some of that project work is starting to return. So again, I wouldn't say A quarter or a quarter and a half is indicative of the future, but I'm encouraged by what we're seeing as far as the loosening of the belt a little bit here and getting back to a little bit more normalcy in that space. I think they also recognize that in many cases there are significant laggards from a technology perspective. And the utilization of the emerging technologies, specifically this influx of these agentic AI models, can help leapfrog them and get them not only up to date from a technical debt perspective, but catch them up for perhaps multi-year lag effects. So that's been, I think, pretty positive in the market. And then as far as your comment on PC refresh, yes, we saw a little better than expected in Q1. Again, I'm hesitant to say that that is a byproduct or that's going to just continue throughout the remainder of the year, but there are certainly some elements that would suggest that it should, specifically as we talk about the Microsoft licensing component, et cetera. And again, we're coming up against comps of a pretty low year. But I would remind you that, at least for us, the reliance on that refresh cycle is less, and we continue to train and educate the workforce on the infrastructure component of the field services arm that is impacted by those PC refreshes. We've extended that IoT devices to go beyond PC refresh, so it's an important factor, but, you know, when we set our guidance, we expected it to be pretty flat and maybe even still a little declining, and it's actually performed a little better than our expectations.

Rod Bourgeois | Analyst, Deep Dive Equity Research

Thank you, Gus.

Mike Thompson | CEO and President

Thanks, Rod.

Operator | Conference Operator

Thank you. Apologies. The final question we have comes from Sean Parkins of Deutsche Bank.

Please go ahead. Sean Parkins | Analyst, Deutsche Bank

Hey, guys. Thank you for the call and for the results. I'd like to dig into a little bit more about the data center opportunity that you highlighted to some of the work you have there. Perhaps if you can discuss maybe some of the clients that you're seeing engage with you in those arenas, and then what the go-to-market strategy for your business is there to think about the market opportunity size?

Thanks. Mike Thompson | CEO and President

Well, thanks, Sean, for the question. I'm not really at liberty to share actual client names, but I would say to you that obviously we're engaged with the OEMs in regards to that, and they're an entryway into the some of these clients and I would say at least for a couple in the pipeline, you know, it's kind of the who's who in that space. So we feel really, again, privileged that those types of clients are engaging with us to talk about the installation and maintenance of such a high profile investment for them, you know, and Again, there are billions of dollars, as you know, being spent in this space. We think there's a really big dam. And we've been using this, I'll say, period of the last 12 months to really make sure our workforce is trained up on the utilization of this new technology, not only on how to deploy it, but clearly the The implementation of racking and cabling and immersion cooling is a pretty technical aspect. And so the recognition of our capabilities to do that puts us in really good stead. And, again, I would just say that, you know, we're talking about some major OEMs and major players in data center build.

Sean Parkins | Analyst, Deutsche Bank

Thanks. Look forward to hearing more about it at the investor day.

Thank you. Operator | Conference Operator

Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines. jsPDF 3.0.3 D:20260606090520-00'00'

NYSE:UIS Q4 2025 Earnings Call Transcript Generated on 6/6/2026 Operator: Good morning and welcome to the Unisys Corporation fourth quarter and full year 2025 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Michaela Paworski, Vice President of Investor Relations.

Please go ahead. Michaela Paworski | Vice President of Investor Relations

Thank you, Operator. Good morning, everyone. Thank you for joining us. Yesterday afternoon, Unisys released its fourth quarter and full year 2025 financial results. Joining me to discuss those results are Mike Thompson, our CEO and President, and Deb McCann, our CFO. As a reminder, today's call contains estimates and other forward-looking statements within the meaning of the securities laws. We caution listeners that these statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed on this call. These items can be found in the forward-looking statement section of yesterday's earnings release furnished on Form 8K, and in our most recent Form 10-K and 10-Q filed with the SEC. We do not assume any obligation to review or revise any forward-looking statements in light of future events. We will also refer to certain non-GAAP financial measures, such as non-GAAP operating profit, that exclude certain unusual or non-recurring items, such as post-retirement expense, cost reduction activities, and other expenses that the company believes are not indicative of its ongoing operations. While we believe these measures provide a more complete understanding of our financial performance, they are not intended to be a substitute for GAAP. Reconciliation for non-GAAP measures are provided in the slides for today's call, which are available on our investor website. With that, I'd like to turn the call over to Mike.

Mike Thompson | CEO and President

Thank you, Michaela. Good morning, and thank you for joining us to discuss the company's fourth quarter and full year 2025 financial results. I want to start off with three clear messages that we hope you take away today. First, we continue to execute against a consistent operating strategy, which is yielding improved profitability and free cash flow as we continue to advance our pension removal strategy. Second, the market perception of Unisys and our solution continues to advance among our clients, prospects, partners, and industry analysts. And third, which relates to a subject I know that's top of mind for everyone, we believe artificial intelligence is poised to become a powerful driver of long-term demand in the solutions that are core to Unisys as a designer, orchestrator, and enabler of modern IT ecosystems. Before discussing AI, I want to discuss my first message of how consistent execution of our strategy is translating into financial results. Fourth quarter revenue grew 5% year over year, resulting in a slight improvement in our full year revenue projections coming in above our revised midpoint. Our non-GAAP operating margin was 18% in the quarter and 9.1% for the year, exceeding the top end of our upwardly revised projections and representing 30 basis points of annual improvement. We had a high degree of confidence in achieving the fourth quarter weighting of our license and support revenue, and we met those expectations. Full-year L&S revenue exceeded our original expectations by nearly $40 million, making this the third consecutive year of substantial upside in our highest margin profit center. Our actions to streamline corporate cost reduced SG&A as a percent of revenue by nearly 300 basis points over the past three years. We generated $128 million of full-year pre-pension free cash flow in 2025, up 55% from the prior year and above the $110 million we expected. We have strong liquidity with over $400 million of cash on the balance sheet at year-end, up almost $40 million year-over-year. We increased our year-end cash balance while net leverage, including pension, has improved to 2.8 times compared to 3.0 times at the end of 2024. Our liquidity also improved despite using $50 million of cash as part of a discretionary contribution to our U.S. pensions. Our total contributions have reduced our global pension deficit by $300 million to $450 million at year-end, and lowered future expected contributions by more than the interest on the incremental debt we raised, improving near-term cash flows. We also executed another annuity purchase, which removed approximately $320 million of gross U.S.-defined benefit pension liabilities in 2025. This, coupled with our liability duration matching strategy, which has successfully removed substantially all market volatility from the total future contributions keeps us on a fixed path for full removal of the U.S. defined benefit pension plan. I want to shift to my second message, which is that awareness and perception of Unisys and our solutions continues to advance. We're seeing this evidence by our wins and our pipeline. 2025 was an especially large renewal year, and our team successfully signed $1.7 billion of renewal TCB, securing a large portion of our recurring revenue base. Over a billion dollars of renewal TCB was signed in the fourth quarter alone, which included closing a three-year extension and improved economics with our largest DWS client, who has been with us for nearly three decades. This field services renewal spans US, Canada, and Latin America, and secures the necessary scale for us to provide affordable field services across our client base. Multi-year renewals can be a catalyst for expansion within client account by integrating new solutions that support enhanced client centricity and improved overall margin profile. We capitalized on these opportunities in the fourth quarter, which was our largest quarter of new scope signings in recent years. Almost all of our largest renewals during the quarter included new scope, evidencing improved perception within our existing client base. For example, during the quarter, we signed a five-year renewal with one of the largest public university systems in the United States for cloud transformation, migration, and modernization services and expanded scope to include centralized application management across campuses, and a center of excellence that will leverage AI agents to standardize and modernize application management, streamlining processes for both students and staff. As we discussed last quarter, we've seen some competitors price aggressively to prioritize revenue over profitability and delivery quality. While that contributed to a few significant renewal losses and presents several hundred basis points of growth headwinds for 2026, We're confident our investments in our core areas of our portfolio will continue to drive market and wallet share gains and will both reduce client costs and extend the scope of our delivery for our clients. In our wins and pipeline, we're seeing more instances of clients placing increased value on delivery quality and viewing it as a real differentiator. For example, in the fourth quarter, we won back a public sector client in Australia with a large scope for DWS solutions after they experienced a decline in delivery quality with one of our competitors. This win sets a powerful new foundation for our business in the region and provides a global playbook for showcasing delivery differentiation. We also added several new logo opportunities to our DWS and CA&I pipeline from chief information officers who moved to new organization and engaged us immediately to participate in their transformations because they know we're a true partner with all the necessary skills to modernize and reliably manage complex IT ecosystems post-transformation. We're also achieving new heights in recognition and awareness among industry analysts that influence client decisions when selecting IT solution providers. During 2025, we build upon several years of advancing awareness and recognition within the analyst community, Again, increasing our total report placements by over 20%, including two new leader recognitions. In the fourth quarter, we received a very significant recognition from Gartner, which elevates Unisys to a global leader position in their outsourced digital workplace services Magic Quadrant for the first time. Magic Quadrant reports are the culmination of rigorous fact-based research evaluating completeness of vision, an ability to execute and provide a wide-range view of the relative position of providers. In addition, in its companion critical capabilities for outsourced digital workplace services report, Gartner ranked Unisys as the number one overall provider for the North American market and the number one global provider for both service desk and device management capabilities. This acknowledgement is already helping us access more opportunities, giving us an edge, especially relative to the three of our largest competitors that fell out of the leader quadrant. Unisys was also named the Forbes list of America's best midsize employers in 2026, which comes on the heels of being named Time Magazine's world's best companies in 2025. Our culture is reflected in our below-average voluntary attrition, which was 11.4% for the year. As we look to the future, I want to discuss why we view AI as a powerful long-term driver of demand for our solutions and how we've invested in solution development and delivery skills to capitalize on it. As I said earlier, Unisys ultimately develops, enables, and orchestrates the IT ecosystem. In all three of our segments, we provide solutions that enable emerging technology throughout the enterprise and are agnostic to the placement of AI, software, or hardware that make up our clients' environment. As the industry heads into a major multi-year AI infrastructure build-out to supply the technology needed for broad AI adoption, there's a growing shortage of skilled technicians and that will provide the design and service layer for modernization and postmodernization support. Importantly, demand for services will grow regardless of whether clients develop custom AI agents on private infrastructure, leverage standard capabilities from software providers and hyperscalers within private or public clouds, or a combination of both within hybrid environments. For us, the scale and reach of AI goes beyond the software and extends to physical AI, The scale and skills of our field service organizations present a unique market opportunity for us. We're already beginning to support private AI builds for OEM partners, requiring liquid cooling skills, complementing the work we already do in maintaining critical hybrid infrastructure, such as servers and storage and data centers, or IoT devices in everything from conference rooms to restaurants. We will also continue expanding services our existing use of agentic AI and expect AI agents to continue to be layered throughout our managed service offerings, orchestrating increasingly complex and automated workflows. Clearly, AI is adding complexity to managing the IT estate. Tokenization costs are high, business cases are challenging, and measuring returns on investments is difficult. We expect all these factors to increase client reliance on external providers. Unisys can reduce the cost of AI adoption for clients by developing solutions that can be leveraged across a large base of clients with standardized architectures for faster deployment. In 2025, we launched Service Experience Accelerator, an agentic AI framework for delivering next-generation service desk. SEA is now in production with some of our largest clients, and we are enhancing our solution to improve its ability to handle input ambiguity. We plan to roll this out to about a third of our existing client base during 2026, which establishes a growing base of leverageable technology to support long-term expansion, continued delivery optimization, and enhanced quality. In CA&I, we're advancing our intelligent operations architecture, with an integrated framework for rapidly developing, deploying, and orchestrating AI agents to streamline IT operations and aid in financial operation decision-making, especially as it pertains to design and compute. Our alliance partners offer a significant and relatively untapped opportunity to scale distribution and continue raising awareness in the market. Hyper scalers are eager to promote solutions that use their cloud platforms, tools, and models to drive AI adoption and development of their AI-enabled cloud ecosystem. For example, in CA&I, we're standardizing our SOC managed service delivery with Microsoft's Sentinel and Defender threat detection as its main components. We are powering the service layer with AI agents, which helped us engage with Microsoft on development and discussions about joint promotions. Many of our key enterprise software partners are also seeking to accelerate uptake of their AI capabilities. As another example, we are a high volume user of AgentForce internally, which we adopted to optimize our field service dispatch, and we're engaging with Salesforce to explore how we can jointly offer our internal framework as a service to some of their other clients and prospects. These examples illustrate the repeatable playbooks we developed across our portfolio that we think will help us capitalize on AI-related demand, strengthen our partnerships, and ultimately accelerate our growth in XLNS solutions. In the ECS segment, we continue to be highly confident in the enduring value of our ClearPass Forward ecosystem, despite hypothetical threats posted by AI development. AI coding capabilities do not replicate decades of development required to integrate processes code, equipment, and environments with unmatched latency, availability, redundancy, and security. Our core platform offer an unmatched combination of speed, resilience, and most importantly, security, which is of critical importance to the financial services, government agencies, healthcare, and travel transportation companies we serve. Replicating these benefits would require parsing our unified platform into numerous functions and a wholesale reorganization of business processes for minimal benefit, bringing with it significant business risk. At the same time, we continue investing in our core platforms, which are already cloud compatible, enhancing our value-added products, such as data exchange and ePortal, which unlock valuable data and allow it to move across environments and applications powering AI and analytics. These solutions represent increased extensibility and ecosystem expansion that establish ClearPath Forward as a pillar of a modern AI-enabled enterprise solution advancing digital transformation. At the same time, we are leveraging AI to help us quickly assess workforce skills, identify gaps and vulnerabilities, as well as assist in cross-training and upskilling talent for the future. We are beginning to leverage our internal engineering expertise into advisory engagements with ECS clients. And while quantum computing may not be imminent in the short term, we are beginning to see tangible client engagement for quantum advisory services we introduced early in 2025. With that, now I'll turn the call over to Deb to go through our financial results in more detail.

Deb McCann | CFO

Thank you, Mike, and good morning, everyone. As a reminder, my discussion today will reference slides from the supplemental presentation posted on our website. I will discuss total revenue growth, both as reported and in constant currency, and segment growth in constant currency only. I will also provide information excluding license and support for XLNS to allow investors to assess the progress we are making outside the portion of ECS where revenue and profit recognition is tied to license renewal timing, which can be uneven between quarters. To echo Mike's comments, our results reflect consistent execution of our business strategy and effective de-risking of our future pension contributions, making our financial performance and liquidity stronger and more predictable for investors. We have seen an ongoing positive shift in how we engage with partners, clients, and industry experts, and we think much of that is related to our agility in adopting artificial intelligence within delivery and solution frameworks. And we expect AI to be a strong, long-term driver of demand for our largest solutions. Looking at our results in more detail, you can see on slide six, fourth quarter revenue was $575 million, up 5.3% year-over-year, as reported, and 2.7% in constant currency, driven by the timing of L&S renewal. For the full year, revenue was $1.95 billion, down 2.9% as reported and 3.3% in constant currency, slightly above the midpoint of our revised guidance range. Excluding license and support solutions, revenue was $388 million in the fourth quarter and $1.52 billion for the full year, both of which were down 3.9% in constant currency. I will now discuss segment revenue performance in constant currency terms shown on slide 8. Fourth quarter digital workplace solutions revenue of $126 million was flat sequentially to third quarter and down 3.7% year over year. For the full year, DWS revenue was $508 million down 3.1%. Both fourth quarter and full year segment revenue were impacted by PC related revenue declines, including lower third party hardware and PC field services volumes. As we mentioned last quarter, Microsoft's extension of Windows 10 support has led to some clients delaying upgrade projects or pushing out purchases of new PCs required for compatibility with Windows 11, and recently, higher PC prices due to memory chip shortages have compounded delays. However, we expect PC price increases to benefit us over time as they increase the significance of device costs within client budgets, potentially leading to incremental interest in our device subscription service. which provides intelligent forecasting and planning and a more flexible and predictable cost model. PC-related declines were partially offset by growth in higher-value infrastructure field services in areas such as enterprise storage and network infrastructure, which typically have lower volumes but higher margin and profit associated with them. And as we mentioned before, we believe the PC volume declines have stabilized. Fourth quarter cloud applications and infrastructure solutions revenue was $191 million, a decline of 4.1% year over year. For the full year, CA&I revenue was down 4.8% to $733 million. Similar to what we saw in earlier quarters of 2025, the fourth quarter was impacted by a lower volume of short-term project work at U.S. public sector clients due to federal funding disruptions that have created budget uncertainty in the public sector. This remained a prominent factor in the fourth quarter, the first half of which experienced a federal government shutdown. We were pleased to still be able to secure multi-year renewals in both CA&I and DWS Solutions with several of our largest U.S. public sector clients, some including New Scope. Enterprise computing solutions revenue was $237 million in fourth quarter, up 14% year-over-year. Full-year segment revenue was $629 million, relatively flat to 2024. Within the segment, L&S solutions revenue was $186 million in the fourth quarter, up 19.8%, bringing full-year L&S revenue to $428 million in line with our increased expectations. Fourth quarter revenue for specialized services and next-generation compute solutions, the ex-L&S solutions within ECS, was flat sequentially and down 3.7% year-over-year against a stronger prior-year comparison. Full-year S&C revenue grew 4.9% year-over-year due to increased project work and business process solutions volumes at financial services clients in Europe, Latin America, and Asia Pacific. Total company TCV was $2.2 billion for the full year, driven by strong growth in XLNS renewal signings and new scope bookings with existing clients. Full year new business TCV totaled $491 million, down 38% year over year, primarily driven by elongated sales cycles with prospective clients and hesitancy in the public sector. Full-year new business TCV includes an approximate $200 million adjustment to reflect a mutually agreed termination of a first quarter 2025 new logo signing in DWS where contractual terms were not aligned. We were pleased with this outcome as it averts risk of future profit dilution while preserving a positive relationship with a large prospective client that we anticipate will invite Unisys to bid should they seek new proposals for any portion of this work or for other Unisys solutions. Trailing 12-month book-to-bill was 1.1 times for the total company and 1.2 times for our XLNS solutions. We ended the year with a backlog of $3.2 billion, up 12% sequentially and 11% from prior year. Moving to slide 9, fourth quarter gross profit was $195 million and gross margin was 33.9%. up 180 basis points from the prior year due to L&S revenue growth over a relatively stable cost base. XL&S gross profit was $51 million in the fourth quarter, a 13.2% margin. While this was 540 basis points lower than 18.6% in the third quarter, the majority of the margin compression was due to the aggregate impact of incremental cost reduction charges and timing of variable compensation. Full year gross profit was $549 million, a 28.2% gross margin compared to 29.2% in the prior year period, driven by an increased proportion of lower margin L&S hardware relative to the prior year, which we expect to be more normalized in 2026. Full year SL&S gross profit was $255 million, a 16.8% gross margin compared to 17.6% in the prior year period, which includes approximately 40 basis points of incremental cost reduction expenses. Overall, we were pleased with XLNS profitability considering some of the revenue headwinds we faced this year, and we expect lower cost reduction charges and greater efficiency gains in 2026, supported by workforce and technology investments made in 2025. I will now discuss segment growth profit as shown on slide 10. EWS segment growth margin was 10.5% in the fourth quarter compared to 15.9% in the prior year period. Nearly 400 basis points of the year-over-year margin decline was driven by one-time items, including transition costs. Full-year DWS gross margin was 14.5% compared to 15.7% in the prior year. Over time, we expect a continued long-term shift towards these higher value infrastructure field services, which typically are at a higher margin. CA&I segment growth margin was 20.7% in the fourth quarter, up 210 basis points year over year due to workforce and labor market optimization and increased automation and AI use in solution development and delivery, as well as an 80 basis point one-time benefit. Full year CA&I growth margin was 20.2%, relatively flat to the prior year. At a high level, strong delivery gains have been able to offset the slower pace of investment and project work at U.S. public sector clients. Looking ahead, we are pushing the pace of solution development and standardization in the CA&I segment and sustaining a focus on workforce optimization and rapid adoption of the latest AI models and tools to support additional efficiency gains. ECS segment gross margin was 65.9% in the fourth quarter, up 270 basis points year over year, and full year gross margin was 55.5%. a 250 basis point decline related to increased hardware revenue mix, which should normalize in 2026. Moving to slide 11, fourth quarter non-GAAP operating profit margin was 18%, driven by the higher concentration of L&S revenue in the fourth quarter. For the full year, non-GAAP operating profit margin was 9.1%, above the top end of our upwardly revised guidance range. The sustained strength of the trends in our L&S solutions again contributed more profit than we anticipated. Over the past two years, we have also diligently executed on a detailed plan to streamline our corporate, real estate, and central IT costs. We've been able to reduce SG&A by 13% for nearly $60 million. We expect to again lower SG&A in 2026 in absolute dollar terms by at least $10 to $20 million as we receive a full-year benefit from savings while most of the costs to achieve them are behind us. Fourth quarter net income was $19 million and $63 million on a non-GAAP basis, translating to diluted earnings per share of 25 cents and non-GAAP earnings per share of 86 cents. For the full year, GAAP net loss was $340 million or a diluted loss of $4.79 per share. This included an approximate $228 million one-time non-cash expense related to a pension annuity purchase occurring in the third quarter. Full year non-GAAP net income was $68 million and non-GAAP earnings per share was 93 cents. Turning to slide 13, capital expenditures totaled approximately $20 million in the fourth quarter and $78 million for the full year, relatively flat to 2024. As a reminder, a significant portion of capital expenditure relates to our L&S software and there is no change to our overall capital light strategy. Pre-pension free cash flow, which is free cash flow prior to pension and post-retirement contributions, was $113 million in the fourth quarter and $128 million for the full year, which exceeded our expectation for $110 million. This is the result of a stronger profit performance and more favorable working capital relative to our assumptions. Full year free cash flow was negative $218 million, which includes a $250 million discretionary pension contribution. and $95 million of required U.S. and non-U.S. post-retirement contributions. Moving to slide 14, our cash balance was $414 million at year end, compared to $377 million at the end of 2024. Our cash balance increased by $37 million year over year, which is primarily due to our strong pre-pension free cash flow, as well as some positive impacts from foreign exchange and cash balances and hedge settlements. As a reminder, our changing cash balance includes a $250 million discretionary pension contribution, which was funded by approximately $200 million of incremental borrowing, as well as $50 million of cash from the balance sheet. Our liquidity position is strong with no major debt maturity until 2031, and our recently renewed $125 million asset-backed revolver remains undrawn. Our net leverage ratio is 2.8 times inclusive of global pension deficit down from three times a year ago. I will now provide an update on our global pension plans beginning with slide 15. As of December 31st, 2025, the gap deficit in our U.S. qualified defined benefit plans was $239 million and our global gap pension deficit inclusive of all U.S. and international plans was approximately $450 million. This compared to approximately $750 million at the end of 2024, or a $300 million improvement. $250 million in improvement in our global pension deficit was driven by our discretionary contribution with the remaining approximately $50 million resulting from $95 million of planned contributions to our global plans. On slide 16, you can see a detailed projection of our expected cash contributions. We are forecasting approximately $350 million of remaining cash contributions to our global pension plans in aggregate through 2029, reflecting stability from the actions we took to remove volatility in our U.S. qualified defined benefit plans. Moving to slide 17, we have provided an updated projection of how expected future contributions and the benefits we disbursed to pensioners are expected to impact our U.S. qualified defined benefit plans deficit both with and without annuity purchase assumptions, and the implied cost of full removal at the end of 2029. At the bottom, we've also included our expected deficit reduction in all other plans. However, it is important to remember that while international contributions are negotiated every few years and very stable, the international deficit is impacted by asset returns and has more volatility. These projections are meant to provide a directional indication only of the relative conversion of contributions to leverage reduction in a given year, which will also change if contributions shift between years. Turning to slide 18, I'll now discuss our financial guidance for the full year and the additional assumptions we provide. We expect total company revenue to decline between 6.5% and 4.5% in constant currency, which based on February 1st foreign exchange rates equates to a reported revenue decline of negative 3.8% to negative 1.8%. Guidance assumes XLNS revenue decline of 7% to 4.5% in constant currency. We also expect full year LNS revenue of $415 million at a gross margin of approximately 70%. We also continue to expect 2027 and 2028 LNS revenue to average $400 million per year and continue to see artificial intelligence as a driver of consumption and adoption of value-added products within the ecosystem. and have detected no change in client commitment to our platform. As a reminder, the timing and exact amount of L&S revenue can be difficult to forecast with precision, and it depends on the renewal timing, term, and client consumption levels, among other factors. We expect non-GAAP operating profit margin to be between 9% and 11% for the full year, which reflects a higher margin percentage in L&S, 100 to 200 basis points of improvement in ex-L&S growth margin, and another modest reduction in operating expense in absolute dollar terms. Looking specifically at the first quarter, we expect approximately $415 million of total company revenue on a reported basis, which assumes approximately $60 million of license and support revenue. Based on renewal timing during the year, the first quarter is expected to be the lowest L&S revenue quarter, and we expect an approximate weighting of 30% of L&S revenue in the first half of the year and 70% in the second half. with the third quarter likely the largest quarter of LNS revenue. Based on these assumptions, we expect first quarter non-GAAP operating margin to be slightly positive. We expect a number of non-cash expenses impacting GAAP net income and earnings per share in 2026, including pension annuity purchases and streamlining certain legal entities expected in the second half, which we will guide on a quarterly basis. Also, as a reminder, In 2025, we've removed hedges on our intercompany balances, which could create non-cash FX gains as the U.S. dollar strengthens or losses if the U.S. dollar weakens. These are difficult to guide due to constantly changing rates, but will impact quarterly gap net income. Full-year free cash flow is expected to be approximately negative $25 million, which translates to positive $67 million of pre-pension free cash flow. This assumes approximate payments of $85 million in capital expenditures $70 million of cash taxes, $70 million of net interest payments, $30 million in other payments, primarily restructuring, and $92 million of post-retirement contributions, consisting of $87 million of pension contributions and $5 million of other post-retirement contributions. Approximately $17 million of the pension and post-retirement contributions is expected in the first quarter. We are confident that we have the liquidity we need to comfortably support our pension contributions. We are focused on continuing to increase our efficiency and profitability during this period and maximize our underlying cash generation levels for investment and capital return. Before we open the line for questions, Mike has a few additional remarks.

Mike Thompson | CEO and President

Thank you, Deb. I wanted to take a moment to address our 2026 guidance. We're proud of what we've achieved in 2025, but disappointed that we didn't overcome all of the industry headwinds impacting our XLNS revenue. For 2026, our expectations for mid-single-digit decline in XLNS solutions reflects an intentional deeper push into the adoption of emerging technology within our existing base of clients, and the macro headwinds impacting discretionary spend in 2025 that we expect to linger through the first half of 2026, as we mentioned last quarter. Relative to 2024 year-end, we have more expansive book-to-bill ratio, more expected full-year revenue already contracted and in backlog, and there is less embedded risk from assumptions for timing of revenue ramp on contracted new business. Similarly, for profitability, the majority of the required Efficiency gains have already been actioned or identified. Achieving our 2026 guidance ranges keeps us on a path to potential full removal of the U.S. defined benefit pension obligations by 2029, after which U.S. pension contributions would cease, and we expect a host of new possibilities for investments in capital return. Based on our interactions with existing and prospective clients, and the sequential growth in pipeline activity so far this year, we believe we'll achieve positive XLNS revenue growth in 2027. With that, operator, you can open up the line for questions.

Operator

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Rod Bourgeois with Deep Dive Equity Research.

Please go ahead. Rod Bourgeois | Analyst, Deep Dive Equity Research

Okay, thank you. I'll start with an AI question. So I want to ask, how are AI and automated code modernization tools influencing the roadmap that you have and the demand for ClearPass Forward? We've clearly seen some recent concerns that COBOL refactoring may affect IBM's mainframe business. So I want to ask how you're assessing the implications of that trend for the ClearPass Forward platform.

Thanks. Mike Thompson | CEO and President

Great. Hey, Rod, thanks for the question. Certainly very timely with the communications that we've all seen. Look, the code factoring component of the dialogue that's, I guess, the issue du jour is not really new. Maybe the tools that we're using are new, but we've been talking about code factoring for a long, long time. years, in fact, and, you know, you referenced IBM here, and I think they have a piece out as well, kind of reacting to that. It's really only a part of the story, and it really is talking about, in my opinion, the enhancement of the platform. I mean, the code modernization is kind of the easy part. That doesn't change the engineering challenge of running the mission-critical workloads at scale and doing it securely. I mean, really, it's about Kind of the architecture redesign, the runtime replacement, you know, transaction processing integrity, the hardware tuning and years of performance tuning that's embedded in the platform. Code factoring does none of that, right? It really is just about the kind of modernization of what I would consider to be above the enterprise level of the corp. So from a strategic perspective, you know, internally we talk about clear path forward 2050. I mean, that's kind of the timeframe that we're looking out for that ecosystem. And we think net-net is going to be a positive to kind of drive more demand to the platform. And think of it as kind of the automation above the enterprise level and giving our clients more and more flexibility to that. And I guess secondarily, I would say that, you know, the other area that it's really important for is the continual kind of documentation of the code base, et cetera, testing, and really reverse testing, right, kind of doing scripts in in current languages and maybe refactoring them back to COBOL into kind of a legacy mindset. So the reality is we don't view that as any change from the strategy that we're currently on. And I think if you look at what we've encountered, I mentioned in my prepared remarks, three straight years of roughly $40 million of improvement against our expectations in that business. That's a byproduct of longer contracts being signed, additional consumption being signed, and the tooling that we've done over the course of the last, say, five years in that ecosystem has really positioned it to be AI-enabled. So I don't think it's really changed our strategy at all, and we see it as a continuation of the ability to kind of automate around the enterprise platform layer.

Rod Bourgeois | Analyst, Deep Dive Equity Research

So, Mike, I just want to take an extra second on that. I mean, what you're saying is that the co-factoring threat, I think what you said was automation above the enterprise level actually adds to the usage of your platform. Can you just add more color on that point?

Mike Thompson | CEO and President

Yeah, look, I think in general what we've been targeting and what we've been seeing is to put tools above the enterprise platform that allows for analysis and data extract, data movement across platforms, et cetera. And so using kind of AI agents and I'll say refactoring of code above that enterprise level really just continues to enable the use of the data. And remember the data set that we're talking about are standardized data sets and decades worth of data embedded in there, right? So if you're really trying to enhance a large language model, the key is really access of that data, not necessarily what code it's written in to get there. So the easier we can make that, the more customized or localized we can make that interface through the use of these particular agents, I think will be beneficial and cause more use of data, not less.

Rod Bourgeois | Analyst, Deep Dive Equity Research

Got it. Okay. Thank you. And then just a question about the outlook for bookings in 2026. Last year had a big load of renewal activity, but at the same time, over the last couple of years, you've invested to win new logos. So I want to get a perspective on your latest pipeline and sales efforts and what the outlook is for your bookings activity and your bookings mix. I mean, will the mix shift towards existing client scope expansion, where I think you had some positive commentary. What's the outlook for the bookings next for 2026?

Thanks. Mike Thompson | CEO and President

Yeah, thank you, Rod. Great question, and I appreciate the opportunity to expand on that a little bit. So you're right. I mean, we signed $1.7 billion of renewals in 2025. That clearly took a lot of the team and the client's focus away to kind of get that behind us, which was great. We've got a really strong backlog and, frankly, a higher backlog position going into 26 than we had going into 25 in relation to that. But the corollary or knock-on to that is when you're doing that renegotiation on renewals, typically clients are not talking about new scope opportunities, right, because you're really focused on what that renewal looks like. So on the heels of that, and we mentioned in our prepared remarks that when we've done those renewals, we've actually embedded into that some new scope opportunities. So as you know, we think of new business as new scope and new logo. So I would say two things. One, our focus on new logo expansion in 26 is enhanced. because we've got a lot more, I'll say, bandwidth to really get after that because the renewal cycle is a little smaller this year, probably about a third of what it was last year. So we'll have some more focus there. And then secondarily, and more importantly, I think, is the new scope expansion opportunities in the existing base will allow us to grow that new business as well. So I think you're right in looking at kind of that new business, and I bucket it that way intentionally because it's not just about new logo. It's really about the proliferation of new scope opportunities, whether that's in our existing base or whether that's with new logo clients. We talk about having roughly a $31 billion TAM in our existing base for new scope opportunities, so that's a really important element to our growth trajectory of the future.

Rod Bourgeois | Analyst, Deep Dive Equity Research

All right, thank you.

Mike Thompson | CEO and President

Thank you.

Operator

The next question comes from Mayang Tandon with Needham.

Please go ahead. Mayang Tandon | Analyst, Needham & Company

Thank you. Good morning. Mike, you mentioned the longer sales cycles and some of the competitive pricing dynamics. So maybe if you could just provide a little bit more details around how you counter some of that competitive pricing. And of course, you can't control the overall market. Discussionary spending slowdown. But how do you maybe counter that with your go-to-market strategy, some of your sales investments to maybe help, maybe offset some of that pressure points in the market?

Mike Thompson | CEO and President

Yeah, thank you, Amin, for the question. Super important, right? Look, when we think about the sales cycles in general, I would say 25 was a really tough year just because of all of the macros and kind of the adoption of new technology, people a little uncertain around how much to adopt, where to adopt it, uncertainties around, you know, whether it was tariff-related or, again, other macro-related issues, geopolitical, et cetera. I think that weighed on the longevity of the contracting cycle a little bit more than the mechanics of, you know, what we typically see. And I would say some of that is already starting to ease. We've got a pretty good jump-off point for Q1 as far as our pipeline is concerned, our discussions with clients in regards to that. In fact, just anecdotally, I had some correspondence with hopefully a future client that's talking about setting kind of record pace in their contract renewal cycle, really trying to expedite the use of that. So I think those were a little bit more macro-oriented than they are, you know, process-oriented from our perspective. But clearly we've done a lot from the embedding of tools and technologies and process changes, qualifications of the pipeline, and also, you know, kind of how we're approaching opportunities. to enhance and streamline the first touch point to contract closure. So, you know, very focused on trying to do everything we can to shorten that cycle and be very prescriptive about how we approach clients and who we approach for what. So definitely are some elements embedded in that. As far as pricing is concerned, look, it's always been very competitive pricing environment. I think what has made it a little bit more competitive is you've got this pause, I guess, or the hesitancy to grow some of the industry, right? We've seen our traditional industry CAGRs from say four and a half or some percent CAGR growth down to flat, which means you've got a lot of folks chasing a smaller pie, right? And so from our perspective, We rarely want to have a discussion or even start a discussion that talks about commodity pricing and base to the bottom, right? All of our go-to-market approach is around enhanced experience and value and quality, right? And so, and we mentioned a couple of the renewals that we didn't win, and I mentioned those in Q2 and in Q3. that we need to maintain pricing discipline. We know what the value and the market-based pricing is for what we deliver. And we think we're delivering value in advance of that market pricing. So we should be able to get at least market-based pricing. And so not trying to, you know, just compete on price. If the client doesn't see the value we offer, obviously that's going to be a longer term problem anyway, right? So our point is really to get in front of that early, make sure we can illustrate the value that we bring to our clients, and we have plenty of quals to support that. So that's kind of how we're addressing the market on both of those fronts.

Mayang Tandon | Analyst, Needham & Company

That's very helpful. And just a very quick follow-up for Deb, maybe. Deb, given the guidance range, I'm just curious, as you entered this year, have you built in a little bit more buffer in your expectations given some of the uncertainty and macro headwinds, or would you say you've basically aligned your guidance with your historical strategy? And in that context, you know, what dictates whether you come in at the low end of the range or the high end? Like, what are some of the factors we should be considering?

Deb McCann | CFO

Right. Yes, I think, you know, we definitely, as Mike talked about, some of the revenue, you know, pressure, some of the industry headwinds is what we considered, you know, as we did the guidance. So I think You know, the things to look for are, you know, as some of those macro factors, you know, alleviate is what we assumed that later in the year some of those factors alleviate. You know, we had some, you know, as Mike talked about, the mix of new logo is planned for, you know, to have a lot more new logo this year as far as renewals. So as we're doing that, we think the Gartner logo Magic Quadrant will help, and so if we sell new logo kind of faster, that'll be another, an element to look for that would increase, you know, what we put out there as our guidance. But we've kind of built in all these headwinds, you know, through MOSA 26.

Mike Thompson | CEO and President

Yeah, look, I would say too, like, we absolutely took a different approach to our guidance this year. It's not last year's same exact strategy. You know, we saw, you know, obviously the PC refresh cycle. We were expecting that, you know, never came to fruition. And so we've kind of backed that off and looked at the trajectory a little bit when we talk about that cycle. You know, clearly we've got the hardware cost components, and we think that that's going to have some opportunities for DSS. But I would say, in general, there was a little bit more of a conservative approach to the way we set guidance. But I want to just be really clear. related to top line. I think from a bottom line perspective, we have been very consistent in our ability to execute bottom line improvement. We're also calling for another, say, 150-ish basis points of bottom line improvement. Good line of sight to that. But we definitely took into consideration the kind of market hesitancy that we have seen. We've kind of carried that through the first half of the guidance And, and I think, you know, we want it, as you know, we're, we're, we kind of pride ourselves on the level of transparency, uh, that, that we, that we put out on a regular basis as it pertains specifically, uh, to our guidance. And, and we really kind of went through element by element to say, Hey, is this an area, what we feel really good about it and, and, and kind of how to get there. So a little bit of a different approach on top line, I would say in general, you know, just taking out some of the things that we thought were going to happen that didn't happen in 25 and expect it as they pick up throughout the year, kind of a mid-year convention on that.

Mayang Tandon | Analyst, Needham & Company

Great. Thank you so much, Mike and Deb.

Sure. Thank you. Operator

Appreciate it. You're welcome. Thanks. The next question comes from Maggie Nolan with William Blair. Please go ahead.

Hi. Thank you. Maggie Nolan | Analyst, William Blair

I wanted to look ahead a little bit. You talked about several things that you're working on in the script that would help accelerate XLNS revenue growth. And I'm just wondering what leading indicators we can watch to assess this progress. And then what is kind of a realistic timeline, especially given, you know, some of the first half pressures you just outlined? What is the realistic timeline for, you know, seeing some level of growth accelerations?

Mike Thompson | CEO and President

Great. Thanks, Maggie, for the question, and really good one and intuitive here, too. I would say to you, you know, clearly our new business kind of conversion rate is the, I'll say, earliest indicator on top line. So I look at that question in two ways. One is really about the top line expansion and the growth. And the other is about the deployment of our embedded technology, right, when we talk about enhancing the capabilities of our bottom line, right? So pushing that technology out to our existing client base we think will add some ability for us to grow top line through the use of, you know, as I mentioned earlier, new scope opportunities within those accounts. Just know that that also comes with a little bit of a headwind, right? So leaning into the adoption, and one of the examples I gave was the service experience accelerator adoption that we're looking to push out to a third of our existing install base. Well, when we push that out, there's going to be some pricing pressure on that top line because clearly it is – The agentic service desk that we're using is a lower cost of delivery, and some of that we have to share with our client base. So you're pushing out this technology, which is going to put a little bit of a headwind pressure on, but we think we're going to overcome that headwind with the expansion of the opportunity embedded in that client and the addition of new logos to that base as well. So those are the things that we think are really going to support that XLNS growth rate. That's a DWS example. On the flip side, when I think about CA&I and the example there, we talked about the intelligent operations platform and really adding those agentic agents to expand our scope within the construct of the hybrid infrastructures that we support and manage. Frankly, when we think about the current drivers I'll probably misquote this, so we may need to change it, but I think there was a recent McKinsey report out where we talked about a $300 billion to $400 billion TAM in what I would consider to be the above enterprise layer automation of AI agents, right? And we saw a lot of noise in the market around software and service implementers for software. That's not what we do, right? Like, we're more in orchestration. on that, but when we think about the application of AI agents above the SAS level enterprise software, that is what we do. That automation component, both to help with transition and to actually orchestrate and manage post-orchestration of the IT ecosystem, that actually allows us to participate a little more fully in what used to be just solution implementers of ERPs or CRMs or HCMs, where they're taking that customization layer or that integration layer and moving it above the enterprise stack, that's an area we do play in that we historically haven't, right? So I think it gives us a lot more opportunity to participate in that legacy TAM and in this future TAM on both CA&I and DWS.

Maggie Nolan | Analyst, William Blair

That's very helpful. Thank you. For my second question, just on margins, could you maybe distill for us the main puts and takes on margins in the next year, just kind of excluding the SG&A efficiencies you've gained, assuming that there's not incremental efficiency to drive there in the near term beyond what you've already outlined, the efficiencies that we'll be annualizing?

Mike Thompson | CEO and President

Yeah, look, I mean, I think it's been fairly consistent from our perspective where we think those are coming from. Primarily, it is the application of emerging technology, right? The embedding of AI into our delivery platform allows us to deliver in a much more efficient manner. So clearly, there's going to be margin benefit from doing that. And, you know, as I mentioned, some of that margin benefit comes in the form of a revenue share, if you will, right, giving some of that back to the clients. But, you know, clearly a portion of that stays embedded in our delivery platforms. And as we then add to that platform through the use of top line growth, there's going to be obviously additional margin pull through from that point of view. So I would say it's primarily in the application of emerging technology. There are still opportunities for us to be more efficient. There are still opportunities for us to continue to look at, I'll say, upskilling or rightskilling or rightshoring components of what we do, and we continue to look at those opportunities as far as the delivery workforce is concerned. But again, the adoption of a digital workforce, working alongside our human workforce, we're kind of working both sides of that equation. And then I would say lastly, when you think about the mix shift, as we continue to push more and more into some of these newer elements of our solution, and I'll just pick on field services as a very practical example. as we continue to shift the mix of what we're actually supporting with those field service technicians, whether that's liquid cooling, whether that's hybrid infrastructure, whether that's high-end storage, those are just higher margin elements of work for, you know, the same technician moving away from some of the more traditional PC break fix. So I think those three elements would be what I would point to as the real drivers of where we should expect to see margin improvements. which is, again, why I think we're really confident in the ability to execute it because a lot of the technology is obviously already embedded and we're already moving it into production. And, again, I think we've put a track record out there, you know, almost 600 basis points improvement, you know, over the last three years in XLNS gross margin, right? So we're looking for another, you know, 150 basis points there in 26th.

Maggie Nolan | Analyst, William Blair

Thank you.

Mike Thompson | CEO and President

Thank you.

Operator

The next question comes from Anna Goschko with Bank of America.

Please go ahead. Anna Goschko | Analyst, Bank of America

Hi. Thanks very much. So first question is on the L&S revenue outlook, I do sense your kind of historical pattern of being conservative and then you know, beating and raising. So, you know, back in October when, I think it was October when you had the Clear Paths kind of webinar for us, you had talked about a $400 million CAGR for the next three years, and it looks like you're already kind of beating that with the $415 expected for this year. But then I think you did comment that you still expect about $427.28. So just wanted to understand, I understand there's license renewals in there, but it seems that the driver is AI in terms of consumption. So wanted to understand what you're thinking or expecting with regard to the impact of AI being a continued driver of consumption.

Mike Thompson | CEO and President

Great. Thank you, Anna, for that call and that call out. I'm going to reiterate a comment I made in an earlier point. We did revisit kind of the way we were putting our guidance together, and this is another good example of that. And so you saw that we actually put out here $415 million of L&S revenue, even though a little while ago we were talking about an average of $400 over that three-year period, and we carried that average I think we started that maybe in the 360 to 370 range, moved it to 390, moved it to 400, and are still saying 400 in those out years. And you're exactly right also that the driver of that has been consumption and use. much more so than just the license renewal schedule. And we do think that that's the AI comment that I made earlier in regards to Rod's question, right? The more tools and techniques and processes that we can build and put on the front end of that ecosystem or that platform, the more consumption of that data and obviously the more value that orients to the platform and, frankly, to our clients and to us. So we do expect that trend to continue, which is why we increased that CAGR average for those out years. And I would just note too that, you know, the 40 million beat over the last three years, which you kindly pointed out as well, you see the 415 kind of take some of that now into our guidance to go okay, you know, this has been a pattern here of continued consumption, so we wanted to bake some of that in so that we're not, you know, sometimes it's just bad to continually overperform than it would be to underperform. So we're trying to do a better job at making sure that some of that overperformance that we've seen and expect to continue to see is baked into the numbers.

Anna Goschko | Analyst, Bank of America

Okay. But for 27, 28, you just haven't really adjusted that yet for any of us that are following the AI space or the AI impacts. I mean, consumption levels should continue to increase. Is that fair?

Mike Thompson | CEO and President

Yeah, look, I would say it's too far out for us to adjust. you know, multiple year out consumption estimates. But I would say if history is indicative of the future, then yes, we would expect as we go further down the road that we'll revisit that estimate. But for now, we felt pretty comfortable with it's already a $10 to $15 million step up from what we were chatting about before. So you can assume there is some consumption baked in there.

Anna Goschko | Analyst, Bank of America

Okay, great. And then, Deb, so just on some of the kind of balance sheet stuff, so I just want to make sure I'm understanding on the free cash flow guide, which is a use of 25, so that is largely your expected all-in use of cash, right? So if I just do this simple arithmetic on your current cash balance, you're going to be approximately $25 million lower at the end of 26.

Deb McCann | CFO

That's correct. And that translates to pre-pension of $67 million, you know, compared to the $128 million this year.

Right. Anna Goschko | Analyst, Bank of America

And then the slides on the pension outlook are great. Thank you very much. It's really clarifying. So then if I look at the slide on the potential annuity purchases, you've really, you know, give us the estimates of what the deficit's going to be. So at the end of the day, you know, whether you purchase an annuity or not, like your pension deficit's going to be down roughly in the $50 million range, right? So net, net, like your net debt is going to be lower at the end of the year because your cash is only going down by like 25, but your pension deficit's going down by, at least 50. Is that the right way to put it?

Deb McCann | CFO

It's down by that, yes. So it's down by about that much, but in the next few years, 229, 180, 137, it's all on that chart 17.

Mike Thompson | CEO and President

Yeah, I mean, every contribution is going to drive down that deficit value. It's not dollar for dollar, but you will see you know, continual improvement in the deficit and in net leverage.

Anna Goschko | Analyst, Bank of America

Okay. And then the annuity purchases are non-cash.

Deb McCann | CFO

Right. We use the plan assets to reduce the plan liabilities.

Correct. Okay. Anna Goschko | Analyst, Bank of America

Okay. And then, so, you know, I know you worked really hard last year to do the bond issuance and, you know, it came at a rate that was, a little higher than you probably preferred, and your plan at some point is to refinance those lower. Obviously, like the market overall is pretty messy right now. So those bonds are trading below par. Have you thought about using some of your cash to buy back some of that debt at this point? Because it's a pretty attractive rate.

Deb McCann | CFO

Yeah, I mean, we always look at everything. But, I mean, at this point, You know, we're always looking to conserve cash, right, given the pension obligations, given everything. But we're always looking at everything. But it's not, you know, something at this exact moment we're planning to do. But we're always looking at it.

Anna Goschko | Analyst, Bank of America

Okay, so the preference is just to keep, like, a solid cash balance, it sounds like. Yes. Okay, great. Okay, well, thank you very much.

Operator

You're welcome. The next question comes from Anya Soderstrom with Sidoti.

Please go ahead. Anya Soderstrom | Analyst, Sidoti

Thank you for taking my question. Most of them have been addressed already, but I'm just curious. You mentioned that the public sector has been a headwind in 2025. What are you seeing there as we have entered 2026?

Mike Thompson | CEO and President

Hey, Anya, it's Mike. Thank you for the question. Look, I think I would say that we've seen an improvement in public sector in general across the board. So we're optimistic that we'll get back to some level of normalcy. I mean, you can only kick the can so far down the road. These things, and you know the work that we do is not discretionary work, right? So at some point we have to get on with business. And so I think in general, so far, the tail end of 25, we've started to see a little bit of easing of that pressure. I think that has continued into 26. And we're hopeful by kind of mid-year that we'll get back to kind of our normalcy as it pertains to kind of public sector work that we're doing. In fact, we signed a big deal Recently in Australia public sector that was in one case we had a win back from a competitor and another we expanded a relationship there that was pretty significant in the region.

So we're optimistic. Anya Soderstrom | Analyst, Sidoti

Okay, thank you. That was all for me.

Mike Thompson | CEO and President

Thank you, Anya.

Operator

This concludes our question and answer session and concludes our conference call today. Thank you for attending today's presentation. You may now disconnect. jsPDF 3.0.3 D:20260606090522-00'00'

NYSE:UIS Q3 2025 Earnings Call Transcript Generated on 6/6/2026 Operator | Conference Operator: Good day and welcome to the Unisys Corporation Third Quarter 2025 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Michaela Paworski, Vice President of Investor Relations.

Please go ahead. Michaela Paworski | Vice President of Investor Relations

Thank you, Operator. Good morning, everyone. Thank you for joining us. Yesterday afternoon, Unisys released its third quarter 2025 financial results. Joining me to discuss those results are Mike Thompson, our CEO and President, and Deb McCann, our CFO. As a reminder, today's call contains estimates and other forward-looking statements within the meaning of the securities laws. We caution listeners that current expectations, assumptions, and beliefs forming the basis of these statements include factors beyond our ability to control or precisely estimate. This could cause results to differ materially from expectations. These items can be found in the forward-looking statement section of yesterday's earnings release furnished on Form 8K and in our most recent Forms 10K and 10Q filed with the SEC. We do not assume any obligation to review or revise any forward-looking statements in light of future events. We will also refer to certain non-GAAP financial measures, such as non-GAAP operating profit or adjusted EBITDA, that exclude certain items, such as post-retirement expense, cost reduction activities, and other expenses the company believes are not indicative of its ongoing operations, as they may be unusual or non-recurring. We believe these measures provide a more complete understanding of our financial performance. However, they are not intended to be a substitute for GAAP. Reconciliations for non-GAAP measures are provided within the presentation. Slides for today's call are available on our investor website. And with that, I'd like to turn the call over to Mike.

Mike Thompson | CEO and President

Thank you, Michaela. And good morning, and thank you for joining us to discuss the company's third quarter 2025 financial results. We continue to demonstrate our steady focus on improving delivery and operational efficiency which is helping us successfully navigate the macroeconomic uncertainty in the market and other headwinds impacting revenue. We remain on track to meet or exceed the midpoint of the improved non-GAAP operating profit margin guidance of 8% to 9% provided last quarter, as we expect to generate $110 million of free pension, free cash flow for the full year. We're on track to meet our increased L&S expectations of $430 million for the current year, $40 million above our original expectations, supported by strong retention and consumption trends in our high-value software ecosystem. These trends have now helped generate upside in each of the past three years, and we're increasing our projection for out years to approximately $400 million of average annual L&S revenue for the three years of 2026 through 2028. The quarter also reflects our commitment to executing the pension strategy we laid out and the realization of the benefits we said we would achieve. We said we would remove substantially all market volatility from our aggregate U.S. pension contributions, and those have remained stable. Our pension debt has come down with our quarterly contributions, And we executed an annuity purchase in September to remove more than $300 million of U.S. pension liabilities, over half of our stated $600 million target by the end of 2026. While revenue was light relative to the color provided last quarter, much of this was related to timing, including a shift of a large license and support renewal, which closed early in the fourth quarter. Timing on XLNS hardware pass-through also contributed to the quarterly miss on top line. Additionally, market dynamics affecting the PC cycle and IT budgets continue to cause clients to pause or delay project initiation, slow the pace of transition for some new business, and limit market penetration of newly introduced solutions. Some of the early signs of improvement we've seen at the U.S. state and local clients lost some steam as concerns about federal funding returned leading up to the ongoing U.S. government shutdown. Our revised full-year outlook reflects some additional revenue timing elements, including a shift in expected fourth-quarter revenue recognition from upfront to overtime, which will generate future revenue. We could see some of the headwinds that challenged XLNS growth this year persists for a few quarters, so we're acting quickly to adjust our approach to mitigate those impacts. At the same time, feedback from clients, partners, and industry analysts have only increased our confidence in the positioning of our solutions and our ability to establish baseline XLNS growth over time. Meanwhile, we're still delivering on profit dollars and free cash flow priorities. The most important elements required to achieve that success are the continued execution of our L&S solution, which we continue to outperform, and the efficiency gains in XL&S delivery, where we're stepping up our efforts. We have already made significant improvement in our XL&S gross margin and have identified incremental opportunities within workforce optimization and the application of AI-driven productivity solutions. Looking at all these factors, we believe we're on a path to improving our growth profile over time, continuing to enhance profit, chip away at the pension deficit and liabilities, and ultimately fully remove our U.S. pension liabilities. Looking at client signings, third quarter total contract value increased 15% year over year, driven by a strong quarter in XL&S renewals. New business TCV of 124 million was in line with the solid levels of new business in the second quarter. Year-to-date, our new business signings are slightly positive relative to 2024, which was a strong year for new business signings, some of which are still building up their full revenue run rates and are showing expansion opportunities. The pricing environment remains competitive, which is not unusual. Clients want to share in the AI cost savings, and in some cases their expectations may be unrealistic. We've also seen some competitors undercutting on price based on aggressive assumptions for the size and pace of future AI-related efficiencies, and we think that they're taking on a high degree of risk in those cases. We are seeing these dynamics on a handful of renewals, and in certain cases have been willing to accept certain attrition, especially at clients prioritizing cost over value, and offering limited potential for us to expand in higher-value solutions. We continue to take a disciplined approach aligned to our priorities of profit dollars and cash flow, and we believe clients are beginning to adjust their expectations as they're gaining knowledge on how the use of the emerging technology applies to their ecosystems, which allows us to build competitive advantages in our portfolios. We have large new business opportunities within our extensive existing client base, and many of our third quarter wins highlight our ability to expand those relationships. In many cases, our wins reflect a close alignment between solution development and our clients' efficiency priorities. For example, in digital workplace solutions, we signed a renewal with a global industrial manufacturing client that included significant new scope to transform and streamline IT support. As part of this engagement, we will transition existing service desk to our next-generation service experience accelerator, and we'll also deploy virtual tech cafes and migrate IT service management capabilities to a new platform to streamline IT support without sacrificing quality. This engagement also includes new scope in CA&I solutions, such as automating network operations monitoring to both improve process and reduce costs. In cloud application and infrastructure solutions, we've signed an expansion deal expected to drive significant cost savings for a public sector client in Australia. Leveraging our deep multi-cloud expertise, we proactively identified an opportunity to optimize their hybrid infrastructure by eliminating a high-cost platform, resulting in migration project work and ongoing managed services revenue for us and millions of dollars of annual cost savings for our clients. During the quarter, we renewed one of our largest public sector infrastructure managed services contracts, a seven-year extension to manage data center environments for a large U.S. state government. We also introduced a new cyber vault solution to protect critical infrastructure used by all of the state's cabinet-level agencies spanning revenue, public health, transportation, and more. The enterprise computing solutions, we signed a new scope contract with a large European financial services clients to consolidate some core systems onto one of our platforms. We will provide transformation services through our proven migration factory to accomplish this project and help our client execute their simplification and rationalization program. Our deep expertise in financial services sector has been a key driver of new business in ECS segments. And in the third quarter, that also included a noteworthy new logo win for our modern core banking industry solution with a financial institution in Latin America. Branch banking remains an important channel in the region, and we've developed a differentiated offering that integrates branch and digital banking with central core banking technology, incorporating capabilities from our recent partnership with Thought Machine. Our innovative end-to-end offering will consolidate legacy systems for customer management, deposits, loans, accounting, treasury, and compliance into a single, secure, scalable solution that will become the backbone of our clients' financial operations. I now want to discuss our solution portfolio, including some trends we're seeing in client demand and where we're focusing our investment, innovation, and partnership efforts. We allocate a significant portion of our capital expenditures to our ClearPass Forward solution in the ECS segment, which we discussed in more detail in an investor education session earlier this quarter, a recording of which is available on our investor website. A core element of our ClearPath Forward 2050 strategy is the continued evolution of our operating systems and surrounding ecosystem of products, industry solutions, and modernization services. We are continually expanding several dimensions of ClearPath Forward, including speed, security, and resilience, to maintain strong value proposition that has allowed us to retain clients for decades and support increasing consumption. In the third quarter, we released updates to one of our ClearPath Forward operating systems, expanding cloud compatibility, and made significant post-quantum cryptography security algorithm enhancements. Looking at our industry solutions portfolio, in travel and transportation, we completed the integration of our in-transit system to our cargo portal, which means our platform now allows detailed tracking across the cargo journey in accordance with international air transport association standards. In banking and financial services, we're seeing client interest in quantum enhanced fraud detection for financial transactions, a topic on which members of our ECS team recently published research accepted by the International Conference on Quantum Artificial Intelligence following a rigorous peer review. In DWS and CA&I, we continue to invest in our AI-driven portfolio that's based on technology-led delivery models. This is beginning to allow us to show up in the market with higher value offerings at better price points, making us more competitive in the markets. This puts pressure on the top-line growth but allows for reduced cost of delivery and better margin profile. In digital workplace solutions, we're already seeing this in the uptake of our service experience accelerator. During the quarter, we rolled out this solution to additional clients and continue to see roughly 40% deflections away from human support to automated support handled by our agentic AI agents. Data from early client adopters also indicates an improvement in the end user experience. In a service where marginal change has meaning, we're seeing a substantial 28% increase in user engagement and a 24% decrease in abandonment on average. Our knowledge management capabilities are identifying gaps in approximately 10% of support tickets and addressing them with automated content generation, to improve accuracy of the training data and the effectiveness of our agentic AI agents. In field services, we've invested in Salesforce's AgentForce technology, which leverages agentic AI to automate scheduling, rescheduling, and pre and post work summaries, while continuously learning and making autonomous decisions to improve and optimize dispatch efficiency over time. During the quarter, Unisys became an authorized Apple product reseller, adding MacBooks and iPads to our existing device subscription service, which provides comprehensive lifecycle management with intelligent device refresh and a flexible, predictable cost model. This partnership enables client decision-making based on the user's needs rather than supplier limitations. In cloud applications and infrastructure solutions, our application factory has taken shape and yielding a growing pipeline of new opportunities. Application development is a bright spot within public sector, with clients remaining interested in modernizing inefficient platforms, including for criminal justice information, identity access management, and licensing and permitting. We also continue to cross-sell and up-sell new opportunities for our CA&I solutions at existing enterprise computing solution clients. primarily related to ClearPath Forward clients seeking to modernize their application layer and expand digital capabilities. We're also making a push to cross-sell CA&I solutions into our base of ECS clients in the financial services and public sectors that use our business process solutions, where we believe our workflow and process knowledge combined with industry expertise is a unique combination. In both DWS and CNI, we continue to view the market of mid-sized enterprises, those with $1 billion to $5 billion of annual revenue, as a relatively untapped market opportunity where we have all the ingredients to effectively compete and source significant new revenue. These clients typically value personalized service, which they're not receiving from larger providers and have less organizational complexity allowing them to establish their relationship with us at a higher level and more quickly. Given our digital workplace solutions are market-leading, even for the largest enterprises, we see the mid-market commercial sector as a larger opportunity to build leadership and differentiation, particularly within our CA&I solutions. A top priority heading into year-end is defining more clearly a set of CA&I solutions tailored for this segment of the market, and with a streamlined and repeatable sales motion. This involves solidifying preferred partners and building more standard architectural solutions and delivery frameworks, just as we've done in IT service management with Freshworks and EasyVista and in licensing and permitting with Clarity. We are already enhancing our cybersecurity portfolio in this manner, an area where our pipeline is growing and where we're seeing strong secular growth tailwinds in market demand. We're leaning in with partners like Dell and Microsoft to develop end-to-end security managed service playbooks, integrating security tooling, standardized solution frameworks, and repeatable sales motions. We've also begun designing a standard architecture for Unisys intelligent operation specific to mid-size enterprises that can also incorporate private AI clouds. Running AI workloads exclusively in public cloud environments is very expensive and cost prohibitive for mid-market clients. We're exploring potential technology partners with OEM, data centers, and GPU as a service providers so we can offer our clients alternate private AI frameworks with Unisys service wrappers to bring down those costs. Before turning the call over to Deb, I want to provide an update on the industry recognition, including the growing acknowledgement in higher growth areas of the market. In the third quarter, we received a new leader ranking in cloud services for mid-market enterprises. We were also recognized for the first time or appear in new reports in cybersecurity, agentic AI services, and AI-driven application development. This was in addition to maintain leader positions in a number of updated reports put out in multi-cloud, digital workplace, and generative AI services. These recognitions come from highly respected firms such as Avasant, Everest, IDC, and ISG, and give credence to our strategic focus on application development, AI services, and penetration of the mid-market. The majority of the clients and prospects rely on industry experts in some manner when choosing IT service providers. So our steady rise in many quarters should open up new business opportunities in areas of the market we want to penetrate to support XLNS growth and our new solutions. Finally, I want to mention that Unisys was named to Time Magazine's 2025 list of world best companies for the first time, recognizing us amongst global organizations that exemplify excellence in today's corporate landscape. Our investments in upscaling and development opportunities for our employees is an important component of that excellence. and supports a stable workforce maintaining our low voluntary attrition, which was 11.7% on a trailing 12-month basis. With that, I'll turn the call over to Deb to go through our financials in more detail.

Deb McCann | Chief Financial Officer

Thank you, Mike, and good morning, everyone. As a reminder, my discussion today will reference slides from the supplemental presentation posted on our website. I will discuss total revenue growth, both as reported and in constant currency, and segment growth in constant currency only. I will also provide information excluding license and support or XLNS to allow investors to assess the progress we are making outside the portion of ECS where revenue and profit recognition is tied to license renewal timing, which can be uneven between quarters. To echo Mike's comments, we remain in a good position to achieve our increased profitability and free cash flow outlooks to maintain our strong liquidity position. And we took another step forward on the journey to removing our U.S. pensions with the annuity purchase we executed in September. While we have faced some XLNS revenue headwinds, our license and support cash engine is being powered by our base of high-quality clients who continue to commit to and increase consumption on our platforms. At the same time, we are fine-tuning our strategy to ensure we capitalize on the advantages offered by technology like agentic and generative AI and quantum encryption to expand the scope of our efficiency initiatives and deliver innovation that advances our clients' efficiency goals. Looking at our results in more detail, you can see on slide four that third quarter revenue was $469 million, a decline of 7.4% year over year, or 9% in constant currency. We had an approximate $12 million impact from the shift in timing on a license and support renewal that closed just outside the quarter, which will benefit L&S fourth quarter revenue. Excluding license and support, Third quarter revenue was $377 million, down 3.9% or 5.8% in constant currency. This was below our expectation of $390 million we shared with you last quarter due to foreign exchange movement and dynamics I will cover now as I discuss constant currency segment revenue. Digital workplace solutions revenue was $125 million in the quarter, down 5.8% year over year. Year-to-date, DWS revenue is down 2.9%. The third quarter decline was driven in part by the shift of low-margin hardware revenue, some into the fourth quarter and some into 2026. Volumes in some of our traditional PC field services were also lighter than we expected, and a pickup and PC refresh activity was dampened by Microsoft's extension of security support for the significant number of devices still running on Windows 10. Third quarter cloud applications and infrastructure solutions revenue was $180 million, a 6.8% decline compared to the prior year period. This segment has our highest public sector exposure, where activity levels have already been suppressed, and the uncertainty around federal funding heading into the government shutdown caused incremental slowing. That impact continues to be primarily concentrated at U.S. state and local governments, though we were pleased to secure meaningful renewal TCV with some of these clients at an improved margin. Year-to-date, CA&I revenue is down 5% due to volumes in the public sector. Enterprise Computing Solutions revenue was $133 million in the third quarter, a 13.9% year-over-year decline due to the cadence of L&S renewal signings, which have a higher fourth quarter concentration than last year. Within the segment, L&S revenue was $83 million compared to $105 million in the prior year quarter. Specialized services and next-generation compute solutions revenue grew 1.7%, benefiting from new business and application services we are delivering for clients in both travel and transportation and financial services. Trailing 12-month signings of approximately $2 billion translate to a book-to-bill, of 1.1 times for both the total company and our XLMS solutions. And we exited the quarter with a backlog of $2.8 billion flat year over year. As Mike touched on, the complexity and pace of negotiations have continued to elongate cycles on some renewals in DWS and CA&I. Moving to slide six, third quarter growth profit was $117 million, a 25.5% growth margin down from 29.2% a year ago. as a result of the cadence of L&S renewals. Ex-L&S gross profit was $70 million, and ex-L&S gross margin was 18.6%, up 70 basis points year over year, largely due to lower cost reduction charges in the quarter. Excluding that benefit, we continued to make incremental gains in delivery efficiency to maintain profitability despite revenue decline. Our investments in workforce optimization are helping us hone in on incremental opportunities to improve delivery, and we plan to act quickly to capitalize on those. I will now touch briefly on segment gross profit. DWS gross margin was 16.2% in the third quarter, essentially flat year over year. As Mike discussed, we are leaning heavily into technology to automate delivery. DA&I gross margin was 19.6% in the third quarter, relatively flat year on year. We were pleased to maintain profitability especially given the higher margin profile of CA&I solutions being impacted by public sector uncertainty. Segment margins continue to benefit from automation and optimizing workforce and labor markets, as well as synergies we are achieving from centralizing application capabilities. ECS growth margin was 46.2% in the third quarter, down from 58.2% a year ago, which was due to the timing of L&S renewals and NICs from integrated system sales. As a reminder, our L&S solutions have a fairly fixed cost base, and the very high concentration of license renewals is expected to drive a significant sequential increase in fourth quarter ECS growth margin. Moving to slide seven, third quarter gap operating loss is $34 million, which included a $55 million non-cash goodwill impairment in the DWS segment related to the near-term industry dynamics challenging volumes, and the pace of client signings. Non-GAAP operating profit was $25 million, a 5.4% non-GAAP operating margin, which is in line with our expectations for mid-single digits. SG&A in the third quarter declined slightly year over year and is down 8% year to date, driven by our initiatives to streamline corporate functions, real estate, and technology. We are pushing to accelerate the remaining cost takeouts and increase our overall rationalization programs to maximize savings in 2026. We had a third quarter net loss of $309 million, which included an approximate $228 million one-time non-cash pension expense related to the annuity purchase transaction in the quarter. As we previously discussed, this is an important element of our pension removal strategy. The quarter also included a $4 million foreign exchange loss. As we mentioned last quarter, we ended our hedging program on intercompany loans which removed the cash impact of the hedge settlements, but increases P&L FX volatility, impacting GAAP net income. Adjusted net income was negative $6 million, or a loss of 8 cents per share. Turning to slide 8, capital expenditures totaled approximately $18 million in the third quarter and $59 million year-to-date, relatively flat year-over-year. A significant portion of capital expenditures relates to relatively steady levels, of solution development for our L&S platforms while we maintain a capital-light strategy in our ex-L&S solutions. Pre-pension, pre-cash flow, which is free cash flow prior to pension and post-retirement contributions, was $51 million in the third quarter and $15 million year-to-date. We generated $20 million of free cash flow in the third quarter and improvement from $14 million in the prior year period. During the quarter, we made $30 million of contributions to our global pension plans and received a $25 million one-time payment related to a favorable legal settlement in the fourth quarter of 2024. Moving to slide nine, cash balances were $322 million as of September 30th, compared to $377 million at year end, reflecting our use of $50 million cash on hand as part of our $250 million discretionary pension contribution. Our liquidity position is strong, with no major debt maturity until 2031, and our recently renewed $125 million asset-backed revolver remains undrawn. Our net leverage ratio is 1.8 times and 3.7 times, including pension deficit. We expect lower net leverage at year-end, given the strong profit contribution we expect from L&S renewals and expect leverage to gradually come down over time as we contribute to our pensions, though not in a straight line. I will now provide an update on our global pension plans. Each year end, we provide detailed estimated projections for expected global cash pension contributions and gap deficit relative to our quarterly updates. These projections change based on factors including funding regulations and actuarial assumptions. The deficit is also impacted by our planned contributions some of which go directly towards deficit reduction. After the upside senior notes issuance in June and one-time $250 million contribution, the pro forma 2024 year-end U.S. pension deficit was approximately $500 million. As of September 30th, we estimate the deficit to be approximately $470 million. We are forecasting approximately $360 million of remaining cash contributions our global pension plans in aggregate through 2029, which includes approximately $24 million of pension contributions in the fourth quarter, including both U.S. and international. Of the $360 million of contributions we are forecasting through 2029, approximately $230 million are associated with our U.S.-qualified defined benefit plans, relatively unchanged from last quarter. As we discussed on last quarter's call and during our dedicated pension investor education event, the historical pension contribution volatility that was primarily in our U.S.-qualified defined benefit plans was substantially removed by increasing fixed income allocations of plan assets to match duration of plan liabilities. As a result, our contributions through 2029 are not expected to fluctuate more than 3% in aggregate per annum, providing a high degree of certainty as to our future funding requirements. During the quarter, we completed an annuity purchase that removed approximately $320 million of pension liabilities, more than half of the $600 million we aim to remove before the end of next year. This involves transferring $320 million of liabilities and a similar amount of plan assets to a third-party insurer. Annuity purchases reduce ongoing maintenance costs and allow us to remove liabilities at lower premiums than would be paid on a full takeout. I will now discuss our full year financial guidance and additional color provided on slide 10. For the full year, we now expect constant currency growth of negative 4% to negative 3%, which equates to a reported revenue decline of 3.6% to 2.6%, which continues to assume full year license and support revenue of approximately $430 million. This implies fourth quarter revenue of approximately $570 million, which assumes $185 million to $190 million of L&S revenue. We expect to come in at or above the midpoint of our upwardly revised non-GAAP operating margin guidance range of 8% to 9%, implying fourth quarter non-GAAP operating margin in the mid-teens due to the concentration of L&S revenue we expect. We are pleased that this translates to non-GAAP operating profit that is slightly above our original full-year guidance. This stems from the strength and stability in our ClearPass Forward software ecosystem, as well as diligent execution to enhance delivery and operational efficiency and foreign exchange favorability. We will continue to act with agility to remove additional costs where needed to align with revenue levels in certain areas of the business. We continue to expect to generate approximately $110 million of pre-pension free cash flow. This reflects full-year assumptions listed on slide 10. As a reminder, pre-pension free cash flow is difficult to predict with precision, as the exact timing of some larger L&S collections and how those fall around year end could shift collections between fourth quarter and first quarter of 2026. Operator, please open the line for questions.

Operator | Conference Operator

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble a roster. And our first question will come from Rod Borges of Deep Dive Equity Research.

Please go ahead. Rod Borges | Analyst, Deep Dive Equity Research

Okay, great. Thank you. I could ask a long-winded question on AI, but I'll make it short-winded. How are you seeing AI's impact overall on your P&L?

Mike Thompson | CEO and President

Hey, Rod, it's Mike. Thanks so much for joining in the question. Really appreciate it. Although short-winded question may be a long-winded answer, that's As you would expect, lots of impacts in regard to the application of AI. In general, what I would say to you is that the impact of our transformation of our delivery model, which allows us to continue to deliver our solutions in a more, I'll say, cost-friendly way or reducing our delivery costs, certainly helps our margin profile, and we've seen a lot of green shoots in that regard. As I mentioned in some of my prepared remarks, and Deb did as well, there's a knock-on impact, a top line for that, right? So, typically, the AI component of a lower delivery cost means that, you know, our clients are seeing some of the benefit of that, and we share some of that savings with our clients, but it makes us, you know, obviously a lot more profitable and allows us to be a lot more competitive from a pricing perspective. So, you know, we think that's the right way to approach that in regards to the new solution uptake. And then, you know, obviously as we continue to grow and add new logos to the mix, the application of those new logos certainly have an uplift that is much more top line and bottom line accretive because we've already baked that into our models. We're seeing, as you know, within our L&S business, increases in our consumption rate. We think that's pretty much driven by the application of AI across the board, right? So this whole data abstraction layer and AI compute layer, we're seeing some nice improvements in our HPC business. So, you know, clearly that clear path forward consumption, we've increased that guidance, as you know, and we're actually talking about the increase of the out years, 26 through 28. I think we started that dialogue a couple years back thinking that would be about 360 million per annum, and now we're talking about 400 million on average per annum for that three years. So significant uptick in L&S related to consumption that we think is AI related. Certainly AI in our delivery efficiency and hitting those real strategic objectives of increasing our profitability and our delivery. And, you know, in some of those cases too, Rod, by the way, it's not only about just margin improvement in those accounts. You know, we're looking at expansion and new scope and kind of growing those accounts in a bigger way through the application of this kind of technology-led delivery. And, you know, so the scale is one part of it, but certainly the volume is the other part. So, So, you know, we're obviously, you know, huge believers. We've talked for a while that we think this is, you know, exponentially helping us to continue to compete in greater and greater scale with some of our competitors. And, you know, we've got it essentially sprinkled in throughout our delivery, whether that's in intelligent operations embedded in just AI management and orchestration of compute, within CA&I, whether it's embedded in ECS from a ClearPath Forward delivery and navigation, and whether it's in field services and or service desk inside of DWS. All of our solutions essentially have that baked in and continue to grow in that manner.

Rod Borges | Analyst, Deep Dive Equity Research

Okay. And then I guess as an extension of that and applying it to the results for the quarter, despite the revenue shortfall, you seem on track to meet your margin and free cash flow targets. So I'd like to ask, what's enabling the margin performance to come through, even though revenues are coming in less than planned?

Mike Thompson | CEO and President

Yeah, great question, Rod. Thanks for that. Well, look, the first and most obvious is the increase in L&S, right? So that's obviously a higher profit component, and we're seeing a step up in that which is giving us margin pull through. The second and probably less obvious is there are plenty of green shoots embedded in XLNS for our new solutions, right? We've had quite a bit of renewal activity this year. It's probably an unusually high renewal activity coming through in the year. And being able to sign those accounts with our new solutions at a better margin profile And in a lot of cases, being able to expand either expansion of the work that we're doing or add new scope to those renewals are also benefiting us from a margin profile. So I think what you're really seeing here on the top line is you're seeing some reduction or accretion in top line related to either contracts that have attrited off or the slowness of some of the PC cycle or some hardware shifting But all three of those are lower margin accreted off. And what we're adding is higher margin, you know, addition. So right now the top line is suffering a little bit from the accretion being a little higher than the addition. But, you know, we feel like that's the right path from our perspective. And, you know, we've tried our best here to fully deliver, you know, what the risk is for the remainder of the year for the, you know, the impacts that we've been seeing over time. whether that's the PC refresh cycle, whether that's, you know, slow down in the adoption of Microsoft 10 to 11, or whether that's just the uptake in project work in public sector due to, you know, the prevailing issues there in the U.S. with the government shutdown and others. So a little bit of a balance, but in general, you know, it's allowed us and I think proves our margin continued improvement in our new solution delivery. I mean, just as a reminder, over the course of the last three years, we've improved that gross margin in XLNS by almost 600 basis points, and we continue to see opportunity to continue to see that expansion, regardless, really, on what's going on in the top line.

Deb McCann | Chief Financial Officer

And also, Rod, this is Deb, just to add, we have also increased some of the SG&A savings we talked about. At Investor Day, we're accelerating some of those. Some of those were through 2026. We've accelerated some of those. into 25, and we're, you know, ramping up our efforts overall on rationalizing our cost base.

Mike Thompson | CEO and President

Yeah, look, I think Deb mentioned, too, in her prepared remarks around, you know, kind of the variability of that workforce. So clearly we're going to take, you know, some level of action to make sure that we continue the margin improvement that we've been seeing over the last couple years.

Rod Borges | Analyst, Deep Dive Equity Research

All right, and just a final quick one here as inputs to the model link. Can you give your view on the pace of your delivery improvement going forward and how that would impact Q4 cost reduction charges specifically?

Thanks. Mike Thompson | CEO and President

Yeah, thanks, Rod. So, look, I mean, we've always been and continue to refine our delivery costs, and so there's some level of kind of BAU cost reduction that you normally see. I would expect that you'll see some of that increment in Q4 costs, and the cadence probably be a little higher in Q4 just to kind of mirror the variability in the workforce. I don't think it's going to be like a crazy significant increase in that, but there certainly will be actions taken to mitigate the exposure that we've seen on top line or some of the, you know, de-risking efforts that we're going to do to maintain the margin profile.

Rod Borges | Analyst, Deep Dive Equity Research

Got it.

Thank you. Mike Thompson | CEO and President

Thanks, Rob.

Operator | Conference Operator

The next question comes from Mayank Tandon of Needleman Company. Please go ahead. on behalf of Mayank Tandon\ This is Brandon on for Mayank. Thanks for taking my question. I guess I just was wondering, what are you guys seeing on the demand front in cloud spending, particularly on the AI front? I know you guys mentioned, like, increased competition, but I guess what are you guys doing to navigate those increased competition dynamics that you guys are seeing?

Mike Thompson | CEO and President

Hey, Brad, and thanks for the question and thanks for participation in the call. Look, the demand is certainly there. I will tell you, I was just on the road, frankly, in Europe and met with a whole host of clients and just had what we call a CIO and CTO forum and had a big discussion with, you know, 20-some-odd potential clients and existing clients in that forum. So, you know, clearly the demand is there for the application I think what we're bumping up against is the application of that technology into an ecosystem that is very sensitive, right? There are many attributes that need to be addressed, security being one of the primaries involved with that. So there's money there certainly to be spent. The demand is there. We continue to get validation from clients. and industry analysts that our solutions are there and what they want. And, you know, as I mentioned, the competition continues to be, you know, fairly aggressive in that. So, you know, we've got to really make sure, you know, from a defensive posture that education is key and really having those dialogues around what that output looks like and why, you know, our client centricity model and being, I'll think, a little bit pragmatic in how it gets adopted, where it gets adopted, and the time of adoption is really important. So there's an equal amount of hype as there is an equal amount of, you know, practicality in the adoption of these AI models, right? And I think from our perspective, we're taking a tack to really try to be very conscious around setting the right expectations with our clients, not promising things we can't deliver, And in some cases where those expectations aren't met, then, you know, then we have to attrip that potential, you know, client opportunity because, you know, we're not looking for a race to the bottom here. We're really talking about adding value and experience to our clients. And, you know, one of the stats I like to use when having discussions with our clients and potential clients is, you know, for our top 50, On average, we've serviced those clients for, you know, roughly 20 years. You don't have that level of experience with a client base because you're looking at a short-term adoption of a technology. We really like to think our technology is state-of-the-art, and we want to talk about the future and how we get our clients to the future. So the demand is certainly there. Our solutions certainly meet that demand. And, you know, the key is really about client education. and setting an adoption roadmap. on behalf of Mayank Tandon\ Okay, thank you. That's super helpful. And then I know you guys, last quarter, you guys touched on the public sector, I think specifically for the cloud business. So I was wondering if you guys, you guys mentioned the call a little bit, but any update on that with the government shutdown in terms of client conversations and client demand with the shutdown?

Thank you. Mike Thompson | CEO and President

Yeah, great question. Thanks, Brennan. So Yeah, we did talk about that last quarter. In fact, last quarter, we mentioned that we started to see a little bit of green shoots in public sector and, you know, thought that sector was coming around a bit from a project orientation. That has reverted, right? That I'll say influx of project work is basically really quiet. Now, Deb mentioned in her remarks, and I think it's important, You know, we've got a lot of renewals and have had a lot of renewals this year in public sector and are doing well to renew, you know, those particular accounts. But we're not seeing the uptick in the project work that we had started to see. So, you know, there are a couple areas where we're leaning in. You know, we talked about that a little bit on the call, but You know, we talk about the justice system. You know, we talk about access management and things like that. There are what I would consider nondiscretionary areas in public sector where the demand is fairly constant, and there's some project work in that space. But clearly, there is, continues to be a pause in project work in public sector, specifically related to U.S. public sector. I wouldn't say that holds true across the board. You know, we mentioned on the call about an Australian client that we had some good success with and expansion in other regions. But U.S. public sector is also where a good chunk of our CA&I business is allocated. So there's definitely been kind of a pause in project work there. And so the green shoots that we started to see in Q2 have really subsided and You know, I think there's a little bit of a wait-and-see approach here, and we expect that that's going to continue for a couple quarters. So, you know, we're kind of sitting tight. We're having good conversations with folks, but there's a lot of uncertainty there. on behalf of Mayank Tandon\ Thanks. That's super helpful. Thanks, guys.

Mike Thompson | CEO and President

Thank you.

Operator | Conference Operator

The next question comes from Anya Sorenstrom of Sedoti.

Please go ahead. Anya Sorenstrom | Analyst, Sedoti & Company

And thank you for taking my questions. A lot of them have been covered already. But can you just, I think you mentioned you're starting to see pricing pressure. Is that something you only started to see now in the third quarter? Or can you talk a little bit more about that?

Mike Thompson | CEO and President

Hey, Anya. Good to talk to you again. Yeah, no, we did mention that. I wouldn't say it's something we're just seeing in the third quarter. As you know, this is a highly competitive space that we're in. I would say in the third quarter and especially as we go through renewal cycles with clients, there's more and more players in that renewal cycle. And, you know, frankly, in a couple instances, we've seen competitors really just undercut pricing to, in my mind, levels that we're just not willing to go to, right? You know, we've made a commitment as a management team that we're going to stay disciplined and the contracts that we're signing. We know we've got value. We know that we can bring that value to our clients. But, you know, we're not just going to sign contracts to maintain a top line if it's not helping our bottom line. You know, our objectives were very clear, and we continue to follow them. We're trying to grow profit dollars. We want that margin percentage to increase. We're increasing cash flow or, you know, obviously, moving positively in the cash flow arena. And we think that's the better way to drive shareholder value. And so, you know, that pricing pressure I think is, you know, certainly relevant and continues to be relevant in our discussions. But, you know, please don't take that comment to think that we're not competitive in pricing. We are. You know, we're right there in every deal that we're talking about. But there's a limit to how far we're willing to go And from our perspective, if the client doesn't have the capability for us to grow or the capability or want to move to our next-gen solutions, we're really not interested in just re-signing a contract at lower values for the old delivery model.

Anya Sorenstrom | Analyst, Sedoti & Company

Okay, thank you. And then I'll take you and just maybe go over some puts and takes for the free cash flow for 2026.

Mike Thompson | CEO and President

Sure, Deb, we don't take that?

Deb McCann | Chief Financial Officer

Yeah, so as far as, you know, for 2026, we're not, you know, giving guidance at this point for 2026, and we'll discuss that when we report fourth quarter. But there are, to your point, you know, a lot of moving pieces. So obviously, you know, with the capital market transformation we did, right, we lowered our pension contributions, but the interest expense will move higher. And, you know, so there are moving parts that as we're formulating our plan for 2026, you know, we'll lay out to you when we report that next quarter. But I think a key thing is, you know, the biggest driver, you know, L&S is clearly a big driver at 70% margin. So, you know, as we finalize what that number we've set on average, 400 million, and those are 70% margins. So those, you know, are a big impact. But I think what's most important is we feel we have a really strong liquidity position. So as we go into 2026, you know, right now our cash balance is 320 million. And if you look at the cash color we've given, you know, to hit about 110 million, pre-pension, that puts us about $390 million of cash by the end of the year. So we feel like, you know, we'll be entering 2026 in a good place from a liquidity perspective. And we also have that $125 million ABL we just renewed that's also undrawn. So we feel good from a liquidity position. And, you know, as we shape the algorithm, what that's going to look like in 2026, you know, we feel confident in that.

Anya Sorenstrom | Analyst, Sedoti & Company

Okay, thank you. And then also, if I understand right, the lower LNS this quarter was due to some being pushed into the fourth quarter and into 2026. Can you just elaborate on that a little bit and what you're seeing there?

Mike Thompson | CEO and President

Yeah, so just to be clear, the push in the quarter got signed in the early days of Q4 for LNS. So that's not anything into 26. That is really just a shift of something we thought was going to sign by September 30th, signed in October. All of it was signed. All of it is in-house. So no real issue from an L&S cash perspective, just a quarterly timing. Deb, anything?

Deb McCann | Chief Financial Officer

Yep. Nope. No, that's just all within this year. Okay. Great. Thank you. That was all for me.

Mike Thompson | CEO and President

Great. Thanks, Anya.

Operator | Conference Operator

Once again, if you would like to ask a question, please press star, then 1. And our next question will come from Arun Sisadri of Forza.

Please go ahead. Arun Sisadri | Analyst, Forza

Everyone, thanks for taking my questions. Just a couple from me. It sounds like the book to bill is still pretty strong. So does that reflect confidence in the, you know, I guess, you know, what the timing impacts in LNS as well? And sort of what are you seeing in terms of that renewal activity and You talked a little bit about renewal activity being, you know, enhanced this year. Is that, I guess, those two are potentially related. But any color there. And then secondly, if you could, is there any way you could size that renewal in LNS that moved over to Q4 that would be helpful?

Thanks. Mike Thompson | CEO and President

Yeah, so I'll start that. And, Deb, I'll ask you to kind of chime in here with some color as well. So you're right, the book-to-bill, I think we are at 1.1 is what we're talking about on book-to-bill. And, you know, clearly that's a solid book-to-bill and happy with that and aligned to kind of our, you know, contracting models and our normal modeling for our forecasting. So, you know, the renewal cycle that I talked about, I mean, and I was actually talking more about XLNS, L&S, we've talked about the renewal cycle quite a bit, and, you know, as we've indicated, that renewal cycle is actually increasing our L&S expectations over the next three years. So I'm going to discount that for a second, Arun, and based on your question, and really speak about XL&S. So for this year, just to give you a sample, the XL&S renewal cycle for this year is about three times what it will be for next year, right? So it gives you a sense of the baseline that we're actually renewing this year. And if you think about that, the resources it takes to go after all of that renewals is also, you know, obviously puts some pressure on the work that we're able to do in new logo acquisitions. So there's a pretty high renewal cycle this year. We've been very successful in that renewal cycle. Now, I'm not saying we've renewed every single contract that was out there, and a couple of them, as I've mentioned, you know, we didn't because the, you know, the investment that the client was looking for us to make was not conducive to the pricing that we expected to get. So a couple of those contracts we did not renew, but the lion's share we did, and for many of those we've actually renewed them at better margin profiles and have increased some scope and or expansion in those accounts. So we've been pleased so far with the the ability to renew those and to renew that work under our new delivery model, right? That's really key, that we're converting these clients upon renewal to the delivery model that's technology-based, and that's an important element of that cycle because that brings in the enhanced margin profile. So, you know, get happy with, you know, the current book-to-bill, happy with the progress we're making on renewals, We have quite a bit of renewals coming up in Q4. Progress on those have been very good. So, again, kind of pleased with where we're at there. Would I like to win every single one and get them at higher margins? Sure. Is that a realistic assumption? Probably not. Deb, anything you want to add to this?

Deb McCann | Chief Financial Officer

Yeah, just that, as you can see, I mean, the TCV year to date, right, XLNS renewals is 572 million versus last year, 321. So it's 78%. increase over last year, just to demonstrate kind of how big our, you know, the renewal cycle's been this year. And then related to your one on the L&S renewal that shifted out, that was just a few days after the quarter. That was about $12 million we had mentioned of revenue that shifted out one quarter. But it won't impact, it will not impact the full year.

Arun Sisadri | Analyst, Forza

Got it. And then, but also, you also have a fairly significant expectation, I think, for the for Q4 that's factored into the numbers? And it sounds like your confidence is pretty high in terms of that XLNS renewals in Q4.

Mike Thompson | CEO and President

Yeah, I think as common on the renewals was the LNS component. And of course, we're super confident in the LNS component. And we're also confident in the XLNS component of renewals. You know, so look, everything that we're not confident about has been baked into kind of our you know, updated guidance. So we feel pretty good about what's out there to close. And, you know, obviously at this point in the year have pretty good insight to, you know, how the next couple months are going to close out.

Deb McCann | Chief Financial Officer

But to your point around the LNS renewals, right, one, a few day slip, right, can shift. And so we mentioned that throughout the script, right, that we do have high expectation for for Q4, which we feel confident in, but, you know, there is always that slip of an element.

Mike Thompson | CEO and President

Yeah, wonderful point, Deb, and really, if you think about it, Arun, you know, our talk on that has always been around not if, but when, right? So we're really confident that it's going to renew, and, you know, and we're very confident that it's going to renew in the timing that we expect it to, but, you know, as we've just seen in this quarter, a shift of a couple days makes a difference. Thanks, Arun.

Operator | Conference Operator

The next question comes from Matthew Galenko of Maxim Group.

Please go ahead. Matthew Galenko | Analyst, Maxim Group

Hey, thanks for taking my quick question. If we see the other side of the government shut down in the relatively near future, do you expect like a quick return on forward momentum on project work that's been gummed up? Or, you know, how quickly do you see the market responding to things opening up?

Mike Thompson | CEO and President

Hey, Matt, thanks for the question. Good talk to you again. Look, I don't think our expectations are that it's going to be a light switch effect where the government opens back up and all of a sudden all this project work starts to open up immediately. As we indicated last quarter, we just started seeing some green shoots on that work and then it shut back down. So we think that's going to linger, frankly, for, you know, a couple quarters. So do I think it's going to be like a Q1 recovery if the government opens up before then? No, I do not, right? We've got to kind of reengage. They've got to reassess what the outputs of that government work is. The focus is going to be on non-discretionary work first and then project work second. So, you know, we're kind of baking into our expectation that that's going to be several quarters prolonged.

Matthew Galenko | Analyst, Maxim Group

Great. Thank you. Thanks, Matt.

Operator | Conference Operator

This concludes our question and answer session. I would like to turn the conference back over to Mike Thompson for any closing remarks.

Mike Thompson | CEO and President

Thank you, operator. Before we wrap up, I just want to reiterate a few key points we hope you take away from today's call. First, the trends remain strong in our most powerful profit and cash driver, which is L&S Support Solutions. We plan to meet our increased expectation of $430 million for this year, and have increased our expectations for the average annual LNS revenue in out years from 26 through 28 to $400 million per year. Second, while the market dynamics posted headwinds in our ex-LNS business that we don't expect to dissipate overnight, we're adjusting our approach to mitigate those impacts, and importantly, we're continuing to deliver on our profit and cash flow objectives, And then lastly, you know, we're building momentum in our AI-led solutions with technology-first delivery models. This is making us more competitive, supporting our margins, enabling us to scale our most differentiated innovation more quickly, and we're seeing more and more clients and industry analysts support the belief in that momentum. So, you know, I'd like to just make sure we take away those three points from today's call. And, Operator, thank you for your time, and you can close the call.

Operator | Conference Operator

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect. jsPDF 3.0.3 D:20260606090523-00'00'