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'