Third Quarter 2026 Earnings - UNISYS CORP

Financial Performance:

• Q3 2026 revenue grew 2.5% YoY ($472M), or 0.6% in constant currency, exceeding prior guidance; Total Contract Value (TCV) signed was $594M, up 43% YoY.
• TSNS revenue increased 2.6% YoY ($387M) driven by new business and hardware volumes; ClearPath revenue was $84M, up 2% YoY (above $80M guidance).
• Non-GAAP operating profit margin improved 180 bps YoY to 7.2% ($34M profit vs. $34M loss prior year), excluding a $151M non-cash pension settlement expense.
• Adjusted EBITDA was $60M (12.7% margin), up from $42M (10.5% margin) in the prior year; Year-to-date adjusted EBITDA margin is 11.5%.
• Free cash flow was negative $58M (vs. positive $20M prior year) due to timing of ClearPath collections, $37M semiannual interest payment, and $30M pension contributions; Cash balance stands at $264M with a $125M undrawn revolver.
• Net leverage ratio (including pension deficit) improved to 3.2x from 3.7x YoY; Global pension deficit estimated at $450M, reduced by ~$520M since July 2025.

Guidance and Future Outlook:

• Full-year revenue guidance raised to negative 3% to negative 1.5% in constant currency (previously negative 5% to positive 1.5%); implies Q4 revenue of ~$570M.
• Non-GAAP operating profit margin guidance reaffirmed at 9% to 11% for the full year; Q4 margin expected in mid-to-high teens due to ClearPath revenue concentration.
• Full-year free cash flow guidance unchanged at approx. negative $25M; ClearPath revenue expected at $425M this year, with ~$400M average annual run rate for 2027-2028.
• Management anticipates revenue inflection and sustained growth for TSNS in the back half of 2027 as client attrition lapping and the 2025/2026 renewal cycle reset conclude.
• New business TCV growth (up 61% YTD) is expected to convert to revenue over a 3-6 month integration period, with margin accretion realized at 12-18 months post-signing.

Business Segments and Product Lines:

• TSNS: DWS margins declined to 9.5% YoY due to hardware mix and investments in agentic service desk deployment; CA&I margins improved to 20.6% driven by delivery improvements; ECS margins surged to 55.5% due to high-margin software license renewals.
• ClearPath: Positioned as a data backbone for AI; $84M quarterly revenue; ePortal 13 reaching GA in November; AI developer toolkit driving consumption and demand for sovereignty/resiliency.
• New Products/Partnerships: Partnered with Refroid Technologies for AI data center field services (cooling, installation, maintenance); integrated Microsoft Security Copilot into MDR solutions; launched Gentic AI service desk at new industrial and construction clients.
• Renewals: Completed $1.4B in TSNS renewals in 2025; ~50% expected in 2026; renewal cycle largely complete, with added scope offsetting AI-driven pricing deflation.
• Strategic Wins: Secured Heineken's global end-user service desk (doubling scope); expanded U.S. defense contractor IT outsourcing; renewed major U.S. state agency and global bank in Mexico.

Market and Competitive Landscape:

• AI adoption creating new markets (data center field services, data governance, agentic AI orchestration) while causing pricing headwinds on same-scope renewals; AI is transforming delivery efficiency.
• Demand is strongest in mission-critical/regulatory sectors (public sector, financial services, travel) and declining in discretionary project spending; hardware costs (memory/GPUs) are shifting client focus toward managed services.
• Unisys maintains a structural advantage over peers due to high exposure to operational budgets (managed services) rather than capital expenditure cycles.
• Company named a leader in AI-enabled cloud infrastructure (Nelson Hall), digital workplace services (ISG, Everest Group), and future-proofing (Avasant).

Risks and Challenges:

• Client Attrition: Known client losses continue to impact revenue, though the impact is diminishing and will largely lap in the back half of 2027.
• Margin Pressure: DWS segment facing margin headwinds from hardware mix, client attrition, and upfront investments in AI/Agentic service desk deployment.
• Cash Flow Timing: Q4 revenue recognition and cash collection from ClearPath renewals could shift to Q1 2027 depending on signing timing; 2027 free cash flow guidance not yet provided.
• Macro Environment: High interest rates impacting client CapEx for discretionary projects, though Unisys' managed services model is less exposed; political uncertainty regarding data center regulations in different jurisdictions.
• Pension Liabilities: Continued volatility in pension deficit and contributions, though mitigation strategies (annuity purchases) are reducing long-term exposure.

Management Commentary and Tone:

• Tone is confident and constructive, citing "steady execution" and a "solid first half"; management emphasizes a clear path back to growth as the renewal cycle resets.
• CEO Mike Thompson highlighted the shift from "capability to client outcomes" in AI and the strategic value of the ClearPath ecosystem in an AI-driven world.
• CFO Dan McCann provided detailed color on non-GAAP adjustments, pension strategies, and the structural benefits of their hybrid infrastructure model.
• Management expressed strong conviction in the backlog growth (2.92B) and the margin accretive nature of new business signings, particularly in DWS.

Analyst Questions and Answers:

• TSNS Growth Timing: Management stated TSNS will likely sustain positive growth in the back half of 2027 as attrition laps and the refreshed base from the 2025/2026 renewal cycle takes hold; Q4 execution remains a near-term variable.
• DWS Margins: Margins are depressed by intentional AI infrastructure investments (agentic service desk) and hardware mix, but new business is margin-accretive; the lion's share of investment is behind them.
• ClearPath Cash Flow: High confidence in renewal revenue recognition ($205M in Q4), but cash collection may slip to Q1 2027 if contracts sign late in the quarter; revenue impact is minimal.
• Data Center Field Services: Pipeline evolving via partnerships (Refroid) and hyperscalers; election outcomes may shift geography of builds but not the overall investment trend; Unisys prepared for global deployment.
• Interest Rates/CapEx: Client demand for discretionary CapEx is constrained by rates, but Unisys' backlog is >80% on managed services contracts, insulating core revenue from interest rate volatility.

Other Key Points:

• Completed an annuity purchase transferring ~$200M of U.S. defined benefit pension liabilities to a third-party insurer; aims to reduce U.S. pension deficit to ~$600M target by H1 2027.
• Trailing 12-month attrition rate is 11.9%; named to Business Insider's 2027 Innovation list and WSJ's 2027 Top 100 Most Loved Workplaces.
• 2026 TSNS renewal total of ~$2B (1.4B in 2025 + 600M in 2026) puts the company through the majority of its contracted base.
• Global pension contributions for 2026 estimated at $97M; 2027-2029 contributions expected to remain stable.
• Unisys remains model-agnostic, orchestrating a mix of open-weight and frontier models based on client needs for data sovereignty and IP protection.