Again. Again, the segment being ECS, L&S being the ClearPath product, I think you should expect to see continuing margins at the rate that I'm indicating. That 70% is what it's been and what it will continue to be. The oscillation there is really dependent on how much hardware is in any type of renewal cycle. There is a hardware component. If it's a heavy hardware component, it'll deplete that margin slightly, but normally you should expect in the 70% margin range. Again, you should be expecting something in the area of about $400 million per annum revenue. Cash flow there is obviously a really strong profit for us.
What is the risk of AI driving clients migrating off the platform, or could AI actually be a potential benefit? What are the implications of AI?
Yeah, great question. Well, net net, we believe AI to be a benefit to that business. And we're already seeing it and have been seeing it over the last couple of years. That is the consumption that I'm talking about. So bringing the AI to the data, well, we've got decades' worth of structured data sitting in our ClearPath Forward operating system. And it is a playground for utilization of AI and data telemetry. So that is really what the driver of consumption is. I think the element where you would say, OK, is there risk of people moving off of the platform for the use of AI? I think you would think about that through the lens of AI-generated development of code and software, et cetera. That's why I talk about ClearPath Forward as an ecosystem.
Yes, you can write a piece of code with AI, but you can't run a business with that piece of code. And we're talking about companies that have hundreds of applications sitting on top of our operating system bespoke to how they run their business. We did a little demonstration for investors, in fact, on our website, and I'd point anyone interested to go look at that. It gives you a real good sense of why it's so sticky and why the risk of losing to AI in the construct of that is really not a feasible program at this point.
So who are the main players you're competing with on the ClearPath Forward platform?
We don't really have any competition in that space to speak of. I would say the nearest thing that would be like it would be like z Series from IBM, i f you're thinking like old mainframe vernacular type of thing. But we typically don't lose clients to them or anyone else based on our renewal cycle. And there's really no one else in that space. If you think about that ecosystem, it is the combination of the operating system, the platform, the data exchange. It would be like having an ERP, a CRM, an HCM all combined in one application.
So think about an enterprise replacing all of that and the cost of what it would do to do all that and get five nines resiliency and have an operating system that, according to NIST, is the only one in the world that's never had data forcibly extracted from it. So super secure, super resilient, and really no reason to move.
Great. Good to hear.
Yeah.
Let's turn to IT services, so maybe the Digital Workplace Solutions, DWS. Maybe a little bit of background on what the services are in that business, and then what are some of the financial metrics we should be focused on?
Yeah, I would say that if I think about DWS, and I'll liken it to CA&I too and try to cover off on both of those, there are really about five solutions in both sides of those that we focus on that are things that move the needle. So embedded in DWS, I would say Device as a Service would be one component of that. That's everything from the lifecycle of adoption all the way through the dissolution or recovery of that asset and the scrapping of that asset. That's imaging, that's managed service around it, as well as the procurement, storing, inventory, imaging, et cetera. Also embedded in there, you would look at Experience as a Service or essentially our experience, I'll say, management. So it's really about the data telemetry of those devices. End user device management, service desk, field services, those are all components of DWS.
And it's really when I think about that segment, I think about the things that touch the employees of our clients. It's those devices that we're really talking about. If I flip the hat to our Cloud, Applications & Infrastructure business, same kind of five focus areas, but think of those as more infrastructure oriented. So that would be cloud transformations, managed services from a cloud perspective, application development, application management, and managed security services, running SOCs, doing those types of things. That gives you a sense of kind of what is embedded from a solution perspective in what we would call Ex-L&S or our IT services bucket. Margin profile is pretty consistent between those two businesses. We're expecting kind of the mid-20s or low- to mid-20s as far as the margin profile of those businesses.
Some a little better, some a little less, depending on how much of it is consultative in nature or how much of it is personnel oriented or automated. And we talked a little bit about AI, but AI is loaded through all of those 10 solutions from our point of view that really help support the delivery at a better margin profile. But the pricing pressures in the market today require us to give some of that savings to the clients in the form of reduced cost for them, which would be revenue for us. But obviously, we're expecting to get better margin profiles out of that.
What about the growth opportunities in both these segments?
Yeah, I would say the TAM in CA&I is a much larger TAM, probably about $600 billion versus DWS, which is probably in the $150 billion range. So just by the nature of the size of that, it's going to have a little bit higher potential growth trajectory on the CAGR. I think that CAGR growth is probably in the 10%-12% range. And probably CAGR growth on DWS is probably going to be more in the 5%-8% range, kind of blended at 9-ish, I would say.
Got it. Very helpful. Then, Mike, you mentioned AI, but I think it might be helpful to give some real-world examples, especially in these two segments, how AI is actually benefiting you. I know you've talked about that on prior earnings calls. Maybe one or two examples would be very helpful.
Yeah. So look, we and everyone in our space has been applying AI for years. Clearly, it's gotten much more traction over the course of the last couple of years. And it's because of the type of AI that we're talking about. I think the easiest example for me to give that's real would be the Generative and Agentic AI that's embedded in our service desk solution. So Service Experience Accelerator is the platform by which our next-gen service desk is actually supporting our clients. And for us, this is not about proof of concept or ROI. It's in production at clients, and we use it ourselves internally. So when I think about that, if I look at the Generative AI component, that would be kind of omnichannel upfront connectivity to your service desk.
So voice, chat, email, text, whatever that might be, utilizing natural language processing and being able to adopt multilingual inputs, transition that to either a digital agent or an agent in a low-cost location, but you have the translation component of it. So you can really do that in a manner that's pretty cost-effective and pretty effective from an experience point of view. And then really understanding how much of that the digital agent is actually going to be able to process. Now, that's historic automation and the application of Ge nerative AI. The Agentic AI component of that comes in when you think about knowledge curation and what they're using to actually answer whatever the ticket is or whatever the input is.
In that case, we use agentic AI to actually map out all the problems that a company has, the solutions they have, how far back those solutions go, are they still relevant to solve the problem, and can we fill the hole with things that they don't even have knowledge management articles yet, have the digital agent write the knowledge management article, fill in the hole, and answer the question, and then have continuous learning so that that knowledge management curation continues to develop to support our client. That would be a real practical example of how we're using Generative and Agentic AI to support a service desk scenario.
Makes sense. And then in terms of competition and who you're going head to head against in both these segments, who are the players? Is it the generic IT services companies?
Yeah. It's everyone. So on the apps side, I think, or the cloud side, it's probably more kind of the Accenture, Deloitte, CAPS, IBM, HCL, TCS. On the other side from a DWS, it's probably more some of the Indian pure plays, as well as Wipro, TCS, HCL, Atos, DXC, et cetera. The normal players.
You believe your win rate versus them is heading in the right direction, or has it been sort of tooth and nail? What's sort of the competitive climate look like?
I would say, first off, it's always been a very competitive environment, as you know. So I don't know that it's any more competitive than it's been historically. What we do see, however, is there's more pricing pressure now. And I think because the AI in general, when applied, is driving down, or a headwind to revenues, and it's forcing companies to have to get more volume and/or have price concessions. So I would say in the construct of competition, our solutions keep us at the forefront. We were just named in Gartner's Magic Quadrant as a leader in DWS. And in fact, three of the folks that I just named got pushed out of the Magic Quadrant into a challenger role. It gives you a sense of our solutions are differentiated, which keeps us at the table. But we want to be conscious about our pricing discipline.
Right. Got it. And then going back to the margins for each of these businesses, DWS and CA&I, they are relatively low versus some of the other players that we monitor. Now, it could be a mix of services. Are there ways to improve margins through offshore delivery, through AI adoption, through other initiatives, which could be more sort of comparable to what we see in the market?
Yeah. Yeah, I think you see that for a couple of reasons. Number one, I'll say we've improved our margin profile about 600 basis points over the last couple of years. So we are seeing opportunities to continue to enhance that. We're not at the end of the rainbow there. I do expect additional efficiencies just in what we're doing currently, and so there definitely is opportunity to do that. The mix of how much hardware is embedded in some of those solutions has a margin drag on it, and there clearly is a pyramid of services rendered that allow for higher margin profiles, so the trade-off is, yes, there may be a higher margin profile for those businesses, but they have a lot more book and bill in year, and they have to sell a lot more consulting work.
We have about an 80% renewal. I'm sorry, an 80% recurring revenue mix, so 70% plus is already in backlog when I start the year, and so since the margin profile is a little lower, that's the trade-off for having very consistent business. If I wanted a higher margin profile, I can do a lot more consulting work, but it's a lot more book and bill type thing. I'd like to see that mix maybe instead of 80/20 be maybe 70/30, and that would be an opportunity to advance the margin profile, and then lastly, and you said it in your question, the adoption of emerging technology continues to provide opportunities for us to deliver in a more efficient manner, which again helps that margin profile, a portion of which goes back to the client in the term of a revenue share.
Got it. Very helpful. Before we get into the pension discussion, which we have to do, at least briefly, I would love to just hear from you on what do you think of as normalized growth for Unisys when you put everything together? I know we're in a pretty tough environment, but hopefully getting better. Where is sort of your thought process around normalized growth for the business as a whole?
Yeah. Look, it really hasn't changed from our 2023 Investor Day. I think we should be in that 3%-5% CAGR growth as a total company. Some businesses growing at a higher clip level than that. Others kind of maintaining the base that they have. But that's where I think we would play, at least in the medium term. Clearly, short-term macros are presenting a problem for the entire industry there. But I think we've got a good chance to get to that in a relatively short order.
Good to hear. So maybe we'll turn to pension. I think just in the interest of time, maybe a quick recap of where you're at right now on the pension contribution. You did obviously a lot of initiatives last year to address that and focus on improving free cash flow. So more of a broader question for you on where we stand today.
Yeah. So look, it's been a drag on the stock, in my opinion, and valuation for a long time. We've done a tremendous amount of work to continue to mitigate it. Over the course of the last five years, we've removed $2.5 billion worth of pension liability. The most recent transaction that we did, both in our debt financing, allowed us to contribute additional cash to that pension. And also, I think, and importantly, allowed us to mitigate any pension contribution volatility in the future. So we were able to, with the amount that we put in, we were able to mitigate any growth risk on the assets. And we were able to align the assets very closely from an asset and liability duration matching, which took away really the volatility that we've seen in the past in pension contributions.
So what that means in plain English is the contributions that we're going to continue to make against those plans will really start to improve our net leverage on a regular basis because they're delevering the company and not really just going into the pension in general. So from a debt perspective, we're pretty happy about that. We see a very clear path to kind of net leverage normalized into 2.5, maybe down to 2 times, which we think is important. And we also see a path to totally defuse the pension over the course of the next three to five years. We've done multi-billion dollars worth of annuities over the course of the last five years. We just did one very recently. This was in July.
I think it was about a $320 million annuity that we were able to do basically below par, so giving away more liability than asset. Those components come out of the trust, not out of the company's cash. So we feel like we've got a pretty strong cash position, and we feel like we've got a very clear line of sight for full defeasance of the plan. And I think we've been pretty transparent in our approach to do that. And I think over the last five years, we've executed against that transparent plan. So it should give us some real credibility on this is going to be behind us in the short term.
That's good to hear. I know that's a priority for you in terms of free cash flow. As you think about capital allocation beyond that, if you execute on your plan, what are some of the top priorities for you from the capital allocation side?
Yeah. Well, look, I mean, obviously, we want to continue to look for opportunities to invest in the business, whether that's inorganic activity or not. But clearly, in our line of sight, and we've been public about this as well, return of capital might be something that we have an opportunity to do. We also have the opportunity to pay down some of the debt with a slight premium. I think there's a 2.5-year non-call provision on that. After that, we'd be able to de-risk as well. So first and foremost is grow the business. And then beyond that, I would say probably assuming the pension's taken care of would be equity, looking at some kind of buyback program.
Mike, more of a stock question. So one of the things that's intriguing is, I mean, your valuation, I mean, it's been a tough stretch for the whole IT services market the last few years. But even given that, your stock is significantly undervalued, I would argue, relative to the broader IT services group. So from your standpoint, what do you think investors are missing? They don't really appreciate about the Unisys story, the execution that you have been embarked on the last few years.
Look, the first thing that I think we're clearly missing is the value of ECS or L&S. I mean, that business alone is probably worth more than our current market cap, if you think about the discounted cash flows of that business and the longevity of that business. So that's something that I don't think we've ever really gotten full credit for. I think there's a little bit of hesitancy in the market, and I think we need a couple of quarters' turns on that the pension is actually solved for and that there's not going to be this volatility come back in. So a little bit of wait and see on that. But I do think that we've been out there and telling that story.
Part of it is we've got to be out there telling that story more and keeping in front of the investors so that they really understand the mechanics of that and the transparency there too. And look, I think we've proven again the Ex-L&S business margin profile continues to improve. There's a track record there. This isn't just lip service. We can go back three years, five years, say, "This is what we said. This is what we did." And I think that credibility will be there too. So to me, it's really ECS. It's continued EBITDA improvement in the business. And it's the understanding that the pension is behind us. I think that will give our stock a significant uplift.
That's fair. Yeah. I guess we have time for one question or two questions from the audience, if anyone has anything. I guess we're almost out of time, and we covered a lot of ground.