Good morning, and welcome to the Conduent First Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions [Operator Instruction]. Please note this event is being recorded. I would now like to turn the conference over to Alan Katz, Senior Vice President of Investor Relations. Please go ahead.

Good morning, ladies and gentlemen. And welcome to Conduent's First Quarter 2017 Earnings Call. Joining me on today's call is Ashok Vemuri, Conduent CEO and Brian Walsh, Conduent CFO. Following our prepared remarks, we will take your questions. This call is also being webcast. A copy of the slides used during the call was filed with the SEC this morning and is available for download on the Investor Relations section of the Conduent Web site. We will also post the transcript later this week. During this call, Conduent executives may make comments that contain certain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995; that, by their in nature, address matters that are in the future and are uncertain. These statements reflect management's current beliefs, assumptions and expectations as of today, May 10, 2017, and are subject to a number of factors that may cause actual results to differ materially from those statements. Information concerning these factors is included in Conduent's Annual Report on Form 10-K filed with the SEC. We do not intend to update these forward-looking statements as a result of new information or future events or developments, except as required by law. The information presented today includes non-GAAP financial measures. Because these measures are not calculated in accordance with U.S. GAAP, they should be viewed in addition to, and not as a substitute for, the Company's reported results prepared in accordance with U.S. GAAP. For more information regarding definitions of our non-GAAP measures and how we use them, as well as limitations as to their usefulness for comparative purposes, please see our press release, which was issued this morning and was furnished to the SEC on Form 8-K. With that, I will turn the call over to Ashok for his prepared remarks. Ashok?

Good morning, and welcome to Conduent's Q1 2017 earnings call, our first quarter of results as a public standalone company. Brian and I will cover our financial performance, as well as detail the progress we are making to transform Conduent into a profitable, predictable, sustainable and market leading enterprise. In addition to sharing an overview of our first 90 days, I will provide a view of the work ahead and the operational improvements we are making to achieve best-in-class performance. I'll then hand it over to Brian to go into more details on the financials and our outlook for the year. From there, we'll open it up for Q&A. I'm on slide three. During the first quarter, we achieved financial results in line with our expectations while making major strides in standing up our new company, refreshing the business model, developing a client-centric go-to-market strategy, focusing on our operating model and creating a one Conduent culture. Additionally, our strategic transformation continues to be on track and I remain confident of our journey forward. Brian will provide more detail on our progress in his presentation. In terms of our financial performance, revenue declined within the range we expected while our key profitability metrics improved across the board. And since our last call, our finance team took advantage of an opportunity in the credit market to reduce our interest expense by repricing our Term Loan B. I'm very pleased with the results and appreciate the commitment to making this happen. Strategically managing our balance sheet reflects just one of the many internal improvements we are making in the Company. Additionally, we are addressing the way we are structured, the way we operate and the way we go-to-market. Our legacy is as an organization comprised of many standalone acquisitions made over several decades…

Thank you, Ashok. Let's start with an overview of the Q1 financial results with a walk through of the P&L on slide eight. As discussed, revenue of $1.55 billion was down 8% or 7% on a constant currency basis compared with Q1 2016. This is in line with our expectations. The first quarter is also typically our weakest quarter from a seasonal perspective, given that starting in Q3 and through Q4 we have higher volumes from open enrollment activity in the health care sector and higher levels of customer service and industry specific activity in the retail and travel industries through the holidays. We also have increased expenses in the first quarter, with higher employee-related expenses. In terms of year-over-year, the decline was primarily driven by lower volumes from some is clients, contract losses and contract remediation efforts. Including the impact of New York MMIS, approximately 40% of the total revenue decline was as a result of contract remediation efforts. Gross margin was 16.7%, an improvement of 100 basis points versus the prior year period, reflecting the transformation initiatives and improvement in the other segment. Selling, administrative and general costs improved $14 million for the quarter, driven by strategic transformation, partially offset by corporate synergies. We continue to work aggressively to reduce G&A by focusing on streamlining our real estate footprint and our corporate functions. Q1 adjusted operating margins improved 150 basis points compared with the prior year, driven by the improvements in gross margin and selling and administrative and general costs. Adjusted EBITDA of $153 million was up 5% year-over-year with adjusted EBITDA margins of 9.9%, a 120 basis points improvement over Q1 2016. We are pleased with the progress that we're making in growing both adjusted operating profit and adjusted EBITDA. Interest expense was up $25 million year-over-year…

[Operator Instructions] And our first question will come from Brian Essex of Morgan Stanley.

I guess I just wanted to point out one point of inquiry that I've gotten for investors, particularly over the past couple of weeks and then I can follow up on it. But there's been a growing interest in benefit wallet within your platform, particularly I think as one of your peers kind of called it out. Could you help us understand maybe size of business, how profitable it is and who the competition is there?

So benefit wallet is an integral part of our overall HRS value proposition. We don't break that out to give the details in terms of its financials. But suffice it to say that it's profitable; actually very profitable; growing at a very healthy pace; very integral to our overall solutions in the benefits space in the HRS space; and something that we will continue to invest in and extremely proud of the performance to-date.

Maybe just as a follow-up, I've been getting a number of calls from investors along this line of questioning. And I know that you spent a lot of time with investors managing expectations, talking about the underperforming businesses and the ones that need fixing or turning around. But any others inside your portfolio that you would highlight that you get the most excited from, maybe ones that are growing quickly with better margins that would offset some of the ones that are in decline?

So as I've mentioned in my last quarter's call, we had asked all our business heads to take us through their business plans and substantiate why they should be part of the future of Conduent. So that exercise is now done. Through that exercise and through the verticalization of the Company, we are very clearly in a position to identify the services, the platforms and the businesses we believe are core. We continue to provide some amount of time and flexibility to our other businesses that have not made the list of core in the first round. Out of that, we expect some of them to -- with a little bit of investment and appropriate yield in the short time frame expect them to be part of core. We’re taking a hard look at some of our businesses that clearly, both from a geographic perspective both from a value proposition perspective, from the investment required or the obsoleteness of the technology will not make the cut. At this point in time, the reviews are still going on so we do not want to make a comment, specifically as to which businesses are core and which are not. But that's an aggressive work in progress for us.

And any indication in terms of timing when you might expect to conclude that review?

We should be able to conclude that review by the end of summer, and then make the appropriate decisions and have discussions with regards to how we continue to amplify those that will be part of the Conduent future.

[Operator Instructions] Our next question will come from Puneet Jain of J.P. Morgan.

So can you talk about some of the drivers that were incremental relative to your prior revenue expectations? And do you still expect flattish growth profile by next year?

So if we look at revenue decline for this year, we've worsened our guidance to 4.5% to 6.5% of the decline. When we looked at Q1 revenue performance, it was in line with our expectations, about half of it or 40% was due to strategic decisions, including the Other segment and the rest of it was lost contracts and volume issues, specifically in customer care. And as we look at this year, the reason we're worsening the guidance is the portfolio review that Ashok mentioned. There are some businesses that we will be deemphasizing and running off because of where they are located, from a geographical perspective; because of the profitability of the business; because the business may have a long tail of a lot of small clients that create a lot of complexity. And so based on that decision, there's about 100 to 150 basis point impact on revenue that we're expecting from those changes. And again, this is just businesses we're running off, any divesting would be outside of that and we would talk about that at the point we were ready to start getting serious about a transaction. So this is just businesses we're running off. And then as we think about next year, getting to flat is still the goal. And again, just as a reminder, it's going to be a combination of organic improvement and acquisitions as we build up our cash flow this year we intend to use it for strategic acquisitions.

And then quickly, one follow-up, the Other business. Thanks for all the updates on why it was breakeven. But do you expect for Others margins for the entire year? The loss in Q1 was a little bit below what we had expected.

Yes, so we see Other as being lumpy quarter-by-quarter. So we don't see it to getting to breakeven this year, but we do think it'll get to breakeven faster than what we initially said based on all the work we're doing on the segment. So some time in 2018, we think it'll breakeven. But we're still running off revenue. We still have a lot of cost actions to take on this segment and we don't believe it'll get to breakeven this year, but we'll make good progress. And just keep in mind some of this progress is lower depreciation and amortization, so it doesn't flow through to our adjusted EBITDA.

And our next question comes from Jim Suva of Citigroup.

I have one question and a follow-up, which I will ask at the same time. The first question is on the lower revenue guidance, I understand, it sounds like you’ve completed a review of your Company. How is this review different than like upon the initial separation from Xerox, when you took over as CEO, the Investor Day and the earnings call three months ago. And it sounds like it's not completed, but could you do some more defocusing your revenues or am I reading that incorrectly? It just seems like the full business review doesn't wrapped up when you do the separation. And the follow-up question is on the signings, you’ve mentioned difficult comps year-over-year. And while I appreciate that, I just wonder, is this something more in two or three years or in future pipeline. Do you have a lot of other challenged year-over-year total contract signing, because the percent decline year-over-year of like minus 40% or something that guide is quite concerning as far as when we look at this and the future pipeline for Conduent. Thank you.

So Jim, let me address each of the questions that you've asked, starting with revenue. So clearly, as we stood the Company up and we look at our portfolio of business, we look at our contract. We established a much more tighter discipline in terms of deal qualification and criteria of this kind of businesses that we want to get into. We began to see the picture of actually what the business really looks like in terms of its sustainability, in terms of its growth opportunities. We have completed our exercise with regards to all our business segments. And I think as Brian mentioned, we've gone through, thanks to a much more tighter business intelligence and much more transparent deal financials into each and every contract to see which are the ones that we want to continue to sustain and grow and those, which we will take active remediation exercise and negotiation with our clients. So we believe that the picture that we have right now is the picture as we see it. There is no asymmetry of information with regards to a change in that, based on any further review. Of course, this is a function also how the market behaves. With regards to signings, we had a total contract value, which is 931, a TCV, which is lower than last year. But in that there's two elements to this, one is TCV for new business, which is -- $530 million, which is composed of ARR which is about 11% higher than where we were this time last year; and nonrecurring revenues, which is about 12% higher than where we were last year. The numbers speak to the fact that we are much more disciplined in terms of the deals we want to do, the geographies that we want…

Is there some lumpiness in the contract signings looking ahead that we should be aware of as you kind of cited year-over-year, the TCV that was impacted by a difficult comp year-over-year?

Yes, I would just add that if you look at renewals, that our contracts are up for renewal in Q1 versus Q1 of last year we had lost contracts up for renewal. And we see that playing out this year as well. Last year was a very high renewal year for us. So that is a dynamic that's impacting the renewal TCV.

Jim, I will just note that we provided some additional disclosure on the book and terminal rate on slide 18 of the deck. So I'd encourage you to take a look at that.

And the next question will come from Keith Bachman from Bank of Montréal.

I was hoping you could talk about the cash flow guidance. You're keeping the same percent of EBITDA and yet it looks like you're getting to a negative free cash flow number. I think streets, which had consensus estimates, the estimates were over $200 million positive number and yet it looks like you're guiding to a negative $80 million number. Could you talk about what's in that? And it appears to be, I think, a bit worse or significantly worse than what streets missing. What's the composition of that number, please?

Yes, so the $81 million was the use of cash last year for free cash flow. The guidance for this year is 20% to 30% of adjusted EBITDA, which is roughly $130 million to $200 million and that's consistent with what we said in the fourth quarter’s call and at the December investor event.

I was trying to understand it, I think the $81 million is a number you had some puts and takes. Is that a normalized number on the negative $81 million? In other words, you had some one time items and also some significant tax benefits that also helped the number?

That's right. So that last year, the negative $81 million was impacted by a lot of separation costs, restructuring charges, the fact that we stopped our factoring program in the fourth quarter. So there are a lot of one time items and we also had some capital lease buyouts we had to do and operating lease buyouts related to the separation. So the $81 million was impacted by one time items. This year, we obviously have higher interest expense that we have to take into account, but there are one time items that go away that were inside that $81 million, and that's contemplated in our guidance.

And then my follow-up question would be the cost savings that look to be consistent or are consistent with what you previously announced. Could you talk a little bit more about, you mentioned that there's going need to these investments against those potential cost savings and contract adjustments. And is there any kind of metrics that you can give us as we look out, if you're already given guidance for this year, so implicit within that presumably is the variance between the cost savings and what the potential benefits are to the bottom line. Could you give us some help on how to think about that as we look out over the following year?

So one, I'll just make the point that we have dyssynergies this year that we believe will be about $60 million for setting up the corporate functions that offset the savings. We do need to make investments in our sales force, in our platforms, and in our IT infrastructure and in our employees to a certain extent. And those investments started in Q1 and they'll ramp as we go through this year. The portfolio decisions that we're also talking about creates a near-term pressure on profitability because we have to take additional cost actions to take overhead cost out as we runoff some businesses. So those are the dynamics that we're seeing this year. As we get into next year, obviously, the dyssynergies that are part of our run rate, we'll continue to make investments in those same areas and we'll see flow-through. And again, our long-term guidance hasn't changed. We believe adjusted EBITDA will be greater than 10% growth next year.

And next question comes from Shannon Cross of Cross Research.

The first one, can we talk a little bit about what you're seeing in terms of your verticals, and maybe specific customer bases within the segment. I know you noted transportation was strong, but state and local was weak. And I think government health care as well, which I think probably make some sense. But I'm just kind of curious as to what you're hearing from your customer base in terms of how they're looking at signing deals. And also like what they're thinking about in terms of deal, you said customers are kind of shifting to shorter deal, which -- that's your strategy. But I'm curious, is that across the borders or is that with specific customers? And then I have a follow-up. Thank you.

So in terms of -- let me break this down in terms of our performance in ARR and NRR, so that will give you a better picture of how the segments themselves or the sub segments themselves are performing. In the banking insurance and capital markets sub segment has actually performed very strongly in ARR terms. Our high-tech industrial and retail businesses have performed very well. In fact, specifically high-tech businesses performed very well. If I look at the NRR business, which is typically where the public sector has a better performance over the commercial sector; we've seen good performance in health care; we've seen good performance in state and local along with our transportation business, which quarter-on-quarter had performed fairly well. The one stand out for us in the NRR part is our health care sale, which is part of the commercial business which has also turned in a fairly strong performance. So across the board, we've had good performance with a few exceptions, especially the accounts and media business, which had not -- which continues to underperform quite significantly as compared to the rest of the businesses. But that is also because it's very, very strongly supported by customer experience, which we still have some ways to go before we turn that around. With regards to tenure of deals, I think along with our strategy to sort of make the tenure of the deals smaller and drive maybe renewal rates higher as these turn. So in the commercial space, it was typically three to four years in the past; we are now driving more towards two to three years; that is being reciprocated by the clients as well; this is not just about customer experience in fact, outside of customer experience, we are seeing tenures, lead tenures come down. The public sector continues to be where it always has been five years and beyond. But clearly, in the commercial space, we are beginning to see, as the usage of platform increases as the usage of more of the analytic work increases or our share of that increases, the tenure of the deals is becoming shorter.

And then in terms of EBITDA for this year, I'm just trying to understand, given you’re ahead of plan and I understand some of the benefit from a segment margin perspective was D&A. But given that it seems like you’re ahead and things are progressing in certain segments, and you held to the full year for transformation. If you think you're being conservative or was the -- the EBITDA of 5% to 6% growth, which I understand is in line but maybe tightened a little bit. Is that more a reflection of maybe a little more revenue pressure? I'm just trying to understand, because if you're walking away from unprofitable contracts or low profitability contracts, do you think maybe you'll see a little benefit. Thank you.

So the dynamics I would point out is the Other segment is improving, but some of it as you said is D&A. And again, that can be lumpy as we go throughout the year as we run off the education business and as we work to improve the health enterprise business. The transformation savings are tracking and that's clearly we do have the dyssynergies that are offsetting some of those savings. Also the portfolio dynamics, as we runoff certain aspects of the portfolio, even though they're low margin, in a lot of cases, it creates pressure on the overhead cost structure, which we have to address which we will address, but that's a timing issue as we do that. And then we do need to ramp our investments. The 5% to 6% is how we see it based on the forecasts that are coming in. And if we need to change the range as we go throughout the year, we will do that appropriately.

And our next question comes from Frank Atkins of SunTrust.

I want to ask a little bit about public Company costs and the impact to the P&L going forward, and investments and kind of systems to give you visibility on operating metrics. When will you lap that and what's the impact of that over this year?

So corporate dyssynergies, we're expecting them to be $60 million this year compared to about $10 million last year, so it's 50 million incremental. We had about $17 million in Q1 as we had some IT costs where we had double cost as we were transitioning off TSAs and transitioning onto our own systems. We expect those IT costs to come down as we go quarter-by-quarter. But that's how we see it. And then as we get into next year, it'll be normalized. And at the same time, we are attacking these corporate functions, finance HR, the non-corporate parts of the function, we're attacking them to become more efficient, to automate processes. So it's not just the fact that we have dyssynergy that we have to deal with, but we're also looking to modernize the functions and reduce the cost of the functions. From a systems perspective, business diligence is very important. We’ve started ramping those investments and we will see those ramp this year, but that's well underway and in progress. Some of them are infrastructure data center transformation, IT infrastructure information that's mostly ahead of us at this point.

And for my follow-up, I wanted to ask a little bit about some of the operating metrics that you're taking a look at them. Where do you see utilization, attrition and the trajectory of some of those going throughout the year? And if you could comment briefly on the wage environment in U.S. and what the tighter labor market may means for that?

So in terms of attrition, we had about 6,000 people decline in Q1 over the previous year. So that is a combination of voluntary, as well as involuntary attrition. We clearly are an organization that is structured from a people and organizational design perspective, not as a services company. And as we approach that, we'll probably continue to see some more optimization and streamlining of the various resources that we have. As a function of the reduction of the geographic footprint, we will continue to see some attrition, involuntary attrition happen as we drive more of our business onto platforms, and given the investments that we're seeing in our automation business and the reception that it's getting in the marketplace and the uptake it's getting. We again expect to see some amount of attrition from a people perspective as we drive more automation into the business. From a wage perspective, we are continuing to see the standard wage increase as we have seen last year, nothing extraordinary out of that. But as we're hiring more and more people to drive more of our analytics, more of our mobility business, our wage structure is changing only marginally at this point in time. We continue to hire aggressively, our salespeople on a gross basis that number is higher than last year. But on a net basis, it's lower only because the churn in our sales team is quite extensive. We cannot continue to sell what we want to sell with the sales capability that we had in the past. Altogether, I would say from a wage perspective, it's probably not changed very much. Our sales compensation structure has changed quite a bit in terms of the fact that we want to drive our sales people more towards revenue and the quality of the dollar. We have provided incentives for our management team in order to hit our strategic transformation goal. And all of that, though not directly in our financials at this point in time, we’ll hit our financial of course based on the fact if we hit our target.

And this concludes our question-and-answer session. I would like to turn the conference back over to Ashok Vemuri, Conduent's CEO for any closing remarks.

Yes, thank you. And thank you, all for participating in our call. I think in conclusion, I'll probably say that the first 90 days have been fairly exciting. We've stood up the corporation. Our management roster is now complete, we hired our leadership team. We took the opportunity in the marketplace to reprice our Term Loan B. We're doing extensive portfolio analysis, whether its contract remediation, whether it's changing the operating model to make it more services-oriented, driving a higher degree of client-centricity. We're hiring salespeople in the market that are focused towards delivering the appropriate deal for our services business. We're tightening the deal criteria. We're standing in front of our clients and proactively pushing our various solutions. We're focused with a dedicated team on our strategic transformation both on the go-to-market model as well as on the savings part of it. We have better visibility and business intelligence in terms of how our own Company operates, how we take decisions, how we price deals et cetera. And we're driving towards the culture of one Conduent. So on the whole I would say the first 90 days have been extremely exciting. The team has really stood up to the test and for us now, the job is to continue to sustain this performance in order to achieve the results that our constituents look forward from us. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.