Good morning and welcome to the Conduent Q1 2018 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded. I'd now like to turn the conference over to Alan Katz. Mr. Katz, please go ahead.

Good morning, ladies and gentlemen, and welcome to Conduent's first quarter 2018 earnings call. Joining me on today's call is Ashok Vemuri, Conduent's CEO; and Brian Walsh, Conduent's CFO. Following our prepared remarks, we will take your questions. This call is also being webcast, a copy of the slides used during this call was filed with the SEC this morning and is available for download on the Investor Relations section of the Conduent website. 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 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 09, 2018, 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, everyone. And thank you for joining our first quarter 2018 earnings call. Brian and I will cover our financial and operational performance and provide an update on our progress to transform Conduent into a profitable, sustainable and predictable enterprise. Brian and I will also take your question following our presentation. Let's begin on Slide 3 with an overview of our performance for the first quarter. Note that I will be comparing our results adjusting for the impact of the new accounting standards and our 2017 divestitures. We are off to a solid start to the year. We are making strikes across every facet of the company, and are starting to see the results on the work we began last year. There are a range of highlights to share, but I will zero in on several that are noteworthy. Revenue, we reached an important milestone this quarter. Adjusted for the strategic actions we have taken, total company revenue was flat compared to last year. Commercial segment revenue grew 3% when adjusted for strategic actions. This is an encouraging sign of stabilization in the top line of our core business, allowing us to pivot to revenue growth in the next few quarters. Profitability was also a standout metric this quarter. Our adjusted operating margins improved 180 basis points versus year ago. Adjusted EBITDA grew by 10% this quarter and our adjusted EBITDA margin was up 140 basis points to 11.3% despite the fact that Q1 is typically a seasonally weak quarter. Cash, improved profitability combined with an acute focus on cash management, resulted in another strong cash performance this quarter. Adjusted free cash flow improved meaningfully, and our use of cash in the quarter was half of what it was in the prior year. Our balance sheet continues to get…

Thank you, Ashok. Before I begin, I want to discuss some modeling items. First, I want to remind everyone that as we discussed in our year-end earnings call, 2018 financials will have several factors that will impact year-over-year comparables. As such, throughout the presentation and in the exhibits and the appendix, we will provide both GAAP numbers, as well as our year-over-year results after adjusting for the divestitures that we completed in Q3 2017, and the adoption of the 606 revenue recognition accounting standard. This accounting standard change primarily impacts how we recognize pass-through revenue for postage and deferred revenue. We have also provided a more detailed block on a quarterly basis for our 2017 results by segment in the appendix. Second, we have made several changes to the other segment. As discussed on the last earnings call, we moved the health enterprise business out of other and into the public sector. We also moved the Q3 2017 divestures into the other segment for easier segment level compares for our commercial and public sector businesses. Now, let's begin on Slide 8 with an overview of the first quarter financial results, and a walk-through the P&L. Revenue of a little over $1.4 billion for the quarter was down about 9% year-over-year as reported and 10% on a constant currency basis. Adjusting Q1 2017 for the impact of divestitures and the 606 accounting standard adoption, revenue would have been down about 4% year-over-year. As Ashok mentioned in his remarks, further adjusting for the impact the strategic decisions year-over-year revenue would have been flat. Gross margin was 17.7%, an improvement of the 100 basis points. The improving gross margin reflects continued progress on our transformation initiative and increased pricing from remediated contracts. SG&A declined year-over-year and adjusted operating margin improved. Adjusted EBITDA in…

Thank you, Brian. Before we wrap up, I’ll spend a few minutes to elaborate on the kind of company Conduent is becoming, and the way we are creating value for all our stakeholders, our employees, our clients, our shareholders and society at large. Over the last year, we have been refining our portfolio to put greater focus on those businesses, which are scalable, profitable and platform based, have market-leading positions and market growth opportunities. These capabilities and services have a common strategic thread, which allows us to achieve differentiation and price advantage. There are two slides I will use to convey this. Moving to Slide 17. This is a one page depiction of how we think about the work we perform for our clients. I’ve shared this on our last earnings call. And whereas, I will not go into as much details, hence it was important to reinforce it with you. We are an essential participant in the value chain for how our clients deliver services to the end-users. We work on behalf of our clients to manage data intensive, repeatable, individualized transactions happening at massive scale. Our service offerings are delivered through a combination of technology platforms bundled with complementary business services, covering all stages of end user interaction from enrollment to transaction processing from account management to customer experience. Here are some reference points for the scope and scale of our business. We manage approximately 50% of the automated tolling systems in the U.S. We manage the funding for a range of government payments across the country, ensuring approximately $100 billion is provided to citizens for their benefit every year. And we provide full HR outsourcing and benefit administration to some of the largest companies in the Fortune 500 list. Together, our deep client base, broad offering portfolio…

Thank you. We will now begin the question-and-answer session [Operator Instructions]. And at this point first question comes from Puneet Jain with JPMorgan.

It seems like second quarter divestures will hurt margins, but should be low growth businesses. And new customer care divestures should be accretive to both renew growth and margin. So my question there is one, is that right and second, as you deploy divested proceeds and M&A and debt pay down, how should we think about overall impact on your free cash flow from those actions?

So Puneet this is Ashok, I will address this question. I think it’s important to first and foremost characterize the fact that the actions that we are taking on the divestitures very – and practically will be cash flow and EPS accretive. And I think it’s important to position what we are doing to better explain and understand. If I look at the portfolio of divestures that we are looking at on the -- at the portfolio level, these businesses have margins and revenue opportunity growth well below the corporate average. In between these portfolios, there are assets which have margin or financial profile, which is better than the company average and in certain situations, its way worse. If I look at the reasons why I'm doing it, it’s not just about the financials at a point in time. It is also about the fact that what is the prospective of future for it in terms of how much investments I need to make, what is the margin profile as I take that forward, whether the various factors that I described earlier on in terms of whether they can be platform based, technology underpinning, whether they can be scalable, whether they can be standardized, whether they have the potential for active shoring and whether they drive the opportunity for cross selling and are in the growing market with growing opportunity. If I look at all of that, not just the financial profile of a few assets within that portfolio, we come to the conclusion that we’d be better off in divesting these businesses, and using the proceeds to continue to drive down our level, so that there is cash improvement and EPS accretive, as well as make acquisitions that will plus the delta between where our capability is today and where it could be. We are maniacally focused on optimizing our business and rightsizing that business in order to drive shareholder value, as well as provide a better service to our customers.

And how much of fiscal '18 revenue guidance is already in the backlog or in other words, how much of it depends on NRR or transaction volume?

Puneet, its Brian. Most of our revenue would be in the backlog. There is some that we expect from new business signings, both ARR in the year and NRR. But a lot of it would be in the backlog. And we’ll continue to progress as we lap some of the strategic actions we took last year as we lap some of the cancels inside of public sector. As we ramp the one tolling deal that I mentioned, we’ll start to see progress. We see it on the commercial side, and we expect to see quarter-by-quarter improvement.

Thank you. And our next question comes from Bryan Bergin with Cowen.

Follow up on the asset sale question. So can you comment on the margin profile of the new $175 million of public sector sales compared to company average? And then just as we think about the net impact to you in the aggregate. For the planned sales you've made that are both margin here and the additional $175 million. Do you need to offset that with the customer care business to get to that lower than average trajectory?

So what I would say is that the margin, once we remove the standard overhead costs, is 16% on the two deals that we signed. If we look at the $4 billion, including customer care that we’re looking to divest, that has a margin profile that is lower than the company average, driven by the customer care margins. But as we divest that billion dollars the margins of the company improve as we take out the stranded overhead cost. As Ashok said, it will be accretive to cash flow and to EPS once we deploy the proceeds. And then it positions us to better grow revenue as we have businesses that we believe are competitive in market that they compete in and that the markets are strong. So we view these divestitures as key to top line performance, profit improvement, cash flow improvement over time.

And then just on the cost takeout, it looks to be on track from the $700 million target, the run rate. You were ahead of that run rate last quarter. Can you give us an update on where you stand now relative to that?

So the $700 million was an incremental $225 million of savings this year to drive profit improvement, and to drive investments in other assets that we need to cover. That is well on track and we’re working to potentially over achieve. But right now, we’re sticking with $700 million but we are trying to drive over achievement.

Thank you. And the next question comes from Jamie Friedman with Susquehanna.

Ashok, I was wondering which segments you anticipate benefiting from M&A, I mean like transportation or health enterprise, public versus commercial?

So we’re looking at tuck-in acquisitions in order to enhance our technology capability. As I have mentioned before, we're not going to do acquisitions, which are contract or revenue aggregating acquisitions. I clearly see opportunities in the public sector space. In the federal government space, our footprint there is fairly small. I think there are good opportunities for technology deployment in the government business, in the state business especially and with emphasis on the health enterprise business, which is something that we now consider core given the remediation we have done there. In the commercial space, I clearly think there are opportunities in our very fast growing compliance business. There are opportunities for tuck-in acquisitions around technology in our payer business that segment is growing very fast. So I think we have a few places where I think M&A, both in the public sector as well as in the commercial sector, would make sense.

And then Brian, in and I think in your prepared remarks, you called out performance in tolling. Can we anticipate that tolling as the contract ramps will improve sequentially in terms of the top line growth?

Yes, that’s correct, year-over-year and sequentially.

Thank you. And the next question comes from Shannon Cross with Cross Research.

I’m just trying to understand a little bit -- again, there are so many moving parts here, right. So when we get through say the end of '19, you’re down $125 million a quarter in terms of revenue that’s not that we’re making any money. But then you also talked about EPS accretion driving. Is that -- are you talking about more debt payment on that, or is that really depended on where you make acquisitions? And then within that, can you give us an idea -- I know, you can’t tell us exactly when you’re going to make acquisitions. But do you have a plan for how that might ramp just so we can -- we get 2020, or as getting closer to a more normalized level?

Sure, Shannon its Brian. So we have $300 million of cash available today for acquisitions, and we would also potentially use some of the cash from the divestures for acquisitions. But we’re also looking at paying down debt. We've been through all our options around paying down debt, and we have a plan. And as we start to execute that plan, we’ll communicate more about it. But it’s going to both be paying down debt lowering interest plus potential additional acquisitions. We’ve been prioritizing the divestures. We have a pipeline of acquisitions that we’re looking at and reviewing and working. But that will be more weighed towards the second half as we prioritize the divestures right now.

And then as we think about the changes you’re making. How are you thinking about your EBITDA margin progression? Has the thought changed because of some of the timing and the magnitude of the divestures that you’re doing, or is…

So I think this year we’ll work through these divestures. But as we think about the out years, once we get the stranded overhead cost out, the billion dollars is at a lower margin than the corporate average and this will help us to get to our long-term margin target faster. And we’ll talk more about this at the Investor Day. But these divestures position us both top line and bottom line to improve faster than we otherwise would have.

And then just one more -- just in that line of thought. In terms of the overhead stranded cost and then obviously the loss of leverage, I would assume, in the business. Do you anticipate needing to do further restructuring in 2019, I guess, to try to get the cost down? Or is that already incorporated in how you were thinking about cash flow and that, going forward?

So as we think about next year, we’ll have a cost program that incorporate taking out the stranded overhead and everything else we need to do to continue to drive margins. We have money aside for restructuring and the views we provided before. As we get into the Analyst Day, we’ll reconfirm those amounts. But I think we have it modeled that’s the next phase of the cost takeout journey we’ll be going after the stranded and overhead. And it shouldn't cause us to have to go beyond what we've said in the past for our restructuring in '19 and '20.

Thank you. And the next question comes from Brian Essex with Morgan Stanley.

Maybe Brian, could you talk about what the current buying environment is like for the assets that you’re selling? How you’re maintaining the discipline? Who the potential acquirers are, whether you see more activity on the strategic side, whether it’s more financial? And how you maintain discipline around getting pricing for those assets?

So we have a professional process that is competitive that we run through each of these. We use advisors and I would say that the market is good. We have both strategic and financial interest and these have all been competitive.

And then just noting on the sale or proposed sale of the customer care businesses. I guess maybe little bit of rationale behind those. I mean it’s not as though you, as a management team, were spending a little more towards -- giving those businesses a go. And maybe just a little bit of thought behind the rationale for selling those. I know you fix them, try get a better price for ones that are already fixed. But just as you work your way to that process, what the rational was that now those are on the block?

This is Ashok. So obviously, we wanted to get our hands around the size, scope and the opportunity to remediate this business. Clearly, the parts that we have identified, we needed to remediate them to make them more attractive from a divestiture perspective. We've done that. These businesses are heavily focused or heavily concentrated, if you will, in the U.S at a time when most of this is not done in the U.S. They occupy a very large real estate foot print. They give us no opportunity to cross and up sell. They are not technology oriented, and are not scalable. So given all these elements of that we have identified the standalone transactional call center work as something that we intend to divest. Now what remains is part of the business that's actually bundled, because customer experience and support continues to be part of value chain of what we bring, albeit maybe at the lower end of it. But it's a bundle -- in a bundled transaction, it allows us the opportunity to cross, up sell and drive much more of the service over a technology platform. So that’s the rationale, which we have used for the divestiture of the business that we intend to do in customers care.

Thank you. And the next question comes from Frank Atkins with SunTrust.

I wanted to see if I can get an update on the global headcount mix, as well as some commentary around talent acquisition and retention.

Yes. So this past quarter, in Q1, our overall headcount was down by about 4,800 people. We continue to very aggressively drive for active shoring, both from the way we deliver our services to our clients, as well as how we run our company, and in terms of epicenter of these operations are. We’ve identified four core hubs, Philippines, India, Jamaica and Guatemala, where we are ramping up quite aggressively, both in terms of talent; technology talent, for example, in India; operations talent in Jamaica and the Philippines and Guatemala. So we are progressing well. I think in terms of the management talent, I mentioned five new capability and business heads. I think we're beginning to find the market, or executives in the market, more amenable to come on board. We've seen a dramatic change in the way our customers are reacting to that very positively. We’ve seen that in the -- despite the new business signings being down, the quantity of that has actually very pretty dramatically improved. And I think we've been able to also hire a lot of talent into our client engagement teams. They are co-located with our client. I think the renewal rate speaks to that. The fact that we’ve had a very strong renewal growth, also speaks to that fact. So I’m actually -- feel in a very good place in terms of being able to drive that business, and with the talent that I’m getting. We have also hired a lot of talent for a very important activity that we have talked about, which is our divestures as well as M&A. This is not a cartridge industry for us. We’ve hired very good talent from the marketplace who are helping drive this and achieve the goals that we want.

And then I also wanted to see if I could get an update on the analytics business. It’s often a driver of growth in some of your peers. Where do you stand there? How are you incorporating analytics in your offerings, and where can that go?

So you may recall that I have said in the past as well that about close of two-thirds of our business is driven of platforms productized applications or a technology stack. And most of our, whether its transactions, whether it is providing a service, is heavily data oriented. So we are the conduit, if you will, for a ton of data flowing between the end-consumer of our clients. So we sit in the middle of that ecosystem. And we are increasingly being asked to provide not just be a data throughput engine but also provide the intelligence or the insight, if you will, on that data, which requires us to obviously ramp up our analytics capability. So we are adding that technology layer very aggressively, both in terms of our people and management capabilities, as well as a lot more technology than we have deployed before. Because if I see most of the transactions in my pipeline, they are about not just being a good steward of the data from one end to the other, but providing a higher level of analytics insight and intelligence on that data, both to the end-user, as well as to our enterprise clients. So we’re sitting in the middle of that digital interaction, if you will. So a big business for us. If I look at what is generally described as a digital business, I would say that’s close to what 40% to 50% in terms of where my revenue comes from today. And we want to expand that, because that's more margin accretive, again, because we spend a significant amount of time on the divesture conversation, I want to refer back to that. The businesses we’ve divested did not give us the opportunity or they had the potential to do this kind of work.

Thank you [Operator Instructions]. And the next question comes from Jim Suva with Citi.

When you talked about identifying the divestures, I believe you then said there is a couple to identify by June, which makes sense. And then you said you have some more traditionally, that was in Ashok’s prepared remarks. Are those in addition to your original plan, are those like incremental? And then to following that, does that rightsize the company perfectly to what you want, or do you think that there is more divestures yet to come?

So Jim, we had earlier announced the range of $250 million to $500 million, of which we have achieved $340-odd million. We have another $175 million as a part of that previous $250 million to $500 million. On top of that, we have announced today an additional $500 million of divestures, which is our standalone customer care. With this, the phase of the divestures all the time is complete. I think we are -- what we are left with is our core business. We want to pivot away to amplifying and growing our core business. Obviously, as we look at the business over the years, things may change like technology obsolesce or market positioning then we’ll come back. But for now, this is the end. Our job now is to get this work that is in process to a point where it can be concluded. And we can invest the proceeds from that whether as Brian said into debt reduction, whether it is in terms of making the appropriate acquisitions to amplify the core business.

And then my last clarification and follow up is, those additional layer of divestitures, sounds like are at the low corporate margins. So am I correct that now your go forward company margin looks to be even more profitable than say than you did at your Investor Day a year and half ago?

If you look at the billion dollars, we’re now looking to divest on average once we take out stranded overhead. That will have a lower margin and company average, and it’ll help us get for a long-term margin target faster. And that's driven largely by the customer care standalone business, which has a very low EBITDA margin.

Thank you. And the next question comes from Mayank Tandon with Needham and Company.

Ashok, you've talked about investing in the sales force. Maybe you could give us an update in terms of where you're at in terms of these investments? And then when do we expect to see some progress from that in terms of both growth in the core business and also in terms of maybe more consistency in terms of new business signings?

So over the last few quarters, I am actually very happy with where our client engagement team and our sales team in terms of number. Numbers are obviously -- this is a process that we started day one, but it took us a while to get to the optimum number. I think we are there. We have the right talent. We have the right skill set. And the resonance that we are hearing and the feedback that we are hearing from the clients is actually pretty. Well obviously, this takes some amount of time for the business to ramp up. It’s easier to do it in existing and install base of clients, and you can see that is happening from a renewal perspective. It takes a certain amount of time to do that in news business, and we’re seeing that as well. But obviously, we don’t have the liberty of not having a consistent predictable new business signings trajectory. The good news is that the people that we have hired are all from the industry. We have new leadership that specializes in this business, whether it’s in finance and accounting, whether it’s in legal and compliance, whether it is in our total benefit outsourcing HRS business. So we have strong leaders with great experience, great client connect who will be able to drive the performance against that, because we are definitely focused on not having to wait for a long period of time for these investments to yield. I actually think that with the sales team coming in, with a much more vertical focus, with an investment that we are making in our technology, and most importantly or as importantly, we do not have to focus on businesses that are non-core, gives us the opportunity to ramp-up and provide the yield much faster.

That’s helpful, and just one follow-up question. In terms of the global sourcing, I think you mentioned, you call it active shoring. Is that additive to the margin over time? In other words, can you get to the mid-teen EBITDA target based on just the mix of business and the cost-cutting program that you have in place than the global sourcing once that takes off, would actually be even more additive to margins longer-term?

That's part of the transformation program, and going into ’19 active shoring and automation is a big part of how we’ll attack the cost base that will help get us through to the margin targets overtime. But active shoring is definitely part of it.

Thank you. And at this time, I would like to return the call to Ashok Vemuri for any closing comments.

Thank you. And thank you everybody for being on the call. There is a lot of information to digest here. We’ve had a fairly busy quarter. We continue to have a fairly busy quarter. We are in the middle of a work-in-progress on our divestures. You’ve seen the first steps of that. I think the full impact and the benefit of this will flow in as we finish around our divestures and more importantly, use the proceeds in a manner that is accretive to the balance sheet, that is accretive to the shareholder and definitely, is accretive we think both from a cash and an EPS perspective, and will drive a much more focused, easily understandable and value-additive business to our clients. With that, I look forward to catching up with all of you on June 8th where I think we will be talking a lot more about our core business as we pivot off to revenue growth. Thank you so much.

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