Good morning. Welcome to the Conduent Q2 2020 earnings conference call and webcast. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask a question. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Alan Katz, Vice President of Investor Relations. Please go ahead.

Good evening, ladies and gentlemen and welcome to Conduent's second quarter 2020 earnings call. Joining me on today's call is Cliff Skelton, 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 afternoon. Those slides as well as a detailed financial metrics sheet are available for download on the Investor Relations section of the Conduent website. We will also post a 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, August 6, 2020 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 financial 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 afternoon and was furnished to the SEC on Form 8-K. With that, I will now turn the call over to Cliff for his prepared remarks. Cliff?

Thanks Alan. Good afternoon everyone and welcome to the second quarter earnings call here at Conduent. I appreciate everybody joining today. This is my fifth earnings call since becoming CEO about a year ago. A lot sure has changed, certainly here at Conduent, but the course on the world stage. I hope everyone remains safe. I hope your families are doing well. Things are tough. I understand and I appreciative everybody showing up today. So thank you. So I would like start off first by acknowledging all the Conduent associates that have helped us make a lot of progress. COVID's been tough, as I said. And with the significance of it, our team has really done a great job and I appreciate all of. As you see on slide four, we had some great feedback from a lot of our associates and our clients and those are just some examples of some of those on our performance. The bottomline is, the fundamentals of the company are improving. It's really due to the hard work of our team. And as you are going to see today, the early returns say that that hard work is starting to pay off. And that's by both some of our new and our tenured associates, so really proud of those folks. Let me quickly go over the agenda and I will dive into the details later. We are going to discuss the high level financials from the quarter, as always. We will talk about our improved sales results. We will certainly touch on both the negative and offsetting impacts of COVID and we will go deep on transportation and our government businesses. After that, I will turn it over to Brian to run through a lot of the more detailed financials and our outlook for…

Thanks Cliff. I will start off on a same note. I am extremely proud of the hard work from our team. It's great to see progress in delivery operations and sales. Before I begin on the financials, I will quickly note that we are going to reporting both GAAP and non-GAAP numbers. The reconciliations are in our filing and in the appendix of the presentation. I will start on slide 11 to review the P&L and the consolidated impact of COVID-19 on revenue and adjusted EBITDA. Revenue for the quarter was approximately $1 billion, down 8.6% compared with our second quarter results last year or 8.3% in constant currency. These results are better than expected, primarily driven by the strong volumes at our government segment related to COVID-19 and less of a COVID-19 impact in our transportation segment. From a year-over-year perspective, prior year lost business and COVID-19 related pressure from the transportation and commercial segments offset the growth in government driven by COVID. As Cliff discussed, we are making progress and trending better than expectations. This is a result of less of an impact from COVID-19, strong execution on our cost takeout program and better topline performance excluding COVID. I want highlight this positive topline trend that we are seeing in the business. It's most visible when you separate the impact of COVID-19 from how we believe the business would have performed in a business as usual environment. The total net impact to revenue from COVID-19 was approximately $35 million for Q2. As Cliff mentioned, without the impact of COVID-19, we estimate that the year-over-year revenue decline for the quarter would have been 5.5%, better than the midpoint of the 6% to 8% decline that we had anticipated at the start of the year. Adjusted EBITDA in the quarter…

[Operator Instructions]. First question is made today will come from Puneet Jain with JPMorgan. Please go ahead.

Hi. Thanks for taking my question. Great result and good to see solid traction in bookings, specifically in new business signings that were up so much. So a question there is, so some of the recent deals you won, how long were the sales cycle there? Did pandemic accelerated conversion of some of those deals in the pipeline? Or in other words, what's driving renewed activity in signings for Conduent?

It's a great question, Puneet. So there is a couple ingredients to what you just said. Very little of what we see in the new business signings has anything to do with COVID. So if you think about the $623 million in new business signings, there is a little bit of P-SNAP in there, but $600 million or so of that is really irrespective of COVID. It's business as usual. So that's point number one. Point number two is that the sales process for us is completely different. It's a lot more about process improvement, dedicated teams, upgrading talent, the governance, bid management and certainly leadership. And so it's a changed sales environment. We are bidding on things we think we have good shot at and we are not messing around with others. With respect to tenure of the deals in that $623 million, it is up, driving the TCV up. So we are looking at roughly 5.2 year average deal length versus in previous quarters in the neighborhood of high threes, into the fours. But the good news our of that, while it's all good, because it creates longer revenue streams and on top of that if you look at it from a year-over-year basis or quarter-over-quarter basis, we are up on quarter-over-quarter, we are 25% or on ARR and in some cases up, upwards of 83% above what we were last year. So not only is the TCV up, but the annual recurring revenue is up and the deal length is up. So we are seeing progress in all three buckets.

Got it. And as you report upside in cost cutting, while that's obviously positive for the near term, but too deep or steep cuts were one of the reasons for revenue headwinds in the past. So how are you balancing benefits from high cost starts with managing execution?

Yes. The way to think about this $100 million which will over exceed in the neighborhood of 20% to 40% this year and those are 2020 numbers. The way to think about it is, it's a little bit different. Roughly 40% of those are temporary cuts that are directly associated with COVID volume. So as the volume goes down, we want to make sure our expenses go down as close to appropriately or correlated as possible. 60% or so of it is permanent and you are exactly right. We need to pay intent focus on or attention to making sure we don't cut into bone. And so what we have done this time is, instead of just what I might call somewhat arbitrary or just say wide swaths of rifts, we looked at it from a completely different angle. We looked at it from operating model changes, spans and controls, areas where we just don't think we have an opportunity to grow and areas where we can combine talent and create more shared services to drive, what I would call, efficiency plays that will then along with automation that will drive some of those reductions. And it's obviously not just people. But it will involve people as well. But we are going to do this way more smartly and that's what we are seeing in 2020.

Got it. Thank you.

You bet.

And the next question will come from Shannon Cross with Cross Research. Please go ahead.

Thank you very much. I was wondering, can you talk a bit about how we should think of the contribution from unemployment and some of the pandemic related Federal money that may or may not continue? And how you are thinking about balancing that against the benefits from the new signings? Is this something that, in theory, could be fairly seamless where as the Fed money, in theory, falls off and new signings to come through? How should we think about that trajectory?

I do not think -- Go ahead Brian. You take it.

Hi Shannon. This is Brian. So first I would just want to say for the Q3 guidance range. At the midpoint, low end of the range, we are not assuming any extension of the Federal government unemployment supplement. The high end, those contemplated being extended for August and September. But the midpoint does not. And then, go ahead, Cliff.

No, all I was going to say is, Shannon, if you look at, Brian's excluded a lot of what we saw with that extra $600 a month, he has excluded in what we are thinking about for Q3. And what we are seeing in the current upswing, which is well in excess of what we thought it would be, that $20 million to $40 million, we thought it would be -- it's mostly unemployment which we see probably continuing, despite we not knowing about that $600 and what it might go to. And the P-SNAP, which we also see on a continuing basis. But both of those are unrelated to what we see on a businesses as usual basis, which when you net out COVID, we see improvement to last year definitely or what we expected in our budget anyway.

Okay. Great. And then, when you are signing all these new contracts, how should we think about the margin profile of the contracts you are signing? How are you determining which RFPs you go for versus ones you don't? Just trying to think about, when we get through the pandemic and get into the next set, is this a situation where margin improvement should continue or at least hold in there? Thank you.

Yes. So when we are looking at new business deals, we target margins that are better than the current margins of the company. Sometimes, for specific deals, we may take a lower margin. But most of the time, the margins we are signing are higher than current company margins.

And how long does it take to get to sustainable margins in a contract because there is obviously an upfront investment that's required?

Yes. It usually ramps over time and it ramps as you go. Through the first couple years, it will have a lower margin, sometimes negative in the first year and then it ramps from there. But it does depend on the offering and we have certain offerings that ramp faster, that make money faster. So it just depends, but there is ramp typically on the margin side.

Yes. It's heavily dependent, as Brian said, Shannon, on the product. Obviously, in the public sector, where there is more upfront investment, it ramps a little slower. Where it's strictly services, it ramps very fast.

Okay. Thank you.

And the next question will come from Bryan Bergin with Cowen. Please go ahead.

Hi guys. Good evening. Thank you. I wanted to ask on the cost plans. You mentioned expected outperformance. Did you quantify how much that means? And then just to-date, where are you relative to the target?

So Bryan, thank you. We have got all of it identified. About half of it executed. When I say executed, it's all planned so we know which ones we are executing when across every month. We expect to outperform between 20% and 40%. So if you think on the outside, $140 million.

Okay. And you are 50% of the way through that run rate?

We are more than 50%. We are 100% of the way to the identification. And we are roughly 70% to 80% of the way to the execution. I mean there are people that come out later in the year. So we are 100% identified, call it 70% executed.

Okay. I heard the comments on the sales process refinement that you are attributing the success here. Is the current sales force appropriately sized now for the pipeline opportunity that you conveyed? Or should we expect investment there?

We are roughly, Bryan, about 25% over the low point from last year in terms of our headcount on sales. Obviously, what's most important out of that mix is the quality and the performance and execution out of the team. We expect another, what I would call, 10% or 20% uptick over the course of the next nine months. So we are not done, but we are 80% of the way there on the body count.

Okay. And just one last one for you. How are you thinking about potential strategic alternative path? Is that off the table in this environment? Or is the performance in any of these businesses now supportive of actions to be taken?

Yes. It's a great question. Look, it's opportunistic never of the table, right. We think we have the right strategy, irrespective of the portfolio. We are starting to see with green shoots and all the rest that strategy take hold and it's working irrespective of the portfolio. But it would be foolish of me to say that it's off the table. It's certainly never off the table and we are completely opportunistic. But we want the price to be right. We don't want COVID to be taken advantage of in the mix. And so I would say, no, it's not off the table.

Okay. Thank you.

[Operator Instructions]. Our next question will come from Mayank Tandon with Needham. Please go ahead.

Hi. Good evening. It's actually Kyle Peterson, on for Mayank. Great to see the improving TCV trends the last few quarters. I just wanted to see if you guys have any thoughts on how quick of the time to implementation and revenue you guys are seeing with some of these project extensions, just so we can get a sense of how quickly some this might translate to revenue and so we can start to continue turning the ship in the right direction?

Yes. So it's Brian. It's similar to the margin answer. It depends on the offering. Some offerings such as customer experience and transaction processing ramp fast. Others, there is an implementation period that can take, in some cases, a year or more. So it does really depend on the offering. The good news is, through the first half we have seen a good mix of different offerings contributing to the sales numbers. So we will have some revenue in the current year from these signings and in others we will contribute as we get into next great.

Okay. Great. That is helpful. And then just to follow-up on margins and your longer term thoughts on the margin profile of the business with some of these new contracts coming in at or above current margins plus the over-delivering on these cost takeout targets. Have you guys given any thoughts or could you give me color on where you think the margin in this business could head in a little more normalized operating environment?

So over time, we have said, before this business, if you look at the peers operate, based on the mix, at about a 15% EBITDA margin. Over time, we don't see any barriers to getting there. In the near term, though, we want to prioritize improving margin somewhat but also investing to turn the revenue around and that balance will keep it lower than that in the near term. And we have talked about being in range bound between 10.5% and 11.5% over the next year or two. And obviously, we had good performance in Q2 and we will keep driving margin improvement as we can. But we want to make sure we get the balance right between turning the topline around and improving the margin.

Great. That's helpful color. Thanks guys. Nice quarter.

Thank you.

Thanks.

As there are no more questions in the questions queue, this will begin the question-and-answer session. I would now like to turn the conference back over to Cliff Skelton, CEO, for any closing remarks.

Well, let me say first, thank you to everybody for joining today. We feel like we are on track in making progress. We hope to have another good Q3 to talk to you about here in three months or so. It's encouraging to see the green shoots but momentum and consistency is what we are looking for. I would like to say thank you, obviously, to our employees for their hard work, for our clients for their business and to our shareholders for your confidence. And I hope everybody stays safe and keeps their family safe during this crisis. So thank you all very much for joining.

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