Greetings and welcome to the Conduent Fourth Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Alan Katz, Vice President Investor Relations. Please go ahead.

Good evening, ladies and gentlemen, and welcome to Conduent’s fourth quarter and full year 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 the 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, February 18, 2021 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 Conduent’s Fourth Quarter and Full-Year Earnings Call. I appreciate everyone joining today. Now, listen, at the risk of stating the obvious, I think we’d all say that 2020 was quite a year. It was certainly quite a year for Conduent as well. However, despite the pandemic headwinds, we are quite proud of how the year ended for us. As Brian and I will discuss in a few minutes, we delivered results that surpassed even our initial outlook from February of last year. And we closed out the year stronger and better as a company. And you’ve probably heard it said in past earnings that in parallel to our growth efforts, our success is heavily dependent on the continued improvement of the fundamentals. Think of it as sort of the foundational rails the company operates on. And I believe we made real progress in that category in 2020. Slide 4 gives a bit of recognition from a few of our industry analysts. You will also see that our hard work is really paying off here. In my remarks today, as always, I’ll review the high-level financials as well as the sales and operational performance in 2020. As a follow up to previous earnings conversations, I’ll also quickly touch on a new key performance indicator, which will replace what we previously reported as renewal rate. The new metric will represent the net annual recurring revenue impact from the previous 12 months of sales and retention activities. I’ll also discuss what we set out to do in 2020. The results from those efforts and what we intend to get done in 2021. Now, let’s turn to Slide 5 to get started. 2020 turned out to be a strong year. Both revenue and adjusted EBITDA came…

Thanks, Cliff. As we’ve done in the past, we’re reporting both GAAP and non-GAAP numbers. The reconciliations are in our filings and in the appendix of the presentation. Let’s turn to Slide 9 to discuss the full year results. We’ll start with the 2020 P&L, as Cliff highlighted, we finish the year strong with results coming in at or above the high end of the outlook that we gave at the start of the year. Adjusted revenue for the year was $4.16 billion down 6%, excluding the impact of the 2019 call center divestiture. The decline was driven by the net impact of COVID and prior year lost business, partially offset by new business ramp. The full year COVID impact was approximately a negative $85 million, excluding the COVID impact full year revenue would have been down approximately 4.1% better than the 6% to 8% initial guidance range that we gave a year ago. Adjusted EBITDA for the full year was $480 million, down 2.6% year-over-year, while our adjusted EBITDA margin for the year was 11.5%, up 40 basis points compared to 2019. The declining adjusted EBITDA was driven by lower revenue and bringing back certain employee costs, partially offset by the cost savings program and our revenue mix. One item to note is that we don’t plan on providing the same level of detail and the impact of COVID in 2021 as it is now in our baseline, while we still plan to highlight major variances in our commentary, as we’ve always done. Let’s turn to Slide 10 to go over the segment results. For the full year, Commercial revenue declined 9.3%, primarily driven by COVID impacts of approximately $158 million in prior year lost business. Adjusted EBITDA declined 31.4%, while the adjusted EBITDA margin of 11.9% was down…

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Bryan Bergin from Cowen. Your line is now live.

Hi, this is actually Jared Levine on for Bryan. In terms of the fed stimulus, can you provide any color in terms of how you’re thinking about impact in your 1Q and then the full-year outlook?

Sure. So what I would say is that for COVID, in general, we expect it to have an overall negative impact in the business on the top-line again this year, like it did in 2020. We see the COVID positive and Government likely coming down versus 2020. And we see the COVID negative impact in Commercial and Transportation likely improving versus 2020, but again, that into a negative. And in Q1, we think Q1 will look a lot like Q4, since the COVID impact started later in Q1 last year. And so we think we’ll be down about 3% to 4% in revenue in Q1. And then that will start to improve as we go through the year and as we lap the COVID impacts from last year.

Right. And then, Cliff, can you update us on the demand environment and the pipeline by business segment?

Yeah, Jared, it’s -- we see a plus up in our pipeline of $2 billion, $3 billion over this time last year. And we’re seeing a lot more outsourcing activity across the segments, particularly in healthcare, but really across all of them. And as you know, in the Government segments, through the RFP activity is somewhat seasonal and kind of lumpy. So it’s not that predictable. In the Commercial space, we’re seeing a lot more activity. We’re seeing it in healthcare. We’re seeing it in call centers, frankly, across the board in the healthcare segment. So the market is strong. The market is strong and our reputation has changed. We’re in a much better place due to a lot of things, the quality of our recent upgrades and talent, and the quality of our operations and technology platform. So, we’re feeling really good about the opportunity going forward.

Great. If I could just sneak in one more clarification, what was the constant currency decline in 4Q?

It was very minor impact from currency. I think it was like 0.5 point.

Okay, good. Thank you.

Thank you. Our next question today is coming from Mayank Tandon from Needham & Company. Your line is now live.

Thank you. Good evening. Congrats, Cliff and Brian on the progress.

Thanks, Mayank.

I wanted to first start with the question around some of the onetimers versus the recurring trends in 2021. I get the California impact, and then, some of the COVID impact that Brian talked about. Anything else that you want to call out, just so we can handicap our model better in terms of what’s like recording versus what’s onetime in nature?

Yes, Mr. Mayank, we in the analysis around the segments, we give the COVID impacts. So if you adjust for those, instead of being down Transportation would have been up on a full year basis, instead of being up Government would have been down on a full year basis in large part because of California. And then Commercial wouldn’t have declined as much. The decline would have been much smaller if we adjust COVID out. I would also point that in commercial, from a margin perspective, in addition to the COVID impacts and the cost savings impacts we did have a couple of onetimers that hit Commercial that shouldn’t repeat. So, some of that decline in EBITDA should come back as we go throughout this year. So those would be the points I’d make on onetimers.

Okay, like what I’m really getting at is, is there a way to maybe now predict when you can get to organic constant currency positive growth? Is there a timeline maybe exiting 2021, 2022 timeframe? Any color on that? I think that’s a question we often get from investors. Just trying to get a feel for when the company can enter positive organic growth territory.

Yeah, Mayank, it’s a great question. Let me – the answer is sort of. And let me tell you why. The timing is heavily dependent on a couple things. This new net ARR activity report, we – metric we gave is sort of something that you can use as an indicator. It’s an activity indicator over the previous 12 months. And it shows the pluses and minuses, between new business AR, losses, price changes, volume changes, and it was to replace sort of the renewal rate that really had so many gaps in it. So that’s one indicator you should consider. But remember, it’s not a timing indicator. That’s an indicator of future growth, but not an indicator of when. Another component in the equation, to answer your question is when is the burn off from previous losses? We think that happens over the course of the next 2 years. As you know, there were some big ones in the past, like Caymus. And then, of course, there’s the unknowns of COVID. And when you put it all into the mix, it’s unpredictable. While we had a great year, the timing is unpredictable. What I would say is, we’re confident that all the vectors are lined up for growth in 2022. But there’s just no way I can predict it with certainty, until a lot of these unknowns become more clear.

Got it. That’s a helpful color. And then finally, Brian, on the free cash flow conversion, you give a few numbers, but I want to get clarity on why is the conversion rate going to be that much lower in 2021, based on your guidance versus what you delivered in 2020?

Yeah. It’s primarily 2 major things I’ll point out. One is, in 2020, we had about a $55 million benefit from the CARES Act being able to defer payroll taxes, half of that gets paid back at the end of this year. That’s about a $27 million outflow this year versus a $55 million inflow last year. And the second point is on CapEx, last year, we constrained CapEx because of the uncertainty around COVID and we decreased it down to $140 million. In this year, we’re bringing it back to $170 million to support new business that we’ve signed, and also the investments we need to make into the business. So those are the 2 major drivers. I would say over time, we think the conversion rate gets better once the CARES Act repayment is behind us, which the second half gets paid in 2022. And restructuring, we’re calling to come down this year versus last year. And it’ll continue to come down as we get our data center program, consolidation program behind us, and as we pivots our revenue growth, so there’s less cost actions just to maintain operating leverage. So we do see EBITDA improving and the conversion rate improving over time.

Okay. Thank you for taking my questions. Appreciate it.

You bet, Mayank. Thanks.

Thank you. Our next question today is coming from Shannon Cross from Cross Research. Your line is now live?

Thank you very much. Good to speak with you. I guess my first one is kind of a big picture question, which is, Cliff, you’ve been in this position for a while, you’ve lived through a pandemic and a lot of changes. Where do you think you are in terms of the overall transition that you wanted to make in the business? And I’m thinking at what point can we start looking forward to the potential for acquisitions to add new capabilities? Or investing in new areas? Or is this still sort of in-process, and so there’s a fair amount of more cleanup to go? And then I have a follow-up.

Yeah, I wouldn’t look at it is as completely serial, Shannon. In other words, what I would say to your point on the fundamentals and the foundation, 30, 40, close to halfway through the heavy lifting. They’ll always be refinements. They’ll always be efficiencies. They’ll always be operating leverage focus going forward. But in parallel to your point, on either tuck-ins or other acquisitions or other M&A activity, I would say that as COVID winds down and the worrisome aspects of COVID are in the rearview mirror, which is – we’re sort of seeing the light at the end of the tunnel on that, we start to open up the aperture, as we’re doing now in the category that you’re talking about. So I would say in 2021, we’re certainly always open to considering lots of things. I think that said, my thought is what you expect from us is prove that we can grow this thing organically. So in parallel, we’ve got a – while we may consider inorganic opportunities, we need to prove to that we can grow the company organically at the same time.

Okay, great. And then, Brian, I guess, I’m looking at the net ARR statistic. And I’m curious from a historical perspective, I’m sure you’ve run it to see sort of how it correlated to revenue. So maybe if we think about the past, I don’t know, 3, 4 quarters, and where that number was or maybe even go back 8 quarters, I’m just curious as to how it sort of trended relative to revenue or what the timing is? Thank you.

Yeah. So Shannon, this is a trailing 12-month metric. So the $60 million encompasses the activity during the last calendar year. And if you think about 2019, we had less new business signings ARR that was closer to 280 versus 350 in 2020. So that number was lower, and our losses were much higher, so that that number would have been negative in 2019 versus the positive 60 in 2020. And that’s why put COVID aside, we declined 4% in 2020. So that’s about as far as we can go back since it’s a new metric. And we’re just introducing it, but that’s the way to look at it.

But what I would say, Shannon, because it’s an activity metric, as you – if the trend is what matters in any given quarter, because it’s the activity of that trailing 12 months, if there’s a big ARR hit or a big loss. It can make the number look a little bit goofy. But if the trend stays positive, it’s definitely a leading indicator that we’re on the right track to growth.

Great. Thank you.

Thank you. Our next question today is coming from Puneet Jain from JPMorgan. Your line is now live.

Hey, thanks for taking my question. Brian, can you talk about various puts and takes that get you to the top-end versus the low-end of your revenue growth guidance? It looks like you plan to start the year with minus 3% to minus 4%, which is at the low-end of annual growth expectations and the comps will be toughest. So what gets you to the top-end from Q1 levels?

Yeah. So I would say at the high-end, it would be more revenue coming from government through SNAP and unemployment volumes and also federal funding. So if that were to be extended here, and for instance – and volumes were higher than kind of the baseline that’s at the midpoint that would help a faster recovery in Transportation and Commercial would help get to the high-end of the range faster than what we have at the midpoint. And then better new business signings ramping faster. So those would be the things that would get us to the high-end, and the worst case would be lower volumes on the Government side, less funding coming from the Government, higher COVID impacts, because Transportation and Commercial are taking longer to come back in maybe weaker new business that would get us tended to the worst case.

Yeah, Puneet, I would say, our sales efforts have a lot more focus on commercial or a lot more opportunity in Commercial than we would have had in 2020. And those products board much faster. As Brian said, that could be a contributing factor to get into the high end.

Understood, understood. And somewhat similar to Shannon’s question, so as you think about 2021 priorities and need for investments in the business, is there a way to estimate incremental investments you need to make in technology? And whatever that number is, will that show up in the CapEx or OpEx? Is there any way we can track that number?

Yeah, so a lot of our investments do show up as CapEx, but there are also OpEx investments that we’re making. But a good indication of the incremental investment this year versus last year is the CapEx number. And again, some of that is to support new business. And some of it is for technology investments. So that’s probably the easiest way to track it.

Yeah, I would agree, Puneet. As we think about what we’re using CapEx for, you can kind of think of it in 3 buckets. So if we have a big sales year, it’s going to require more CapEx as a percentage of that CapEx budget. Then you’ve got the running the business and modifying your systems to make sure you’re up to date on security protocols, et cetera, et cetera. And then you’ve got the discretionary part, which is also increasing in 2021, for either adjacencies or enhancement activities or optimized activities that we have in our product portfolio. So we are seeing some slow ratcheting up in 2021.

Understood. Thank you.

Thank you. We reached the end of our question-and-answer session. I’d like to turn the floor back over to Cliff for any further or closing comments.

Look, I’d like to thank you everybody for joining us today. We really do feel good about 2020. And while it’s in the rearview mirror, we’re proud of everything. But it’s time to hit the ground running here and drive value for our clients and win in the marketplace in 2021. So we certainly look forward to updating you next time. We’d like to – hope everybody stay safe and healthy, and hope you have a great day today. Thank you for joining.

Thank you. That does conclude today’s teleconference and webinar. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.