Greetings, and welcome to the Conduent First Quarter 2021 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alan Katz, Vice President of Investor Relations. Please go ahead.

Good evening, ladies and gentlemen, and welcome to Conduent's First Quarter 2021 Earnings Call. Joining me on today's call is Cliff Skelton, Conduent's CEO; and Brian Walsh, Conduent's current CFO as well as Steve Wood, our current Corporate Controller and incoming Chief Financial Officer. 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, May 5, 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 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 the 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 turn the call over to Cliff for his prepared remarks. Cliff?

Thanks, Alan. Good afternoon, everyone, and welcome to Conduent's First Quarter Earnings Call. Thanks for joining us today, it's great to be with you. Today marks yet another quarter where Conduent has been able to achieve its goals and meet the expectations we discussed in prior earnings calls. As I've mentioned in the past, our goal is to continue working on the fundamentals and pivot our company to growth. We think today marks one step closer to that outcome. Now before I go through the Q1 financials, I'd like to, obviously, acknowledge the announcement we made this afternoon regarding our CFO succession. I want to take a minute to thank Brian for his hard work and dedication through the years. I very much enjoyed working with him, and I wish him the very best in his new role. At the same time, I'm excited to welcome Steve Wood into his new role as our incoming Chief Financial Officer. I've known Steve for a number of years. He's a great partner and an experienced finance leader who will help drive the organization along the next phase of our journey. Importantly, this is a great example of our succession planning efforts. This transition will be seamless for our associates, our clients and our shareholders. Now in terms of the call today, I'll present a quick overview of the financial results, our recent signings performance, and why we're more confident than ever, and why we expect to see a turn on the top line very soon. I'll then turn it over to Brian to run through the more detailed financials. Questions will be at the end, as always. Meanwhile, this slide provides a cross-section of recently received awards and recognition that we're very proud of. So now let's turn to slide five to…

Thank you. Before I begin, I want to thank Cliff and the other members of the Board of Directors for their support and all the opportunities I've been given at Conduent. We've come a long way, and the company is now well positioned for its next chapter. I also want to thank the Conduent finance team and all of my colleagues for their hard work and dedication. And lastly, I want to congratulate Steve Wood and wish him the best of luck in his new role. We have worked closely together since his arrival in 2020, and the company will be in good hands with a CFO like Steve. We will work closely together to make sure that this is a smooth transition, and I look forward to watching Conduent's success over the coming years. With that, let's move on to the Q1 results. 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 10 to discuss the Q1 2021 P&L. As Cliff highlighted, we finished the quarter strong with revenue of just over $1 billion, down 2.2% year-over-year. The decline was driven by lost business from prior years and was partially offset by increased volumes and new business ramp. The continued progress on our year-over-year revenue trend can clearly be seen in the chart on this slide. We are on the right path and the improvement that we see here is encouraging. Adjusted EBITDA for the quarter was $115 million, up 19.8% year-over-year; while our adjusted EBITDA margin for the quarter was 11.2%, up 210 basis points compared with Q1 2020. The increase in adjusted EBITDA was driven by our revenue mix and by our continued focus on driving…

Thank you. [Operator Instructions] Our first question today comes from Shannon Cross of Cross Research. Please proceed with your question.

Hi, thank you. This is Ashley Ellis on for Shannon. Cliff, I was wondering - or Brian - if you could talk about what the drivers were behind the sequential increase in ARR this quarter? I understand it fluctuates quarter-to-quarter, but it was up 45%. And I think, Cliff, you mentioned that you expect revenue to grow year-over-year next quarter. What leaves you confident in that? And where do you see the biggest drivers? And then I have a follow-up. Thank you.

Yes. So the ARR and the sales number was increased because of a lot more shorter-term deals in our sales efforts. So you saw a 10% growth year-over-year in Q1 as it related to TCV, but 67% growth in ARR, and that's due to a little bit shorter-term and a lot more add-on business than we historically have. So we think that's a really positive trend for '21 and '22. We need a combination of both. We need to see the long-term growth rates from large deal TCV, which we really see ahead of us in Q2. But we need to see a lot of these singles and doubles that gets this ARR rate going for both '21 and '22. As it relates to growth rates in pivot and that sort of thing, as I mentioned in my remarks, I think what you should expect and what we expect in Q2 of 2021, is year-over-year growth in Q2 for that quarter. And that's driven by government stimulus increases and a pretty tough compare from Q2 of 2020 when COVID was just hit in earnest. And if you notice, we raised the bottom end of our range up by - up to 4,050 -- with a range of 4,050 to 4,150. And so you can kind of do the math to say, if we finish in the top of that range, which could easily happen, that's - we were at 4,164 last year. So you can do the math to figure out that if stimulus volume comes in strong, we're going to see a growth here in 2021. And we're just not going to know enough until the end of Q2 to know that answer. What's really important, though, back to your ARR point, is this net ARR number, which was $87 million this year and in the $60 million range last rolling three -- 12 months. And that's an indication of all the activities that are creating either positive or negative revenue; not timing-related, but it's an indication that growth is on the horizon and around the corner. So we're really positive on all the aspects, both ARR, the net ARR number as well as the growth opportunities in the back half of 2021.

Okay. Thank you. And then it's been a couple of quarters that you've called out increased service levels and uptime, just, I think, general customer satisfaction improving. As we start a new year and a lot of companies are considering digital transformation, are you seeing an increase or a willingness for those customers to give you more business than they would have in the past? I think you touched on increased retention, but are you also seeing expansion of those relationships?

Yeah. We really are seeing receptivity to a dialogue, which, frankly, when I got here two years ago, was hard to get. We just didn't have the track record and the reference-ability and the support in the marketplace due to our technology stability. And we're in a much, much better place here. We've got -- we're two third to 3/4 away through our data center optimization plan. We've got 1.5 big data centers left to go. That's creating a much more stable upgraded environment. And the result is very, very significant improvements in uptime; very, very significant improvements in incident rates. And we're hearing a lot of great feedback from our clients on that, which makes us get a meeting, a couple of years ago, we couldn't get. That said, no defect is ever enough. Anything less than 100% is not good enough. We want as many lines of uptime as we can get. And that's our mission. But yes, it's a great question, and it's opening doors that we didn't have open before.

And then just one follow-up. As you do eventually turn to more consistent stable revenue growth, do you expect that those existing customer relationships will be a key driver? Or will it be more from net new logos? And that's it from me. Thanks.

Yeah. No, it's a great question because in the past, even when we were selling, we weren't retaining. And what you've heard Brian and me talk about is the fact that we've got this legacy burn off from losses prior to 2019. That is our Achilles heel. We are selling more than we're losing right now. The trouble is that the burn-off from these legacy events from years ago has legs to it. It takes a long time. So the direct answer to your question is it's both. It's a three legged - actually a three-legged stool. It's retaining what we have. It's adding on business for the current clients, which we have. And we proved in Q1 that we can do much better than we did last year in that category. And it's new logo, new clients. And all three of those contribute to the TCV number. Well, the last two contributed to the TCV number. All three contribute to revenue growth.

The next question is from Bryan Bergin of Cowen. Please proceed with your question.

Hi, thank you. I just want to say, Brian, good luck with your new opportunity, and welcome to Steve.

Thank you, Brian. Appreciate it

Thank you.

Sure. A question here on the new business signings. Can you comment on the nature of the commercial new business that you're signing? And what areas are standing out as good opportunities for potentially helping you return to growth?

Yes. I think the good news, in Q1, we saw strong commercial new business signings growth. As Cliff mentioned, it was a good contribution from add on. And we saw it across the board, CXM contribution. We saw it in our health care offerings, so we really saw it in a number of areas. But it was good to see a good contribution from commercial in Q1 because we had a lot of government and transportation contribution last year. And I don't know what you'd add, Cliff?

Yes. We saw a couple of deals in our HSP platform. We've actually got four big implementations underway right now, which is our claims platform for commercial health care. Bryan, we see some real upside opportunity in health care. Heretofore, I would argue that we just not have -- we haven't tapped the breadth of Conduent into the health care space. And very shortly, we'll be announcing a new leader across the segment for commercial health care, who comes out of an environment where she was leading a lot of the sales efforts for several of our competitors into the commercial health care space. We think there's massive opportunity there. We're just seeing the tip of the spear right now, frankly. And while it was a good quarter, there's much more to be had there.

Okay. And then just as it relates to COVID, can you just update us or remind us, again, the impact built into the '21 outlook by segment? As far as -- I understand it's a detriment to commercial, still a benefit to government. Just how should we be thinking about all these moving pieces as you lap the last year issues versus some of the extensions of government programs?

Yes. So when we -- first of all, it gets a little bit harder to track the exact numbers as we get into the second year of COVID. In the first year, we had a discrete plan that we could track against. And as we lap, it gets a little bit harder. But at the start of the year, we said the $150 million benefit from government. We expected it to come down, and we expected the negative impact in commercial and transportation to come up by a similar amount. And we expected it to be roughly still negative around $85 million on a net basis as those two things move in different directions. Now we're looking at it, we think we're probably a little bit better than that with a little bit more coming from government than we initially anticipated, and probably a little less recovery on commercial. But so we're maybe getting $30 million to $35 million more than we initially thought. So instead of being down $85 million for the year, which was similar to last year, maybe we're down $50 million. So that's kind of what we see. But it does get a little bit less accurate as we lap years. So it's not as precise as it was last year.

Yes. If you think about it, Bryan, it was an easier compare to say what's happening in a COVID year versus a non-COVID year than it is to compare it to COVID-year to COVID-year. That's where it gets really difficult. But as Brian said, the $85 million headwind we had in 2020 is likely $50-ish in 2021. And depending on how long some of the subsidy environments and Biden's war on hunger and a lot of other things that could come into play in the fourth quarter, who knows? That could be mitigated even more. But that's what we see on the horizon right now.

Okay. Thank you.

The next question comes from Puneet Jain of JPMorgan. Please proceed with your question.

Hi. Thanks for taking my question. Cliff, can your current margin profile, balance sheet and tech capabilities allow you to close the growth gap versus low to mid-single-digit TAM growth? I want to ask, do you need to do acquisitions of technology capabilities to get there?

Well, so Puneet, it's a great question. And what I would say is that if you look at what we gave as a range of 11% to 11.5% on margin for the expectation for the year 2021 and $4,050 million to $4,150 million on top line. If we hit high into that top line, even going over the top line, I think the same tracking happens on margin, so that's point number one, which has nothing to do with your point on acquisitions. But we think with our continued efficiency plays, with partnerships that we have underway with some possible collaboration with other parties we have in the way and maybe a few tuck-ins in the second half of the year, we can drive that number up to jump-start the target we put in place over the long term, which is 13% to 15%. So Brian, I don't know if you have anything to add to that.

Yes. I think - that's right. I think we still see the long-term targets where we see the peers, the mid-single-digit revenue growth in the 15% EBITDA margin, and that's what we aspire to over time. And it's how do we get there over time, I think in the near term, it's to Cliff's point, tuck-in acquisitions; and maybe over time, something a little bit bigger, but it would be more tuck-in the near term. And then operating leverage from revenue growth to drive margin up continued moving things to shared services and other process improvement and efficiency plays, that's how we see it.

But it's a really good point on tuck-ins. Because if you look at AI and machine learning, we've already got two partnerships in place now. We're looking at others. We've built our own automation platform. The combination of all those will drive margin expansion. And maybe a tuck-in or two jump starts it even further. Is it required? No. Can it accelerate it? Yes.

Got you. And how much in advance do you typically get termination notice for a contract? How soon your growth rates can begin to reflect benefits of underlying net ARR, which has been positive last two quarters now?

Yes. I mean, it...

It varies.

It really varies. I mean, the U.K. in a complicated government or transportation contract, it could be five years-plus. That's on -- the plus five would be extreme. And in a simple commercial kind of call center or print kind of contract, it could be 90 days. It really does depend on how complicated the transition is for the person coming in and replacing you. So it really does depend. A lot of what's burning off that legacy losses are complicated system implementations, and it just takes a long time to replace what we're doing for our clients.

Yes. I think we're - I think that's exactly right. In the government space, typically, you get between a year and two years of advanced notice, depending on the conversion expectations from the incumbent. But as Brian said, sometimes, the runoff for the conversion activity can be as long as five years after notification. And so it's got a long tail. And then in the commercial space, it's not nearly as long. But the good news is, remember that net ARR number is an annual recurring revenue, it's not a TCV number or gross revenue number. So it nets out appropriately. And as long as it's positive, we're going in the right direction.

Understood. All the best, Brian, for your future endeavors. Thank you.

Thank you, Puneet. Appreciate it.

It's win-win, Puneet. So thank you. And Brian's excited, as are we.

There are no additional questions at this time. I would like to turn the call back to management for closing remarks.

Listen, I'd like to thank everybody for your time today. It's been great being with you, and I think it was a good quarter. I'd like to again thank Brian for 24 years of service to Xerox and Conduent. I'd like to welcome Steve Wood. Steve and I worked very closely together. He was my CFO in the past. This - and I assure you that the transition will be seamless. And I assure you that we are well positioned to make you proud of what we're doing here at Conduent in our pivot to growth, and we're really proud of the progress we've made. And we're looking forward to the remainder of the year. Thank you all for your support

This concludes today's conference. Thank you for your participation, and have a pleasant day.