Greetings. Welcome to the Conduent Q4 2021 Earnings Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Giles Goodburn, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and thanks, everyone, for joining us today to discuss Conduent’s Fourth quarter and full year 2021 earnings. We hope you had a chance to review our press release issued earlier this afternoon. Joining me today is Cliff Skelton, our President and CEO; and Steve Wood, our CFO. Today’s agenda is as follows. Cliff will provide an overview of our results and our business update. Steve will then walk you through the financials for the quarter and the full year as well as providing a financial outlook. We will then take your questions. This call is being webcast, and a copy of the slides used during this call as well as the press release were filed with the SEC this afternoon on Form 8-K. This information as well as the detailed financial metrics package are available on the Investor Relations section of the Conduent website. During this call, we may make statements that are forward-looking. These forward-looking statements reflect management’s current beliefs, assumptions and expectations 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. For more information regarding definitions of our non-GAAP measures and how we use them as well as the limitations to their usefulness for comparative purposes, please see our press release. And now I’d like to turn the call over to Cliff.

Thank you, Giles, and good afternoon, everyone. Welcome to Conduent’s Q4 and end of 2021 earnings call. Thank you for joining us. Today, Steve and I will take you through Q4 and full year 2021 results. We will also focus on some significant operational and sales results. Importantly, we want to walk you through the transition from 2021 to 2022 and 2023. We will talk about the base business and why we see the fruits of our labor working and already demonstrating growth. And when and how you will see that growth manifest in the numbers, irrespective of the 2021 tailwind of pandemic one-timers and the effect on 2022. We’ll include some strategic opportunities and discuss improvements in our culture and our client base. But first, let’s start with an overview of our 2021 results. If you’ll turn to Slide 6, you’ll see that Conduent’s Q4 revenue came in at $1.048 billion, virtually unchanged from prior year and $4.14 billion for the full year, which was down 60 basis points year-over-year. This was very much in the center of how we guided the year during our second and third quarter earnings updates. In Q3, we alluded to the benefit of onetime PSNAP and unemployment volumes and how higher-than-anticipated revenues would create confidence in our 2021 numbers, and a year-over-year headwind in 2022. Steve will touch on that momentarily. But the takeaway is in the examination of the base business across the 3 segments, where we’ve seen strong progress. For the first time, we’ll discuss expectations in each segment. The normalization of COVID is upon us, as you know. And while we do mention stimulus volume as a callout due to the fact that those payments are clearly isolated onetime payments, we don’t expect to specifically call out pre-COVID versus post-COVID…

Thanks, Cliff. As we have done in the past, we are 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 8 and discuss our key sales growth and retention metrics. While overall TCV was down 8% for the full year, we are pleased with the almost $1.8 billion in new business signings for the year, showing strong client support for our offerings and capabilities. New business annual recurring revenue was up 16%, with all 3 segments contributing near double-digit growth year-over-year. Nonrecurring revenue grew 61% in the year a function of pandemic SNAP volumes in the Government segment, but also commercial NRR bookings, which more than doubled in 2021 as compared to 2020. During the fourth quarter, a handful of new business signings slipped into 2022. With that said, we expect to have strong sales in Q1 2022. You’ll see in our sales metrics slide in the appendix that average contract length was 3.4 years as compared to 4.8 years in 2020, a function of our deal mix across the segments. We continue to evolve our integrated sales model to optimize the balance between near-term and long-term revenue needs. And in 2022, we are changing our sales compensation models, to further incentivize these outcomes. Therefore, in 2022, we are moving our primary sales metric to annual contract value from total contract value. We will continue to report total contract value, but the shift to annual contract value, defined as total contract value divided by deal term will remove some of the variation caused by the differences in deal length between our commercial and government and transportation businesses. The net ARR activity metric, our combined measure of wins, losses, pricing effects and other contractual changes was positive…

Thanks, Steve. Let’s turn to Slide 13 and we’ll discuss how we’re thinking about our priorities as we move into 2022 and beyond. We think this is particularly important as you examine our continuation strategy for base business growth and the trajectory time line. So what we’re trying to depict here in the priority slide is more or less a game plan of what you can expect us to accomplish over the course of the next 2 years. It’s all about profitable growth and continuing this journey. And as you’ve already seen or you will see when you normalize out the onetime stimulus effects, we’re already growing in 2022. We now need to improve on that trajectory as well as driving margin expansion. There are untapped opportunities that this slide is meant to demonstrate to you. Profitable growth is key. But we’re not going to take our eye off the ball of what we’ve accomplished here before. We want to continue to sustain that hard thought foundation, critical to client retention and new business sales. Whether it’s around automation, tech monetization, consolidating our data centers while we modernize or creating a shared service for operations, all that work will continue to reap rewards into the future. At the same time, we believe there are some adjacencies that are not only opportunistic and synergistic, but quite unique to what we can accomplish here at Conduent. Whether it’s this mid-market opportunity of customer experience as a service, whether it’s integrating our claims capability across our unique environments in commercial health care and workers’ compensation. Whether it’s a continuation of opportunistic geographic expansion into countries like Australia and others or whether it’s payments and analytics, beginning with our transportation business, where we have a unique payment capability. We believe our unique solutions and…

Thanks, Cliff. Let’s turn to Slide 14, and we’ll walk through our 2022 guidance and our outlook into 2023. First thing to note, we are providing 2022 and 2023 guidance excluding the estimated impacts of the Midas business, which we sold on February 8. In the table, we have shown full year 2021, both with and without Midas, where it has been possible to do so. In providing both 2022 and 2023 guidance, we want to show the effect of the continued improvement in our base business trends along the time line that laps both the meaningful tailwind that we experienced in 2021 from onetime pandemic Snap volumes as well as lower legacy losses and continued revenue ramp from improved 2020 and 2021 sales performance as we move into 2023. Overall, we expect adjusted revenues in 2022 to be in the range of $3.825 billion to $3.975 billion. As a reminder, this excludes the impact of the disposition of the Midas business. At the midpoint of this range, $3.9 billion, this would represent a year-over-year decline of $169 million or 4%. Of importance included in this number is the net runoff of onetime government stimulus programs including pandemic SNAP volumes of $198 million. If we were to adjust the impact of these onetime government stimulus programs from our 2021 and 2022 results, our underlying business would be growing at approximately 1% year-over-year from 2021 to 2022. In terms of how this breaks down between the 3 segments at the midpoint of our range, we expect the Commercial segment to grow approximately 2% in 2022. And we expect the transportation segment to grow approximately 3% in 2022. This is offset by a decline of approximately 17% in the Government segment, driven almost entirely by the runoff of the onetime Pandemic SNAP…

Well, that’s a lot to digest. But in closing, 2021 was a good year. Financially, with the benefit of some stimulus tailwinds, we met or exceeded internal and external expectations. Operationally, we improved sales, ARR, service level agreement performance, client retention, and associate engagement. And culturally, we received recognition across the board. Now 2022 is a settling year with the runoff of stimulus, but the base business is already growing. 2023 will be the year with continued improving revenue growth and margin. Our plan continues to work. We have a strategy. We have assets and adjacencies no one else has. And we intend to discuss those and our progress in an analyst briefing in this coming summer. We have a team of dedicated associates and a fantastic client base. I’d like to thank our shareholders for their confidence. I’d like to thank our clients for their business. And I’d like to thank our associates for the loyalty and the teamwork. Let’s go have a great 2022. We’ll now open it up for questions. Operator?

[Operator Instructions] Our first question is from Shannon Cross of Cross Research.

I was wondering if you can talk a bit more about the headwinds we’re facing this year, obviously, the stimulus. And how you balance taking incremental business, I mean, the margin potential that was there in that versus, obviously, now facing a tougher comp. As shareholders, I assume people want incremental revenue, which is good. But I guess maybe if you could dig down a little bit into the various segments and just what gives you confidence that Commercial and some of these others are starting to turn and gives you confidence in the ability to give ‘23 guidance, which is perhaps more than most companies are willing to get in the current environment? And then I have a follow-up.

Yes, Shannon, thanks for the question. A couple of things. One is in our sales routines, we’re now starting to see a lot of more of that middle, mid-market ramp around ACV, ARR and even NRR that is going to help. We’re not just waiting for these long-term big government contracts like we were, number one. Number two, we’ve got a lot more confidence in our in our client base. Due to the improvements we’ve seen in quality, both operationally and technologically. So we’re getting to the table when we weren’t before. And we’ve changed out the way we are modeling our sales efforts and a go-to-market game plan where we’ve teamed up sales executives and account managers together, and we’ve put the same kind of new compensation packaging so that they all win together. And then finally, with this stimulus runoff, it’s very clear in terms of what runs off and what doesn’t. It’s a little less clear on when volume comes back. We think volume is going to come back. We think interest rates are going to come back. That’s not entirely modeled in our game plan. And then finally, we haven’t -- Steve said, we only have 1% of the model that includes some of these strategic initiatives, and that’s in 2023. None of it’smodeled into 2022. So in 2023, I think we’re gaining confidence as we go along. And obviously the proof is in the pudding in terms of how we do in 2022, but it will be very predictable, I think, in the last 2 quarters of 2022.

Okay. And then -- can you talk a bit about the cloud computing project? You took a charge for that. But maybe just beyond what happened there, how you think about investment in technology and automation and where you’re focusing your investment dollars on that side? Because obviously, we need productivity to be able to increase the margins.

Yes, let me let Steve start with that particular charge, and then -- I can then talk about technology investments.

Yes. Look, that was a project that was started some time ago. And as we reevaluated it, and we reevaluated our priorities, right? As you know, we have a lot of products and a lot of potential areas that we could invest. And as we look across the portfolio, I think you think about this as being just an increased level of discipline that we’re bringing to bear on areas that we’re going to invest in versus areas that we’re going to choose to invest less in. And that plays into some of the rubric around the portfolio and the things at the margins of the portfolio. So the decision was based on relative prioritization of where we want to deploy capital against the returns that we can expect to get from that capital.

The strategy, Shannon, is a little bit different. I would say in the past in the early years after the spin, there was what I would call a series of skunk works out there. Where build it and they will come, we just -- that just doesn’t fit with our strategy anymore. We’re looking at a strategy around adjacencies where we process flowed out our businesses. We know where the synergies are. We know where the adjacencies are. We’re doubling down on the technology investments, where those synergy gaps and adjacency gaps are. And the other thing we’re doing is we’re looking where those gaps are to generate revenue as opposed to just good ideas. So that’s sort of the posture into 2022. Again, we think some of these payment opportunities and claims opportunities are going to fit right into that model. But it’s -- to be honest, it’s really as simple as a lot more discipline -- and the discipline is around tying the strategy, the adjacencies and the synergies to our capital investment plan as opposed to build it and they will come. It’s a different model. So Steve’s got 1 add on.

Yes. Shannon, just to clarify on that, it was an internal project. It wasn’t a client-facing project. So that was just a clarification I wanted to make.

Our next question is from Puneet Jain of JPMorgan.

Can you talk about what will drive 100 basis points margin expansion next year? You talked about cost actions, real estate consolidation, interest rates, potentially interest rates benefit from that. Can you quantify a benefit from each 1 of those individual actions or drivers for next year?

Yes, absolutely. So I’ll take the easy 1 first. Our modeling assumes right now 0.75-point interest rate increases by the end of 2022, they’d just anniversary into 2023. So that represents around about an incremental $15 million to $18 million of revenue next year, something in that order. And obviously, that falls through to the bottom line. The actions on our corporate costs are going to drive north of $20 million to $30 million. And then the strategic initiatives that we referred to, expectations are that margins will margins will kind of improve in those adjacencies, whether it’s the payments Cliff talked about or whether it’s analytics or other areas. And then clearly, the effect of the sales ramp exiting 2022 into 2023 with a growth year and a growth year that allows us to have sort of natural operating leverage that we build into the business. Those are the real kind of puts and takes, and we feel confident that that’s sort of back again approaching to the sort of kind of normalized range as we lap all of these sort of onetime effects that we’re seeing right now.

And I would just add that there’s still some opportunities in real estate, Puneet, where this work from home versus work from work, we have about 65% of our associates working from home right now, that may come down 5% or 6%. But we’re seeing that is approaching the new normal. That’s allowing us to collapse our footprint, especially in the U.S. as these leases expire. And by the way, the savings we get in 2022, like quadruple in terms of run rate in 2023. So we see that as another expansion opportunity in our margin.

Understood. And can you also talk about portfolio consideration as it relates to potential divestitures, more divestitures and future as well as a use of cash, given where your stock is right now, can you potentially do repurchase?

You took me right there, didn’t you? The -- here’s the way I look at it. We look at our portfolio. We have a diverse portfolio, as you know. And not all the solutions are created equal in terms of where the synergies are. And we know -- we now understand where the synergies are, and we’re doubling down both from an investment perspective as well as a sales perspective. We also know where we have some stand-alone -- a few stand-alone opportunities on the margin of the portfolio, which could still create some divestiture opportunities. It obviously lines up well when there’s scarcity value on the outside. But certainly, we want to look at profitability, we want to look at synergies and we want to look at scarcity value. We think there are a few still on the radar. In fact, there are a few still on the radar that we’re pursuing or at least considering as we speak. With respect to use of cash, I think we need to also use the rubric of that potential opportunity in terms of divestitures or other M&A activity considerations as a backdrop for what we do with use of cash because that could change the amount of excess cash we have above and beyond what we think we need to keep as a minimum cash on hand. We’re going to -- we’re in the consideration set as we speak. As you can imagine, with the valuations where they are, a buyback program is certainly 1 we need to keep on the radar. We need to keep debt pay down on the radar. And certainly, any kind of potential tuck-ins or acquisitions, small acquisitions. But it’s mostly centered on, I would say, any kind of return to shareholders as well as debt paydown. Now in parallel, I think you would have seen that we paid $100 million of our revolver off of the revolver. So now we’ve got maximum liquidity in that revolver. So that’s not necessarily in concert with the rest of the paydown, but it is a factor in the overall use of cash that we want to put into consideration set. So more to come over the course of the next month or so in that particular regard.

Our next question is from Bryan Bergin of Cowen.

I wanted to dig in just a bit more on margin here. Can you just help us with a bridge for that 2022 margin outlook ex Midas? I did hear the comments you’ve made on the Government, stimulus wind down not being a headwind. Is there also a big impact from higher wages? Can you talk about what you’re seeing there and maybe some of the -- just which are the biggest categories here as we bridge this 11.3% to the midpoint of 2022 outlook?

Yes, absolutely, Bryan. It’s Steve here. So look, the pandemic SNAP margin impact is the largest of those. And clearly, we’ve continued to do work to offset the impact of that in terms of general cost efficiency programs expectations as we progress through the year is the effect of the sales ramp, and the annualization of those cost efficiency programs will play into that rubric of the fact that the margins are going to kind of sequentially improve during the year. You’ll have heard my comment that we’ve got a 0.75 point interest rate increases in there. That’s around about $8 million of impact in the -- we expect in 2022. But the largest single piece that dwarfs all of those really is the kind of margin run off in the government business. And there’s -- clearly, we’ve done work to offset that. And hence, the reason that you’ll see this progression during the year of the margins kind of starting at or below the kind of guidance range and finishing at or above which gives us the confidence around how we think about how that progresses into 2023.

Bryan, with regard to the offsets and wage inflation, I would say it’s a modest offset we’ve looked at wage inflation in a very targeted way. We’re not in a place where we can do it in a blanket way. We’ve also looked at the total compensation and kind of value package for our associates for things like increasing the percentage the company pays for health care as well as some work we’re doing around 401(k). So we think it’s a package at large. It’s most important there are slight offsets, but we’re not seeing those have massive headwinds. They’re modest and targeted.

Okay. And then just on the bookings front. So the new business ARR, that number looks healthy. I understand your comments here on ACV versus a TCV focus -- can -- I think you did mention some talk about deal slippage. Can you just talk about what you’ve seen in the pipeline? Maybe some color around that.

Yes. So 2 things. We all know what was going on with Omicron and everything else in Q4. We definitely had some deals slipped to the right. One of them was in the Bay Area transit, where we had a large renewal plus add-on slip to the right. There will be an announcement forthcoming on that and some other exact deals they can’t really talk about right now, but they did slip into Q1. So we’re optimistic about Q1. If you look at the pipeline in general, it’s very strong. In TCV terms, it’s in the range of -- and it’s consistently in this range of $21 billion, $22 billion, it’s around $22 billion now. What’s really important, though, as you look from TCV, the Stage 2, meaning deals that have a potential for happening in 2022 is in the neighborhood of $7 billion to $8 billion. So that -- and those stages are based on timing and confidence. And then if you translate that to ACV, it’s in the neighborhood of just under $2 billion. So we’re really optimistic on sale, and we need to be because we need to make it happen, and we are making it happen -- and that’s notwithstanding any other new opportunities strategically. So the bottom line is the pipeline is strong. Across all 3 pillars, by the way, not just in the 2 that are already growing across Government as well. So we just got to go get it. And we want to get the ones that generate real revenue in 2022 for sure, but certainly ones that get booked in 2022. So again, pretty sanguine there.

Okay. And then just a clarification lastly here. So if you step back and you isolate the net business impact from COVID, Steve, I think you mentioned 1% growth implied in ‘22. But if we just kind of looked at the last 3 years, what was the business doing ex this net impact, just give us an apples-to-apples view.

So if you were to take pandemic SNAP and unemployment insurance out of all the years.

All three years.

All three years. I believe I’ve got this right, but the business would have been declining something in the region of 9% to 10%.

From ‘19 to ‘20.

From ‘19 to 20. Somewhere in the region of 2.5%, down from ‘20 to ‘21 and then close to a point of growth, 1% of growth into 2022.

So you’re thinking in aggregate numbers, Brian, over the course of the 3 years. Again, net of that $198 million that translates from ‘21 to ‘22 in headwinds, you’re talking about 11% improvement in revenue. So we’re -- that’s one of the reasons we’re positive on what we can accomplish in 2023.

We have reached the end of the question-and-answer session. I will now turn the call back over to Cliff Skelton, President and CEO, for closing remarks.

Listen, thank you. It’s a little longer this time for us, but we had a lot more information to transmit, especially as it came to guidance. So I want to thank everybody for your patience and for joining us. We appreciate your support as we continue on our journey. Hope everyone has a safe week. Thank you.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation, and have a great evening.