Cliff Skelton - President, Chief Executive Officer Steve Wood - Chief Financial Officer Giles Goodburn - Vice President, Investor Relations

Good afternoon, and welcome to the Conduent Third Quarter 2022 Earnings Announcement. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the conference over to your host, Giles Goodburn, Vice President, Investor Relations. Thank you. You may begin.

Thank you, operator, and thanks everyone for joining us today to discuss Conduent’s third quarter 2022 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 a business update. Steve will then walk you through the financials for the quarter, 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 the usefulness for comparative purposes, please see our press release. And now I’d like to turn the call over to Cliff.

Thank you, Giles. Welcome everybody! Glad to have you with us today. Let me begin by saying that Q3 felt pretty good for us. Our adjusted revenue came in at $977 million, right where we expected it to be and adjusted EBITDA at $105 million with a 10.7% margin, both slightly better than expected. So very pleased with how Q3 came out, especially given the economic conditions we’re all experiencing these days. Our new business ACV signings were quite strong at $191 million. One of the best Q3’s we’ve had, and so we liked our overall sales performance, especially from our account management teams. Net ARR activity continues to be positive at $70 million. Now as I’ve discussed in the past, that net ARR activity metric is going to be lumpy from quarter-to-quarter, and what we want to see is a positive number every quarter, because it means we’re selling more than we’re off-boarding or losing, if you will. One loss or win, especially in the public sector, can skew any individual quarter, but not the historical trend. In addition to having a strong sales quarter, we also see an expanding pipeline that bodes well for the future, especially in the public sector. Steve is going to get into that here in a moment. We’re also optimistic because we’ve got a lot of big deals on the horizon, again, especially in the public sector. We expect to land a few of these, which should be meaningful. A couple of other key highlights in Q3 that we’re quite proud of: We were named as a leader in customer experience in all four categories examined by ISG. These categories were digital operations, AI and analytics, work-from-home and social media. Just to put that in a little context, only four or five customer…

Thanks Cliff. As we have done in the past, we are reporting both GAAP and non-GAAP numbers. I would like to point out that certain non-GAAP measures adjust for the Midas divestiture. This is similar to past practice. The reconciliations are in our filings and in the appendix of the presentation. Let’s turn to slide five and discuss our key sales metrics. Our primary sales metric ACV grew 27% for the quarter as compared to Q3, 2021. It was also up approximately 6% sequentially and we have now posted sequential growth in this key sales metric for the past five quarters. Year-to-date we are up 15% as compared to the first three quarters of 2021. All three segments posted year-over-year increases in ACV sales attainment, and we were once again particularly strong in the commercial segment with $114 million of ACV. New business ARR was up 3% as compared to Q3, 2021 and is up 1% year-to-date as compared to 2021. Both the commercial and transportation segments are up quarter-over-quarter and year-to-date as compared to 2021. The government segment is currently down, but our late-stage pipeline of opportunities remains extremely strong. TCV was also up approximately 3% as compared to Q3, 2021. The net ARR activity metric, our combined measure of wins, losses, pricing effects and other contractual changes was positive for the seventh quarter but was down sequentially. The reduction was driven by a renewal price adjustment on a long-standing client, as well as a contract termination, both within the government segment. The combined impact of these discrete items on the metric was $75 million. Both items were understood and anticipated, and most importantly, they have already been built into how I guided the revenue expectation for the government segment for 2023 at the beginning of the year, that…

Thanks, Steve. We’ll turn it over to the operator for some questions here in just a minute, but I want to reemphasize a couple of key takeaways that Steve just discussed. First, Q3 was strong. Q4 retail volumes have some modest headwinds in it, putting us slightly above the lower end of our previous guidance, and recessionary like conditions will have a small effect on 2023 volumes, likely creating a flattish 2023. Now we have some big sales expectations in Q4 and into 2023, creating what we hope will be breakthrough expectations potentially influencing the out-years. That all said, please remember a couple of things. We said in 2020 that this would be a three to five year journey. Now after three years, our year-over-year growth has progressed from year-over-year growth decreases of nearly negative 8% to flat and even more impressive when normalized for the influences of COVID, both positive and negative. Yes, the expectation is for a sustained, positive year-over-year growth and that remains the journey we are on in this next phase, but we should first contextualize that from where we started. Meanwhile, our balance sheet is in tremendous shape. Not only do we retain more than reasonable net leverage ratios as Steve discussed, but we have over $1 billion of total liquidity. Conduent is a different company than it was just three short years ago, amidst the pandemic of a century, an unparalleled political climate, rising interest rates and a recession or recessionary-like conditions that are not fully manifested. We’re definitely proud of our progress. So with that, let’s open it up for questions. Operator.

Thank you. [Operator Instructions]. Our first question comes from Bryan Bergin with Cowen. Please state your question.

Thanks. This is Zack Ajzenman on for Bryan. First question is one on the macro and the pipeline. How much has macro uncertainty impacted client behavior at this point? And also, can you characterize current deal cycle cadence and how that informs early views into calendar ‘23?

Hey Zack! Yeah, we’re not seeing a ton of macroeconomic influence over the pipeline in any negative way. In fact, the pipeline is stronger than it’s ever been, especially as I mentioned earlier in the Government and Transportation businesses. Transportation being more international, Government being primarily in the Government Healthcare business where we see a ton. Where we do see those macroeconomic influences if you will is more in the retail volume space that Steve mentioned in his prepared remarks where call center volume, specifically in the travel industry is causing some reduced revenue headwinds and in some of our technology space, but you know that certainly will recover as we get through these recessionary-like environments. With respect to deal cycle time and the model, I would break it into sort of two parts. One, we are seeing some delays from, let’s call it announcement of a deal to the signing of a deal in the government space specifically and also a little bit in transportation, not so much in commercial. What we’ve got to do and that we can control is when we implement, we’ve got to implement on the time line we committed to with near perfection, as I mentioned in my remarks, because every milestone represents revenue. So we’re all over that, and we see upside to be honest with you, as it relates to the pipeline.

Got it, that’s helpful. And our follow-up is on the net ARR metric. Can you just shed a bit more color on the underlying dynamics here? It sounds like it was embedded in the original guide, but perhaps you could talk about the metric and how it’s performed relative to expectations, excluding these select client volume loss.

Yes Zack. Steve, I’ll take this. I think the metric is largely performing the way we expected it to. What you see in the effect of the quarter is obviously the two deals that I referenced causing it to be down sequentially on a trailing 12-month basis in the quarter. But as you said, those were already things that we fully anticipated, and so they’ve been baked into the guidance and into how we were thinking about the outlook. So this is one of those odd examples where the – we’ve got out a little bit in front of that in terms of how we’ve messaged how the Government segment is going to perform in 2022 and into 2023, and this is the metric, a little bit catching up on it. So overall, our expectation is that that metric continues to be positive and Cliff talked about the fact that we’ve got a very strong late-stage pipeline in the government healthcare business, and you know at the point at which those deals hopefully get inked in the next coming quarters, then we were likely to see that net ARR metric spike up again.

Yes Zack, I wouldn’t react to - I mean as long as that number is positive and the slope is upward, it’s a good sign. I wouldn’t react to the lumpiness of a slightly low quarter, and I wouldn’t overreact in a positive way due to the lumpiness of a really big number quarter. You know it had one deal rolled off in the timing that we thought it would have. You know you would have seen a much higher number, and you’re likely to see a much higher number in the future. That’s also not something we should react to when it’s a trend, not any individual quarter number.

Very helpful. Thank you.

You bet. Thank you.

Thank you. And that’s all the time we have for questions today. I’ll hand the floor back to Cliff Skelton for closing remarks.

Listen, thank you everyone for joining us. As I mentioned, there’s a lot to do. There’s a lot of opportunity, and there’s a lot to be proud of when we consider as I mentioned where we started this journey just three years ago when we were experiencing that negative 8% year-over-year growth rate, and an unstable operating environment and uncertain future. It’s definitely a different company now. I’d like to thank our associates, our clients and our shareholders for their continued support along the journey. I appreciate everybody joining today, and here’s to a great finish in 2022. Thank you very much.

Thank you. And that concludes today’s conference. All parties may disconnect. Have a great day!