Conduent Incorporated

Hello, and welcome to the Conduent First Quarter 2020 Earnings Call and Webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw from the question queue, you may press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Alan Katz, Vice President of Investor Relations. Please go ahead.

Good evening, ladies and gentlemen, and welcome to Conduit's first quarter 2020 earnings call. Joining me on today's call is Cliff Skelton, Conduit's CEO, and Brian Walsh, Conduit'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 Conduit website. We will also post a transcript later this week. During this call, Conduit 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 7, 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 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?

Thank you, Alan. Good evening, everyone. I hope you're all staying safe and healthy. These are difficult times. Before I start my prepared remarks on the quarter, I want to spend a minute acknowledging that throughout this coronavirus pandemic, the Conduit team has continued to provide critical and best-in-class services to our clients and their end users while ensuring the health and safety of our greatest asset, our associates. I'm very proud of the hard work, dedication, and decisiveness of all of my teammates. We've had to jump into action over the last two months in a situation unlike anything we could have imagined. It's in times like these where leaders lead, and pride in our company really shines. I'm grateful to be part of this team. Today I'll go through a business update, including the impact of the current environment, and Brian will cover the financials and our key sales metrics. We'll then take some questions. Let's turn to slide four to review some of the key highlights of the quarter. Despite the impact from COVID, we started the year strong with Q1 revenue of $1.1 billion. This was down year over year, excluding divestitures, but higher than our internal expectations. The strong performance was driven by increased volume, most prominently in our government services business, which helps to offset some of the COVID-related impacts. Q1 adjusted EBITDA was $96 million, down slightly more than expected. and many more. Expansion with existing clients has been a bit slower, which we believe is due to the clients focusing on navigating the current business environment. Nevertheless, we started Q2 with strong signings as well. We expect to see continued progress on sales as the country opens back up, and we are well positioned given our strong pipeline. One-third of the way through the quarter, we achieved over 70% of our quarterly target. I would also like to highlight that our renewal rate for the quarter was 93%. back up to our targeted range. As mentioned in previous calls, client retention goes hand in glove with improved quality. We have seen significant declines in our technology incident rate, and time to resolve is much improved. Client feedback on quality has been very positive. Therefore, we expect continued client retention improvement, which should positively impact the year. Let's move on to slide five to discuss some of the specifics on our responses to the COVID crisis. Our business continuity team started monitoring the virus in January and officially established a proactive plan very early on. We've been working to ensure the safety of our associates while focusing on delivering critical functionality to our clients. Given the rapid deployment efforts, some of our clients have committed volumes to us that were previously serviced by our competitors. In addition, we're supporting our associates with a number of specific initiatives, including making improvements to our policies to extend short-term disability, providing extra supplemental sick leave coverage and introducing a hardship leave policy. We've shifted approximately 75% of our workforce to work from home. This took a coordinated effort from our technology team and our site location leaders while focusing on stringent safety and security precautions. Finally, for those essential on-site employees, we've added increased sanitation, checkerboard floor plans, and staggered break times. We're staying connected through leadership emails, videos, employee appreciation campaigns, and fireside chats. Employee feedback has been very positive along the way. The focus now needs to be on a safe migration to a work from home versus work from conduit model. While still in the planning stages, we believe there are near term as well as longer term approaches to this new normal model and the savings associated with it. Contact tracing and modulating the migration will be required in order to protect our associates and prevent a resurgence of the disease. We plan to use our own MAVEN disease tracking tool that we sell to public health agencies as a tool to help facilitate our internal moves. Having said all that, there will be an obvious impact to our business from the current market conditions. While no one can perfectly predict what's in store for the future, I can give you an indication of where we expect to see puts and takes in the business over 2020 due to both business as usual conditions and the impacts of the current and post-COVID market conditions. Let's turn to slide six to discuss. While the COVID impact in Q1 was confined to March, as Brian will discuss, we expect to see greater impact in Q2 and beyond. On the commercial side, we're experiencing some volume pressure in our transaction processing and customer experience offerings. partially offset by new volume diverted our way due to our quick migration to work from home. Our HSA or benefit wallet business will also be impacted by lower interest rates, which falls straight through to the bottom line. However, this is largely offset from a cash perspective, as we will have lower cash interest expense for the year. Meanwhile, we believe our commercial healthcare businesses will remain somewhat constant on a year-over-year basis. On the government side, We're starting to see significant increases in several of the services that we provide to our government clients. Our payments activity for Supplemental Nutrition Assistance Program, or SNAP, Women, Infant, and Children, or WIC, and especially unemployment benefits, are showing significant volume increases. We're also seeing increased enrollment activity in government health benefits and support programs, which we expect to continue. In our transportation businesses, it's a bit of a different dynamic. We anticipate continued declines in our tolling and parking volumes and expect delays in project delivery for some of our public safety and transit work. Volume decreases in some of these businesses are often partially offset by portions of the business that have fixed pricing, such as in our public safety business. I mentioned some of the work we do for our government clients. This is a differentiating factor for us and could help to offset volume declines in other parts of the business in the challenging economic environment. Let's spend a few minutes digging into the important work that we do for our clients and their end users on slide seven. Our government services business provides critical services to citizens throughout the country. In 2019 alone, we disbursed more than $80 billion to citizens for federal and state and local government support programs. Across all of our government programs, we support over 34 states in delivering electronic payments. We manage over 100 prepaid debit card programs, 39 electronic benefit transfer programs for SNAP and WIC, and seven electronic child care programs. This activity tends to increase in times of lower economic activity, and we are seeing the benefits from a few of these offerings. The first I would call out is SNAP, or Supplemental Nutrition Assistance Program. We're seeing an increase in the number of cards being issued. We're also working with our clients to expand support for families that may not qualify for SNAP, but may qualify for other programs. We also provide prepaid unemployment cards on behalf of 11 states for which, of course, we're seeing significant upswing. In our eligibility businesses, we provide verification services to eight states. Most of the volumes we support are related to Medicaid eligibility, but roughly 25% are in support of other government programs such as SNAP. We're seeing volume increases in this area and expect this trend to continue for the foreseeable future. Regarding Medicaid claims, while our loss of the California Medicaid contract over a year ago is creating a year-over-year decline in revenue, we see a real growth opportunity in this business moving forward. Now before I close, let me spend a few minutes on our strategic plan and how we're implementing our transformation program. On our last call, we discussed that we continue to be opportunistic. for the right valuation. While the M&A market is in a wait-and-see mode right now, we remain sanguine regarding that possibility in the near future. Regardless of what happens on the divestiture front, we're implementing our plan to pivot our business and position the company to weather the current storm, grow, retain clients through improved quality, and become more efficient. In terms of investment, we had said on our last call that we would target investments in growth opportunities across the spectrum of optimize, enhance, and expand businesses. While we do continue to see growth and margin opportunities, we expect to use our CapEx budget in a more modestly paced way to realize more near-term returns while longer-term ROI-driven initiatives continue to be examined, especially given the learnings of the COVID-19 situation. The current environment has provided an opportunity for us to look at our business in a different way, beginning with efficiency, task preservation, revenue retention, and foundational improvement. It's important to understand that we need to bring to bear new ways of running our business. This may require near-term efficiency plays, such as working from home for client-facing associates, or the automation of certain functions which may otherwise may have been years away from adoption. Now, they have become more near-term focal points allowing us to lower our cost of delivering services to our clients while improving performance. We intend to minimize the impact of the crisis through aggressive expense management approaches such as furloughs, a reduction in force, vendor and lease contract revisions, and project reductions. We intend to lead from the front, including salary reductions for our senior leadership team and even our board of directors. The net of it is that this crisis will have puts and takes. but we intend to minimize the damage and fare better than our competition. From a longer term point of view, we're not only looking at the continued efficiency and margin plays, but we're looking to use the current situation to also re-engineer our operating model, reduce staff and unnecessary management layers, and establish new ways to deliver not only improved operating leverage, but improved service levels for our clients. No matter what, our priorities remain growth, efficiency, and quality. What we're seeing is that while we must continue to invest, especially where there is risk to falling behind the competition, with a more modest, cash-conscious approach, we can continue to see the current quality and stability situation get even better. Efficiency can and will improve through automation and operating model changes, and growth is on the horizon due to the post-COVID environmental changes, as well as upgrades to our people and processes. We can see that the fundamentals of this business are turning. Our current pipeline, client feedback, sales execution, and retention indicators give us an optimistic view toward the future. We believe our plan is taking hold. And before I turn it over to Brian, I want to say that I'm more pleased than ever with the remarkable work our team has done to continue to provide critical services during this time of crisis. While no one would choose to have such a crisis to respond to, We see a silver lining with a bluebird here and there, and our intention is to execute our plan to take advantage of the opportunities where they surface and minimize the downside wherever possible. I can't think of a better team of associates to be on this journey with. Thank you. Brian?