Conduent Incorporated

Greetings and welcome to the Conduent Second Quarter 2021 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to our host, Giles Goodburn, head, Vice President of Investor Relations. Thank you. You may begin.

Good evening, and welcome to Conduent's second quarter 2021 earnings call. Joining me on today's call is Cliff Skelton, Conduent's CEO, and Steve Wood, Conduent's CFO. Following our prepared remarks, we will take your questions. This call is also being webcast, and a copy of the slides used during this call were filed with the SEC this afternoon. These slides, as well as the detailed financial metrics package, are available on the investor relations section of the Conduent website. 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, August the 5th, 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 the 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, which was issued this afternoon and furnished to the SEC on Form 8K. And now I'd like to turn the call over to Cliff for his prepared remarks.

Cliff. Thank you, Giles. Good afternoon, everyone. Welcome to Conduent Q2 Earnings Call. I really appreciate everybody being here today. Let me start by saying that Q2 was really a good quarter for us. It marks a milestone in our journey. If you think about the journey from two years ago in August of 2020, or excuse me, in 2019, when I said this was a fundamental and foundational turnaround, I think you'll be quite pleased with what you're about to hear today. Through the hard work of our 60,000 associates, we experienced some pretty good performance in sales, operational excellence, profit, and top line, all of which took place during a pandemic, as we all know. I'm going to talk today a little bit about why we're winning and how improved quality is driving value. And then I'm going to turn it over to our new CFO, Steve Wood, to talk a little bit about the detailed financials. I'm also going to touch on the importance and our confidence and refinancing our debt over the next few months. So if you'll please turn to slide four, I think you'll see that Conduance revenue came in at $1,026,000,000 up 1% year over year, marking the first quarter of year over year revenue growth since the spin in January of 2017. Overall, that performance was driven in large part by government payments and a return to near pre-COVID transportation volumes, project revenue and new business ramp. Meanwhile, adjusted EBITDA was $128 million, equating to 12.5% margin. That's up 170 basis points year over year, driven by a mix of revenue and good expense management. Regarding new business sales, Q2 was the strongest sales quarter since the spin, at $775 million in total contract value. That's up 24% compared to our previous high sales quarter of Q2 of 2020. New Business ARR was also strong at $115 million, up 10% year over year. I'm going to talk about that here in just a minute. Finally, our net ARR activity metric for the trailing 12 months was $106 million. Now, this is the third consecutive quarter of growth, and I'll talk more about that in a minute as well. In other highlights for Q2, we continue to drive service excellence with improved platform uptime, for our clients, which resulted in several significant accolades in the quarter. Turning to slide five, you can see the year-over-year improvements in total contract value. Again, remember, total contract value contains both annual recurring and non-recurring revenue. That number, as mentioned, was $775 million of TCV, our highest single quarter since it's been the previous highest quarter at 2020, Q2 of 2020, was $623 million. Again, annual recurring revenue of Q2 of 2021 was $115 million, up 10% year-on-year. Now, the difference between that 10% improvement and the 24% improvement is the contract length was slightly higher in Q2 of 2021 than it was in Q2 of 2020, certainly much higher than Q1 of 2021. And also, a higher percentage of that TCV is non-recurring revenue. which indicates very strong client confidence in add-on and project volume. As mentioned, the net ARR activity metric, which is inclusive of new business ARR, lost business, contracted price changes, volume changes, et cetera, was $106 million, up from last quarter's $87 million. Now think of that for a minute. 106 million. The previous 12-month trailing was 87. The previous 12-month trailing before that was 60 million. So we're seeing quite impressive positive growth, which indicates that our new business sales are outpacing our losses. And as soon as we outrun all those legacy losses, it's quite an impressive forecast for the future. Also on page five, you can see that our sales were balanced across our three segments of commercial, government, and transportation. On a percentage of revenue basis, our government and transportation sales performance stands out quite nicely. In the transportation segment, we signed a 10-year, $178 million deal with the UK Department of Transport's Highways England. This contract marks a significant expansion for our tolling business in the UK and Europe. It's interesting to see that in the past 12 months, we've secured three major tolling deals. which gives us quite a bit of optimism for the future and the pipeline continues to be quite strong with opportunities on a global scale. The sales performance in government was also quite strong where we signed two major deals, one with the New Hampshire Department of Health and Human Services for Medicaid services and also with the state of Hawaii for Medicaid claims processing. In our commercial business, our sales performance is improving, but it's still lagging that great performance we saw in government and transportation. The good news is that we've had some very encouraging early awards already in Q3. We're doing some things like modifying our go-to-market approach, changing our account management and sales approach, talent upgrades, and we have a very serious focus on the healthcare industry. Now, in the commercial business, a high portion of those legacy losses are resident, and some of the remnants of the pandemic are also resident. We're now burning through those losses, and we see the sales lag reversing in the near term. In aggregate, we're very positive about our sales results, obviously, and we're quite optimistic regarding the second half. Now, regarding the non-financials on slide six, our clients and others are recognizing our progress as well. GM named Conduent as supplier of the year in our category for performance across multiple product lines. This was a first time award for us and separates us as one of the top performers out of thousands of suppliers. Our chief information officer was recognized with an American Business Award Gold Stevie for outstanding technology achievement in the category of leading through digital disruption. And that's all about enabling over 40,000 associates to work from home during the pandemic. and finally I'm proud to represent the company by being recognized among the top CEOs for diversity by Comparably. One of the top 50 CEOs for large companies in the large company category that is. This is really important and I'm very proud of this for our company because we're trying to create a culture here and where all of our associates can be themselves and they're empowered to deliver the very best for our clients. The bottom line is that we experienced a quarter of continued operational performance, great sales, and a set of strong financials. However, as you know, the journey is a continuing one. Earnings alone or one earnings alone certainly will never represent a destination. It's always one step along the way. However, we've said all along that we intend to tell you what we will do and then perform against that commitment. This will be the eighth consecutive quarter where we've delivered on the commitments we made. So today we'll update our guidance for the remainder of the year. Steve's going to talk about that here in a minute, but we remain very optimistic. I want to reiterate that our debt refinancing remains a top priority for us in 2021. The markets remain attractive. And again, we would expect to refinance our debt in the next few months. We will get it done. Also in the quarter, our well-planned transition of chief financial officers was seamless. Steve Wood has already made significant progress as CFO, and I'm pleased to turn the brief over to him to take you through some of the more detailed financials. Thank you all very much for listening. Steve.