Conduent Incorporated

Good morning and welcome to the Conduit second quarter 2023 earnings announcement. At this time, all participants are in a listen-only mode. If anyone should require operator assistance during the call, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. At this time, I would like to hand the call over to 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 second quarter 2023 earnings. We hope you had a chance to review our press release issued earlier this morning. 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. Cliff will then provide his closing comments. 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 morning on Form 8K. This information, as well as the detailed financials 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 CONDUAN'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 limitation to their usefulness for comparative purposes, please see our press release. And now, I would like to turn the call over to Cliff.

Thank you, Giles. Welcome, everyone, to Conduent's Q2 earnings call. I'm joined by our CFO, Steve Wood, who will follow me with the financial and sales details. Today, I'm going to focus on four key messages. First, and importantly, will be a Q2 flyby, if you will. Q2 was a good quarter for us with puts and takes, but generally exceeding expectations. Second, these days, no one can get through a discussion without touching on those two popular and sometimes hyped-up letters, A.I., and more specifically, generative A.I. We'll discuss how we're approaching this new opportunity since we've been using traditional AI capabilities for many years. Third, you'll recall we discussed back in late March three important pillars critical for our medium to long range journey. Portfolio rationalization, payments or specifically real time or instant payments. We talked about several key growth areas with a specific call out in government healthcare and a particular focus on our Medicaid platform we call CMDS or Conduit Medicaid Suite, a production-ready application portfolio supporting states' migration from large legacy MMIS systems to a digital cloud-hosted SaaS platform. And fourth, I'll discuss what we're seeing in the marketplace and the impact on our clients and our associates. So let's start with an intro into Steve's report. In the second quarter, Conduit delivered healthy financial results as we continue to meet, or in this case, exceed, what we previously positioned for you. Despite a somewhat challenging macroeconomic situation, which I'll talk about in a minute, we posted $915 million in revenue with a 10.2% adjusted EBITDA margin, or $93 million, versus $87 million in Q2 2022, otherwise stated an 80 basis point lift year on year. There are a lot of moving parts in those numbers, certainly aided by a strong quarter for government and our benefit wallet business. Sales and net ARR also came in strong, enhanced by a large transportation deal, which Steve will discuss in a minute. Like others, we're excited about the advances in generative AI. Certainly the benefits and the risks are being discussed and debated on a global scale. Now, I don't want to add to the hype, as there is enough of that to go around. That said, we know that over time, meaning months and years, it will become increasingly clear regarding cost, benefit, risks, and opportunity. Our early read is that Gen AI, while different in terms of the ability to generate content by using large amounts of data and compute power, is largely a continuation of work underway, despite claims to a new product-oriented approach, at least with respect to our business process as a service industry. There is no question, however, that GenAI will enhance productivity in our industry. It will drive better answers faster, and it will create better outcomes for our clients. Our view thus far, although we continue to learn, is that GenAI will enhance our already AI-enabled platforms, such as our vehicle passenger detection system in tolling and public safety, and our fraud detection system in payments, or our patient re-enrollment predictive analytics in pharma through our IntelliHealth platform among many others. We have a team of strategy, technology, and operations experts evaluating and instituting pilots and developing a white paper, which in conjunction with several of our large clients, will determine investment needs and impacts. We don't see this as a revenue substitute, but more as a way to expand into value chain adjacencies. And since most of our services are delivered in BPAS environments, where clients are paying for outcomes, not labor substitution. There should be upside, but there's so much more to come that is undiscovered. You should know that we're approaching this in a very thoughtful, outcome-based manner, where clients' needs are met most efficiently and as a continuum of service versus a new value stream, which frankly has not been perfected for many obvious reasons like privacy and regulations. Now, also in late spring, Steve and I detailed our march for growth and value enhancement and how several key elements come to play. We said we believed our portfolio was too wide or not deep enough or nimble enough and sometimes brought with it assets that were either not core or would not grow over time without too much focus or investment. We're well into that journey to solve that situation through a series of thoughtful potential divestitures. We also said we were focused on payments with a particular emphasis on real-time or instant payments. We invested significantly in real-time and instant payments through our partnership with BNY Mellon and utilizing our upgraded integrated payments hub. We're now the first and only BPO company to be processing transactions through the Federal Reserve's recently announced FedNow service. Our clients' endpoint bills and our clients need to process disbursements real time with good funds and reduced costs can be enabled by our platform, which helps connect and decision routing between all financial institutions within the United States. Finally, we said our cloud-native enabled technology in state distributed government Medicaid disbursements and claims is unsurpassed in capability and flexibility. and we're now winning more business in that space. We're in full implementation with our biggest client win to date, the state of Texas, a state we've been eager to win back business from. We're in implementation mode with several others and in contract negotiation with another very large state. All in all, we are executing on the plan we described to you back in March and are proud of our progress. With respect to what we're seeing in the marketplace, it's a mixed bag. On one hand, we see buying appetite quite strong in our government and transportation segments. The ability to grow there is a function of our skill and ability to implement, coupled with improving leadership. Regarding the commercial segment, we're feeling some of the same macro headwind pressures many of our peers were discussing. Some of our clients tend to be a bit more defensive versus offensive. relative to buying commitments and volume projections. Even with clients where we outperform the competition, of which there are many, we're seeing a larger share of a smaller pie in the commercial space. So it's in times like this where we simply need to double down on our efforts to pursue new logos in the commercial space. The workplace itself seems to have settled into the new normal regarding work from home, work from work, even in our production environments. It feels like we're now over the new target. With this phenomenon and the economic growth slowness, we find associate turnover to be flat to down in our production ranks and down in our management ranks. There's no one thing that will drive associate satisfaction and retention by itself. It will always be a combined work in progress. But we are proud to have been recognized for the second year in a row, but now globally, as one of Newsweek's top 100 most loved workplaces for 2023. and recognized by Forbes as one of the best 500 employers for diversity for the third year in a row. Now, I just mentioned four things. Our financial performance, our posture on generative AI, the progress on our three strategic pillars, and what we're seeing with our clients and our associates. And as I've said, we're very proud of all of this. Regarding outcomes that matter most, sales and client retention were strong. Associate retention improved. We won some big deals, and Steve will talk about those. And our revenue and adjusted EBITDA performance was good. Winning means all of that, coupled with the continued execution of our strategic initiatives. And that's what we intend to do. I'll now ask Steve to take you through the breakdown of the results and the outlook overall and within the segments, but with a particular eye on that juxtaposition of sales, macroeconomic conditions, backlog, and our portfolio rationalization efforts. Steve, I'll now turn it over to you.