Conduent Incorporated

Greetings and welcome to the Conduit First Quarter 2024 earnings announcement. At this time, all participants are on a listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Giles Goodburn, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, Operator, and thanks everyone for joining us today to discuss Conduent's first quarter 2024 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. We will then take Q&A, and Cliff will then provide his closing comments. This call is being webcast, and a copy of the slides 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 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 Conduit'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 US 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 would like to turn the call over to Cliff.

Thank you, Giles. Good morning, everyone, and welcome to Conduit's Q1 2024 earnings call. Today, we're happy to report that we have analyst Q&A at the end of our session, as Giles mentioned, as well as a normal report from myself and our CFO, Steve Wood. Q1 marks yet another quarter on our journey that, like others, fought through things like COVID, the shift to a largely work-from-home model, and the many changing winds in the economic stage. As Steve and I have previously discussed, we're very clear-eyed on what we have to do to take this company from what was an operational turnaround to a more narrow, nimble and growing company. We've said a couple of things. One, rationalization of our portfolio will help us reduce drag and create bandwidth. It will also free up capital for the purpose of reducing debt, buying back our stock and other opportunities. We said there would be pain before gain. The timing of divestitures is not perfect, and some margin deterioration will take place in the near term and then expand to normality. 2024, in our plan, is the trough year in both revenue and EBITDA, exacerbated by an average sales year, if you will, in 2023, a phenomenon experienced by many of our competitors as well. Our growth trajectory expectations in 2025 and 2026 will require different talent. We're making progress in mitigating that. More to come in our next earnings on that subject. Suffice it to say that we're adding and changing talent at the senior level to the company. We have to revitalize our sales engine, which we are doing. While timing is always a factor and Q1 performance lagged, the first half of the year will be reasonably strong. Again, while we must execute well, It doesn't take a lot of examination to understand that growth, enabled by a different talent base, a stable operating platform, cash generated by divestitures, and the interlocked cost takeouts, of course, with reduced debt, makes for a more valuable company. That's the journey we're one-third into. So, what about the Q1 numbers? Q1 was a strong revenue quarter for us at $921 million, exceeding expectations. As you may recall, Steve guided Q1 revenue to be down 2% to 3% year over year, and we were essentially flat. He guided adjusted EBITDA margin to be below our full year guided range, and that's where we landed at 7.5%, in line with expectations. Now, for what it's worth, the year over year EBITDA compare is a little misleading because of a one-time item in Q1 of 2023, without which we'd have been in striking distance to flat year over year. While we're quite pleased with our revenue and EBITDA performance, we're less pleased with the timing of sales. Q1 missed expectations, primarily driven by the timing of new business ARR. As you know, we talk about sales in three categories, new logos, new capability, and add-on. We definitely saw some new logo and new capability business slip to Q2. The engine is now moving us in the right direction. We have. and are developing partnerships with other outsourcing firms in the CX space, especially, to drive sales. Our client partnership teams are beginning to penetrate that white space in our portfolio, and we're teamed up with partners such as Microsoft, Virgin, AI, across the BPO and CX arenas to enhance quality, throughput, and efficiency. With respect to net AR, that number was still positive at 17 million, but lower than desired. And that's not worrisome given the Q1 to Q2 timing and the fact that this trailing 12-month number can be unduly influenced in either direction by a large deal rolling off. Steve's going to talk about that further, as well as implications for Q2. As I mentioned, we believe the first half sales should be reasonably strong, with some tailwinds in our commercial business especially, some weakness in our government business, and kind of down the fairway in transportation. Net-net, with the kind of diverse platform we have here at Conduent, the cycles often offset one another, and thus far, 2024 reflects those offsets. Last year, we had some weakness in commercial and strength in government. This year, the opposite. Regardless, the lumpiness is sometimes accompanied by luck, unluck, and one-timers that can often skew the narrative. Now, speaking of narratives, Steve will get deeper on the subject in his remarks, but the divestiture activities associated with our rationalization efforts and the resulting financial reporting will take on a new reporting challenge of its own. As these divestitures monetize in the P&L, we will be transparent on the revenue EBITDA and cash. But as I mentioned, margins in a given divested business can vary considerably, especially in this high interest rate era. Thus, we must pay attention to the timing expectations. Weathering the cyclical variation will be important as 2024 finishes, setting the new baseline for the future RemainCo. Therefore, as you can imagine, there will be some challenges in comparing the remainder of 2024 to previous years, but this is the foundation for our future and part of the plan. Regarding divestiture activities, there's a lot going on. We closed our curbside management and public safety business in a sale to Medaxo for $230 million plus debt. As part of Constellation Software, Medaxo is a global collection of technology companies passionate about changing the face of public transportation. We will begin the transition ASAP, and we will partner up in the process. We are also well on our way to closing the benefit wallet asset transfer and expect the final tranche to transfer this month. We've definitely been busy in the M&A arena. There's more to examine and more to do on that portion of our journey. Thus far, we've used proceeds for debt repayment and will continue to do so in the near term with increasing optionality over time. We're also around $44 million into our prescribed $75 million stock buyback plan previously discussed. We remain committed to reaching the outlook performance previously discussed. particularly on top line. Again, we must continue to improve on the new logo, new capability sales going forward, and we'll continue our disciplined approach to cost containment while bringing in some new senior talent. We will stay focused on EBITDA margins as we drive out stranded cost and modify how we work so that we optimize our cost structure. Profitable growth is a mission, and we've learned that there is always cost refinement opportunity in a transaction-driven company. We also see partnerships in GenAI as becoming even more important in the future. Despite some of the hype you see in the marketplace, real progress is being made. As you may be aware, we collaborated with Microsoft on an initiative to drive innovation using Microsoft Azure OpenAI services. We now have three projects underway, all showing progress and promise and hope to go live on all three in the near term. As always, efficiency improvement becomes even more important in a more focused, narrower company. In addition to teaming with Microsoft, we've partnered with Oracle regarding our electronic benefits and tolling platform database with Oracle, now in the Azure cloud. Think of this as a multi-cloud or cloud within a cloud, now that technology providers are becoming less proprietary and more dedicated to joint outcomes for their clients. This Oracle Database Cloud now running in Azure allows for reduced latency, reduced complexity, and a more efficient model on a unit cost basis. We also continue to achieve recognition for our culture and our products and our services. Nelson Hall placed us as a leader in customer experience services transformation. And for the third year in a row, We're in the GovTech top 100. Finally, Newsweek recognized Conduit as one of America's greatest workplace for women and diversity in 2024. Now this journey is just that, a journey with puts and takes. We have more work to do, as I mentioned, but we're on the flight path to the growth zone we previously laid out. Our associates, 57,000 of them, work hard every day for our clients. Our client base is loyal. That client base includes roughly half of the Fortune 100. Now we have the products. We have the people. We will soon have more of the talent we need. We just have to stay the course, and we will. Thank you for being here. I'll now turn it over to Steve Wood for the financial details.