Conduent Incorporated : Q2 2021 Transcript

Corrected Transcript

05-Aug-2021

Conduent, Inc. (CNDT)

Q2 2021 Earnings Call

	Total Pages: 12
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Conduent, Inc. (CNDT)	Corrected Transcript
Q2 2021 Earnings Call	05-Aug-2021

CORPORATE PARTICIPANTS

Giles Goodburn	Stephen Wood
Vice President-Corporate Finance & Investor Relations, Conduent, Inc.	Chief Financial Officer, Conduent, Inc.

Cliff Skelton

President, Chief Executive Officer & Director, Conduent, Inc.

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OTHER PARTICIPANTS

Shannon Cross

Analyst, Cross Research

Puneet Jain

Analyst, JPMorgan Securities, Inc.

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MANAGEMENT DISCUSSION SECTION

Operator: 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. [Operator Instructions] Please note this conference is being recorded.

I would now turn the conference over our your host, Giles Goodburn, Vice President of Investor Relations. Thank you. You may begin.

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Giles Goodburn

Vice President-Corporate Finance & Investor Relations, Conduent, Inc.

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 was 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 5, 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 US GAAP, they should be viewed in addition to and not as a substitute for the

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Conduent, Inc. (CNDT)	Corrected Transcript
Q2 2021 Earnings Call	05-Aug-2021

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 8-K.

And now, I'd like to turn the call over to Cliff for his prepared remarks. Cliff?

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Cliff Skelton

President, Chief Executive Officer & Director, Conduent, Inc.

Thank you, Giles. Good afternoon, everyone. Welcome to Conduent's 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 - 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 in top line, all of which took place during a pandemic as we all know.

And 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 in our confidence in refinancing our debt over the next few months.

So if you'll please turn to slide 4, I think you'll see that Conduent's revenue came in at $1,026 million, 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 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 5, 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 the spin. 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 in the previous 12-month trailing was $87 million, 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

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Conduent, Inc. (CNDT)	Corrected Transcript
Q2 2021 Earnings Call	05-Aug-2021

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 5, 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.

As 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 is 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 6, 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 (sic) [Awards] 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 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 is 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 Officer was seamless. Steve

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Conduent, Inc. (CNDT)	Corrected Transcript
Q2 2021 Earnings Call	05-Aug-2021

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?

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Stephen Wood

Chief Financial Officer, Conduent, Inc.

Thanks, Cliff, and good afternoon, everyone. As we have done in the past we are reporting both GAAP and non- GAAP numbers. The reconciliations are in our filings and in the appendix of the presentation. Let's turn to slide 8 to discuss the Q2 2021 results starting with the P&L. As Cliff highlighted, we had a strong quarter in line with internal and external expectations with revenue above $1 billion up 1% year-over-year. The trajectory of our revenue trend continues to be positive. Revenue growth was driven by increased stimulus related volumes in our Government Payments business, increased volumes across the Transportation segment, and new business ramp, partially offset by lost business from prior years. Adjusted EBITDA for the quarter was $128 million up 16.4% year-over-year while our adjusted EBITDA margin for the quarter was 12.5% up 170 basis points compared with Q2 2020.

The increase in adjusted EBITDA was driven by a strong revenue mix, continued progress across our range of efficiency programs and a one-time item that affected Q2 2020. This was partially offset by lost business from prior years.

Let's turn to slide 9 to go over the segment results. For Q2 our Commercial segment revenue declined 3.3% where increased volumes and new business ramp were more than offset by lost business from prior years. Adjusted EBITDA increased 4% while the adjusted EBITDA margin of 10.7% was up 70 basis points year-over- year. This was driven by efficiency progress as well as a one-time item that affected Q2 2020.

Our Government segment revenues grew by 2.1% for the quarter. This was primarily driven by stimulus volumes in our Government Payments business as well as the ramp of new business in both payments and healthcare, partially offset by lost business from prior years. Government segment adjusted EBITDA increased by 23% while adjusted EBITDA margins of 35% increased by 590 basis points. This margin improvement was due to the revenue mix and efficiency progress. Our Transportation segment achieved revenue growth across all business units. Revenue grew 12.1% compared to Q2 2020 primarily driven by increased volumes and new business ramp partially offset by lost business from prior years.

Adjusted EBITDA was down 13.8% compared with Q2 2020 driven by some short term cost savings that benefited Q2 2020 and revenue mix. Adjusted EBITDA margin for the quarter was 13.5% down 410 basis points year-over-year. For the quarter our unallocated costs were $69 million, 4.5% higher than the same quarter last year driven mainly by short term cost savings that benefited Q2 2020. In the appendix, we've included the detail by segment of our year-over-year growth trends for the past six quarters. Our trends in the Commercial and Transportation segments are positioned to continue to improve moving forward as we lap the COVID-19 impacts, ramp new business and work through the remaining taper of the legacy losses. Our Government segment is currently benefiting from the federal support of pandemic SNAP which as we have said will come down over time.

Let's now turn to slide 10 to discuss the balance sheet and cash flow. Our balance sheet continues to remain healthy and we have a solid liquidity position. We ended the quarter with $403 million of cash on the balance sheet. As of quarter-end, we had approximately $743 million of capacity under the revolver. Our net leverage ratio at the end of the quarter was 2 turns, in line with our target of 2 to 2.5 turns. As you can see on the debt maturity table, our first major maturity is at the end of 2022. We repaid the remaining $34 million of senior secured notes due in 2024 on May 1 of this quarter. As Cliff mentioned in his remarks, refinancing is a top priority and we see the markets still being attractive. We would expect to complete the refinancing in the next few months.

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