Conduent Inc (CNDT) 2017 Q3 法說會逐字稿

Good morning, and welcome to Conduent's Third Quarter 2017 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Alan Katz, Investor Relations.

Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to Conduent's Third Quarter 2017 Earnings Call.

Joining me on today's call is Ashok Vemuri, Conduent CEO; and Brian Walsh, Conduent 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 morning and is available for download on the Investor Relations section of the Conduent website.

We will also post the transcript later this week.

As many of you would have seen, we have added an Excel-based metric sheet to the Investor Relations section of our website.

Hopefully, you'll find this new information helpful.

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, November 8, 2017, 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 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 morning and was furnished to the SEC on Form 8-K.

With that, I will turn the call over to Ashok for his prepared remarks.

Ashok?

Good morning, everyone, and thanks for joining our third quarter earnings call.

Together with Brian, I'll cover our financial and operational performance, and the progress we are making to transform Conduent into a profitable, predictable, sustainable and market-leading enterprise.

On Slide 3, we provide an overview of our performance for the quarter.

Q3 was a very solid quarter for us with meaningful progress on a number of fronts.

While revenue declined 7% compared with third quarter 2016, 40% of this decline was the result of strategic actions taken to improve revenue quality.

Examples include exiting unprofitable contracts as well as accounts with limited cross-sell opportunity.

We have also ceased operating in defocused geographies and exited segments, which do not have clear synergy with our core portfolio.

Excluding strategic actions, the year-over-year revenue decline would have been approximately 4%, and sequentially, revenue would have been approximately flat.

Profitability improved significantly this quarter.

Operating margins improved 140 basis points versus a year ago.

Adjusted EBITDA increased 11% sequentially and 3% year-over-year.

Adjusted EBITDA margins improved to 11.8% in the quarter, this is up 130 basis points sequentially and 120 basis points year-over-year.

We also made progress across our go-to-market priorities, landing several high-quality wins and renewing 98% of eligible contract this quarter.

We grew net sales headcount for the first time in over 24 months and reorganized our client-facing teams into 2 companion organizations.

One, focused on account management and the other on new sales.

Total pipeline was $13 billion at the end of the quarter, growing 9% compared to year ago.

Despite this progress, we need to still improve our current revenue trajectory in our core portfolio.

Looking briefly at our key segments, we made great headway on the turnaround of our Commercial business with margins improving 240 basis points sequentially.

The majority of this improvement came from better operational delivery, cross-selling, bundling services and increased adoption of outcome-based pricing.

Our Public Sector business remain consistent this quarter with both revenue and margins, down year-on-year as expected, but flat sequentially.

We continue to see attractive opportunities in the Public Sector business, including our transportation and health and human service offerings within the state and local segment.

In many ways, Public Sector illustrates the characteristics of our core business model where technology platform assets are combined with a variety of business services to support a range of distilled interactions with the constituents of our clients.

In this case, the citizens of federal state and local governments.

Later, I will describe this model on a Conduent basis with several more examples.

We also made continued progress with our Other segment where we renewed a sizable Medicaid management information system contract with new terms substantially exceeding our return thresholds.

Lastly, we made steady progress in creating more focus in our business by streamlining our portfolio and prioritizing our selling activity around select, industry and capability segments, our core.

During the third quarter, we divested 5 businesses, resulting in $56 million of proceeds, which contributed to an improved cash position.

Overall, I'm pleased with our progress for the third quarter.

We are right where we expected to be at this point in our transformation journey.

Now let me share some additional highlights from the quarter.

I'm on Slide 4. Consistent with what I have done on prior calls, I will share an update on our strategic transformation initiatives.

This is on track to deliver on accumulated cost savings target of $700 million by the end of 2018, supported with a robust pipeline of savings initiatives.

Real estate is an area where we have made particularly strong progress.

Our annual spend company-wide was around $300 million at the start of the program and we are on track to substantially exceed our original savings target of $35 million.

As we consolidate our footprint around the world, we are aggressively closing sites.

In the third quarter, we closed 24 locations and exited an additional 27 leases.

We continued to make progress on overall expenses this quarter with SG&A as a percentage of revenue, down to 9.7%, an improvement of 60 basis points compared with Q3 last year.

An aggressive adoption of automation technologies combined with process standardization and more modern work models are combining to help us achieve these kinds of efficiencies.

Headcount also continue to decline year-over-year to approximately 89,700 employees versus 94,000 in the prior year period.

Note that this was up slightly sequentially as a result of third quarter seasonality related to open enrollment and higher volumes on seasonal industries like retail and travel.

Going forward, we expect continued progress on all of these metrics as we continue to further streamline the company, standardize our operating model and steadily modernize our solutions for lower delivery costs and a higher overall customer experience.

As I have mentioned on previous calls, our goal over time will be to remix our expense posture towards greater selling activity where we believe we are underinvested compared to the market.

Overall, we are pleased with the progress we are making here and expect to see increasing benefits from this work in subsequent quarters.

Moving on to Slide 5, I will cover improvements to our operational approach, contributing to a near-term performance while setting the stage for future growth.

This includes work underway to progress our go-to-market, technology, infrastructure and delivery model strategies.

Last quarter, I described the way we have reset our go-to-market approach around industry verticals to support greater cross-selling opportunities for higher service line penetration and revenue growth.

Third quarter saw additional progress as we achieved net incremental growth to our client-facing teams as well as rolled out a new coverage model, organized around existing account management and as well as new opportunity selling and development.

We will continue to focus extensively on mining our rich and diverse client base across our key geographies and sectors where we believe we have the maximum leverage for deploying our technology base process capabilities.

The inventorying and rationalization of our extensive portfolio of technology platforms has been a focus since our separation.

During the third quarter, we finalized this work and identified the 24 platforms around which we will build our business into the future.

Over 60% of our business is delivered from platform-enabled services, and I see room for increasing that moving forward.

We have earmarked a considerable investment for additional modernization and competitiveness, particularly around analytics and digitalization.

The highly fragmented structure we inherited including a disjointed IT infrastructure that has impeded productivity and performance as an organization.

During the third quarter, we made major strides in centralizing our technology ecosystem, including standardizing our internal systems, investing in tools and consolidating disparate internal platforms.

Collectively, this work is contributing to a more agile, productive and contemporary work environment.

Finally, given the global nature of our industry and delivery model, we have seen great opportunity to rebalance our workforce management for higher efficiency and utilization.

While 1/3 of our delivery team currently sits in low-cost locations, there is opportunity for us to continue to improve our delivery footprint and leverage high-value, lower-cost locations over time.

Collectively, we believe these actions are contributing to an operating model in line with our business strategy, leaner overall structure and sharper execution as a support to results we are targeting going forward.

Moving to Slide 6, I will share the progress we are making on signings, renewals and our sales pipeline.

We had a range of notable wins and renewals during the third quarter.

As examples, in customer experience, we expanded our relationship with one of the largest brands in the travel industry by winning 2 new 3-year deals.

In the health care insurance segment space, we expanded our relationship with a very prominent health insurance company to include support for member contract services like benefit and claim status inquiries.

In Public Sector, we were awarded a contract with a rail operator, Trenord, and 7 other agencies in Northern Italy to provide a comprehensive ticketing system that will be used by hundreds of thousands of citizens every day.

In Conduent Europe, we added new work and renewed, for 5 years, the cable tech support contract for a large European telco.

Looking at signings, we are down on both a quarterly and year-over-year basis as a result of several factors.

First, our new business TCV was down year-over-year, impacted by 2 large deals that slipped into the fourth quarter.

We have since then successfully converted these in October and are well positioned in terms of new business for the fourth quarter.

Our year-over-year renewal TCV was down as a result of fewer renewal opportunities due to the strong renewal activity completed in 2016.

Renewals were exceptionally strong during the third quarter, hitting 98%.

This reflects not only continued client satisfaction, but the impact of a higher quality book of revenue, strong account management and taking advantage of our historically deep and long-tenured client relationships.

We also continue to see healthy demand for our service lines as evidenced by the growth in our sales pipeline.

Total pipeline was approximately $13 billion, up 9% year ago.

Public transit, state and local, insurance and payment services were segments contributing to our improved pipeline position.

We are still early in the deployment of our new go-to-market strategy and as a result, I am optimistic about the prospects for our pipeline growth as I look ahead to future quarters.

Now let's turn to Slide 7, for an update on recent actions we have taken to create more focus in the very diverse portfolio of businesses we inherited post-separation.

In the third quarter, we completed the sale of 5 businesses, one of which we discussed on the last call.

These businesses generated $60 million in revenues and $5 million in adjusted EBITDA in the first 3 quarters of the year.

We received $56 million in proceeds from the sale, which we will use to grow the business both organically and inorganically.

In addition to the $80 million of annualized revenue that we have already divested, we are evaluating an additional $250 million to $500 million of revenue for potential strategic actions in the fourth quarter.

This extends our effort to rightsize the company along a set of core services and capabilities that we intend to amplify going forward.

The process of streamlining our portfolio is enabling higher focus around businesses we consider core to the future of Conduent.

These businesses are well positioned with scalable technology assets and where we see potential for achieving or maintaining market leadership.

They are segments where we can differentiate on the basis of our technical, domain and process expertise.

And most importantly, they are in line with our vision for how we create value for our clients, managing and operating digital interactions with the people they serve at massive scale where each interaction is personalized, secure, compliant, on-demand and on brand, whether it's a payment, disbursement, question or transaction.

As we transition Conduent into a more verticalized structure, we will build specific bespoke technology solutions, focused on platforms that address specific industry issues thereby moving away from generic solutions to those with greater industry specialization.

Before I hand over to Brian, I will recap our results with several observations.

During third quarter, we gained further traction on our turnaround plan with earlier results most visible in our Commercial segment.

This is our largest segment and the area where we see the most opportunity to turn the business around.

This progress is encouraging and I look forward to providing additional updates here on future calls.

We grew adjusted operating income and adjusted EBITDA in line with our game plan.

We have strengthened our balance sheet by both paying down and lowering the cost of our debt while refinancing our term loan and monetizing noncore assets.

This is creating the financial capacity we need to invest back in the business and position ourselves for longer-term growth and margin improvement.

Our investment in technology and automation will allow us to better serve our clients and be more competitive in new business opportunities.

And finally, we have the team, resources and offerings to create a strong position as a best-in-class provider of technology-enabled business service solutions.

With that, Brian will take us through the financials in more detail.

I'll then make some brief remarks on the focus of our business and what makes us uniquely positioned to take advantage of the continuing trends towards automation and digitalization.

We'll then take some Q&A.

Brian?

Thank you, Ashok.

Slide 9 provides an overview of the third quarter financial results and a walk through the P&L.

As Ashok discussed, revenue of nearly $1.5 billion was down 7.3%, as reported and about 7.5% on a constant currency basis compared with Q3 2016.

Year-over-year revenue decline was driven by lost business and lower volumes as well as strategic decisions including the runoff of the student loan business and New York MMIS, not renewing certain unprofitable contracts and the prior year government health care losses.

In the quarter, approximately 40% of the year-over-year revenue decline was the result of these strategic actions.

All of these factors were partially offset by the ramp of new business.

Gross margin was 17.6%, an improvement of 80 basis points versus the prior year period, reflecting transformation-driven savings and improvements in the Other segment.

These items were partially offset by dissynergies, investments in the impact of the revenue decline.

SG&A declined by $20 million year-over-year, also driven by strategic transformation, partially offset by corporate dissynergies and investments.

Dissynergies were approximately $90 million in the quarter and $59 million in the first 9 months of the year.

Given these trends year-to-date, our full year estimate for dissynergies is now approximately $75 million.

Q3 adjusted operating margin of 7.5%, improved 140 basis points compared with the prior year, driven by the improvements in gross margin and SG&A.

Adjusted EBITDA in the quarter was $174 million, an increase of 3% year-over-year, while adjusted EBITDA margin improved 120 basis points to 11.8% versus the prior year.

This improvement was displayed a $3 million impact to adjusted EBITDA from the hurricanes.

Adjusted EBITDA growth was driven by the Commercial segment as well as the Other segment.

Moving below the operating margin line, restructuring cost increased by $14 million in the quarter as we continued to close facilities.

Restructuring charges have been running slightly above our prior expectations and we now expect this line item to be about $95 million in 2017.

In the quarter, we recognized a gain related to the businesses we divested, which resulted in $16 million of income.

Our pretax income was $13 million, $11 million better year-over-year, driven by the increase in operating income, lower separation costs, the gain on sale of divestitures, partially offset by higher interest expense and restructuring costs.

GAAP net loss in the quarter was $17 million or $0.09 per share, driven by the tax impact from the termination of our deferred compensation plan.

As we discussed in our 8-K filed on October 4, the company made a decision to terminate its deferred compensation plan.

This resulted in a one-time tax impact this year, but we expect we'll have future cash flow benefits.

Our adjusted tax rate in the quarter was 36.8% compared to 39.5% in the prior year period.

Adjusted net income was $48 million, a decline of $4 million compared with the prior year period, as operating margin expansion was offset by higher interest expense.

Adjusted EPS was $0.22 in Q3, an increase of $0.06 sequentially, but decline modestly year-over-year given higher interest expense.

Turning to Slide 10, we'll provide an overview of Commercial segment results.

Q3 revenue declined 6% compared with Q3 last year, impacted by strategic actions, lost business and lower volumes from existing clients.

Approximately 25% of the year-over-year revenue decline in this segment was strategic.

Segment profit grew 26% year-over-year, driven by cost improvements from strategic transformation and the impact from our customer experience contract remediation efforts.

Year-to-date, this service offering is still operating at a negative margin, primarily due to the handful of large relationships highlighted last quarter.

However, we successfully remediated 2 of those contracts since the last earnings call, and we expect this to continue to benefit us in Q4 and beyond.

Segment margin improved 150 basis points compared with Q3 2016.

Adjusted EBITDA increased 9% versus the prior year period and adjusted EBITDA margin increased 160 basis points.

We were very pleased with the improvement we saw in the Commercial segment results during Q3, which was the product of the hard work from the operational teams and progress on our strategic transformation.

We'll continue to work as quickly as possible to improve profitability in this segment while positioning and investing in the business for future growth.

Now onto the Public Sector segment results on Slide 11.

Revenue was as expected, flat sequentially.

Compared with Q3 2016, revenues declined 8%, of which about 20% was strategic.

In Q3, we continue to feel the impact of prior year strategic decisions on our government health care business, which is contributing to the revenue decline.

In addition, top line is being impacted by lost business in state and local, and payments.

Trends in our transportation business were stable with revenue increasing sequentially, although declining modestly year-over-year.

As growth in transit and photo and parking was more than offset by a decline in our tolling business.

Segment profit and adjusted EBITDA were down $19 million and $22 million, respectively, compared with Q3 2016 driven by the revenue decline, dissynergies and investments in our core offerings.

Moving on to Slide 12, I'll provide an overview of the Other segment.

Revenue within our Other segment was $76 million in the quarter, a decline of 15% versus the prior year period.

This was largely driven by the New York MMIS contract, which declined by $13 million.

Our discussions with our client for the New York MMIS contract have progressed and we have reached a preliminary agreement.

We will provide an update once we have a final agreement signed by all parties.

We have remained diligent in our efforts to improve profitability in this segment, which has led to this business being nearly breakeven in the quarter, a $22 million improvement year-over-year.

This improvement was driven by both the Health Enterprise and Education businesses.

The Education business, which includes the student loan portfolio made an adjusted profit of approximately $3 million and the Health Enterprise business lost approximately $4 million in the quarter.

During Q3, we also successfully finalized a large MMIS extension.

This deal of extension was completed within our profitability requirements and the new terms of the relationship had taken effect in Q4, improving our profitability moving forward.

Slide 13 provides an overview of our cash flow in Q3 and year-to-date.

Cash flow from operations was $104 million in Q3 and $65 million year-to-date.

Free cash flow was $73 million in the quarter, although remains a usage of approximately $1 million year-to-date.

Through the third quarter, this is over and -- $150 million improvement year-over-year on free cash flow.

We still expect our full year free cash flow to fall within our prior guidance range of 20% to 30% of adjusted EBITDA or approximately $130 million to $200 million.

This will be driven by a strong Q4, which is in line with our typical seasonality.

CapEx in the quarter was $31 million and $83 million year-to-date.

We would still expect CapEx to be around 2% of revenue for the year.

Cash flow from investing was $141 million in the quarter, largely due to the inflow of $56 million from divestitures and $116 million from determination of the deferred compensation plan.

I want to highlight that the proceeds generated from the termination of our deferred compensation plan will be disbursed to employees primarily in 2018.

This will ultimately flow through our operating cash flow, which was not contemplated in our prior free cash flow guidance and will be adjusted out accordingly.

Turning to Slide 14, I'll provide an update on our capital structure.

During Q3, cash excluding the $116 million in proceeds from the deferred compensation plan, increased $43 million quarter-over-quarter.

We also fully repaid our revolver, which had an outstanding balance of $70 million at the end of June.

Our treasury team again opportunistically repriced our Term Loan B, which was completed in October.

The repricing resulted in 100 basis points production in the interest spread.

With the second repricing, we have now reduced our interest spread by 250 basis points since the start of the year.

While the most recent repricing will not have a major impact in Q4, it will result in more meaningful annual interest savings beginning in 2018.

We have an improvement in our adjusted EBITDA, pay down of the revolver and growth in our cash balance, our adjusted net leverage ratio is approaching our target of less than 2.5 turns and currently stand at 2.6 turns.

Moving on to Slide 15.

Before I close, I want to discuss our 2017 guidance, which reflects the Q4 impact of the completed divestitures.

We still expect 2017 revenue decline between 4.5% and 6.5% in constant currency for the year versus GAAP revenue of $6.4 billion in 2016.

However, given the trends to date and the impact of divestitures, we would expect it to be in the lower end of the range.

Given the same factors, we now expect adjusted EBITDA to grow about 5%.

We estimate that the Q4 impact from the divestitures, combined with the impact from the hurricanes had about a 1% impact on adjusted EBITDA growth.

Finally, as I mentioned earlier, our free cash flow is expected to be 20% to 30% of adjusted EBITDA.

As Ashok mentioned earlier, we are making progress on our core versus noncore work, and are aiming to divest an additional $250 million to $500 million of revenue in the near term, in addition to the roughly $80 million completed in Q3.

Through these portfolio actions, we believe we will strengthen our core business, and position the company to achieve our long-term targets of revenue growth in the mid-single digits and an adjusted EBITDA margin in the mid-teens.

Before we take your questions, I will now turn the call back to Ashok for some additional remarks.

Thank you, Brian.

Before we wrap up, I'll spend a few minutes to present a more distilled picture of our company, our offerings and how we are positioned in our clients' value chain.

Hopefully, this provide some context for our broad portfolio and illustrate the role of technology in our business model.

As you can see on Slide 17, we are an essential participant in the value chain of our clients.

Across the range of industries and service situations, we are the interface with the people they serve.

Whether they are patients, employees, citizens, doctors or insurance members.

We work on behalf of our clients to manage data-intensive, repeatable, individualized interactions happening at massive scale.

Our service offerings are delivered through a combination of technology platforms, bundled with a range of complementary business services covering all stages of end-user interaction, from enrollment to transaction processing, from accounts management to customer care.

To gain an appreciation for the scope and scale of our business, here are some reference points.

We manage approximately 50% of the automated tolling systems in the U.S. We manage customer care interactions for some of the largest telecom, health care and auto manufacturing brands in the world.

We process over 50% of the workers' compensation claims in the U.S. We manage the funding for a range of government payment programs across the country, ensuring approximately $100 billion is provided to citizens for their benefit every year.

And we provide full HR outsourcing and benefit administration to some of the largest companies in the Fortune 500 list.

Together, our deep client base, broad offering portfolio and decades-long operating history, provide the basis for our bold ambition to become an industry leader.

We are a partner with some of the largest and most valuable companies in the world and manage essential aspects of their operations, while interfacing directly with the people they serve.

Looking at the bottom layer of this diagram is our technology and platform solutions that support over 2/3 of our revenue.

Some examples of our technology platforms include BlitzDocs, our award-winning mortgage processing platform providing a quicker and more secure way to process home loans.

BenefitWallet, our next-generation product for employers, health administrators and consumers to manage multiple health accounts on one integrated platform.

Life@Work Portal, our HR portal solution that integrates multiple HR data sources for a personalized employee experience.

Strataware, our worker's compensation medical bill review platform, supporting approximately 40% of all U.S. workers' compensation claims.

Merge Parking Management System, which makes it easier for cities to manage transportation, processing instant information for on-street and off-street parking spaces.

Vector, our technology behind our ability to rapidly design and deliver electronic toll collection solutions.

Midas, used in over 2,200 U.S. hospitals, helping organizations manage, measure, monitor and improve both clinical and financial outcomes.

And lastly, our Maven, disease surveillance and outbreak management solution, which is used by multiple states and cities in the U.S. and internationally.

In closing, I want to reiterate my optimism for the trajectory we are on.

We are transforming Conduent to become a market-leading, growth-oriented business services company, delivering a differentiated value proposition for our clients and investors.

While there's clearly more work to do, we've made significant progress and we will continue to drive all the necessary changes to achieve our company's vision.

I am committed to seeing through our work to create an industry leader, and over time, a great company.

I'm fortunate to have the support of all our stakeholders, supporting our transformation, and the opportunity to lead this organization is exciting and dynamic on many levels.

I look forward to sharing the progress with you for many more quarters to come.

With that, let's open up the call for Q&A.

(Operator Instructions) And our first question today will come from Shannon Cross of Cross Research.

Ashok, maybe you could follow up on what you just -- you have commented about your commitment to the company and address some of the news articles that have been out there, related to the CEO putting an emphasis, I don't know perhaps how you think about the opportunity at Conduent?

Just anything more you can give to comfort investors' concerns.

Yes, I'll do that.

And first of all, thank you for the question, Shannon.

It gives me the opportunity, I think, to clear the air a little bit.

So I wanted to emphatically state that I'm committed to Conduent, our clients, employees and shareholders.

We are in the midst of a very exciting transformation journey that is progressing well, and I have the support of my clients, my board and my team.

This, as you all know, is a multiple year journey and I intend to see that to completion.

I'm committed to building Conduent that is an industry-leading, profitable and market-leading enterprise that will be sustainable over many years.

I intend to be part of that journey for years to come, and cannot think of a more exciting and professionally satisfying place to be than here.

Given the above, whenever I have been approached for an assignment such as you describe, I have not engaged and rejected any such overture.

As far as I'm concerned that is the end of that.

That should clear the air.

And I guess just one follow-up question.

Just talking about some of the remediation of the contracts that are out there, right now.

You remediated 2 during the quarter, I'm curious as to what the conversations are like with the customers, how you're thinking about margin potential on some of these contracts that have been challenged and sort of the scale of how they're reassigning them.

I mean, are they smaller contracts?

Are they -- are you just able to basically say, look, we can't do this unless you give us more margins?

Just how is that working?

Shannon, its Brian.

We had been working a number of contracts over the last year that were smaller.

What we talked about last quarter was having a handful of large contracts that still needed to be remediated, and we made progress in the quarter, I mean in Q3 on 2 of those and so they're larger client relationships.

And then in addition, in the Other segment, we made progress on MMIS contract.

In the discussions with the clients, we need to meet our profitability requirements or we need an exit plan, and that's kind of how we are framing the discussions when the contracts are losing money.

And the customers are willing to, for the most part, accept your terms and move forward?

Or are you seeing a lot of pushback?

So in some of the smaller discussions, there is some pushback, and that's part of some of the strategic actions we've taken, but in the recent discussions, they've been going well and we'll see how they progress.

But, obviously, there is sometimes pushback, but in general, clients that view us as strategic want us to be their partner going forward, will work with us.

In general, they understand that a company needs to make some money on a contract and so the discussions have been going fairly well.

The next question will come from Brian Essex of Morgan Stanley.

Brian, a quick question for you.

You guys are starting to build up some cash on the balance sheet.

I just wanted to get a better understanding of how much cash do you need to run the company?

How much is restricted?

And how might we anticipate the prioritization of that cash, whether it be for utilization of M&A or pay down of debt going forward?

Brian, so of the $468 million that we have on the balance sheet at the end of the quarter, $116 million is related to the deferred comp plan.

We're going to pay $50 million out to employees in Q4 and $101 million will be paid out next year to employees related to the termination of that plan that is all restricted.

In addition, there's about $25 million more that's restricted related to that plan, that once we make the final payment that will free up for corporate purposes.

So that's pretty much all of the restricted cash.

When we think about what we need to run the company, we probably need a $200 million to $250 million balance to deal with working capital fluctuations and to deal with the international requirements we have to fund our operations overseas.

So that's the cash balance we would look to target.

Obviously, we want to continue to make progress on getting to our leverage ratio target of under 2.5 turns, which we're nearly there, but that's how we view the cash needs of the company and then the rest of it is available to investment into the business, and we have said we would use our free cash flow to invest in the business with acquiring companies, and then we have also said proceeds from divestitures would be used for investment in business or opportunistically to pay down debt and our view hasn't changed on that.

Got it, and then I recall, you reached a preliminary agreement for the New York MMIS contract, I understand you've accrued for some liability there.

What do you anticipate might be the cash impact from that -- from the exit of that agreement?

So the cash impact's anticipated to be $20 million and about half of it will be split between Q4 and Q1, and then the other half of it will be spread over 5 years, assuming we finalize the agreement.

And the next question comes from Frank Atkins of SunTrust.

I wanted to ask a little bit about the pipeline, how much of that is industry-specific or kind of higher value-added work?

And what are you doing to maintain discipline on profitability in that pipeline?

So our pipeline -- we verticalized the company about a couple of quarters ago.

That verticalization is actually helping us create more industry-specific solutions, tailor our platforms and our capabilities in addressing some of these problems.

So if I take for example, in financial services, our compliance business is finding great traction.

I would act -- to your question, I would probably say that about 30% of the pipeline is of a higher value chain order.

Clearly, we are not yet in the higher end of the analytics space.

We are still doing the process work on that, but if I look at automation, for example, we signed 50 new -- 50 RPA deals, of which 20 were with net new clients.

So that's a huge progress and where I think more and more of the deals that we will get in the future will be RPA-oriented, which is sort of distinct from labor kind of deals.

So I continue to stay fairly satisfied with the way, the deal pipeline is shipping out in terms of both the value, both the tenure and the value that we're delivering to the clients, and I think some of that is becoming apparent albeit in a small way with the results that we have in the Commercial segment this quarter.

Okay, great, that's helpful.

And for my follow-up, I wanted to ask kind of a status update and some actions you're taking in terms of your global delivery engine, the mix of offshore versus on-site capacity, can you comment there?

So from where we started earlier this year, we -- I think we've made significant progress on that, albeit, I think it's important to point out that it's compared to some of our competitors, we are a little behind.

So today, I would say 1/3 of our delivery gets done from global centers, we intend to increase that.

We've increased that from about 20% to 33% now, but we intend to increase that more.

Of course, we are impeded by the Public Sector business, which does not provide us the opportunity to use the global delivery model as aggressively as we can do for the Commercial sector.

We've clearly identified the Philippines, India, Jamaica and Guatemala as our global delivery hubs, and that's where we intend to not only deliver services to our clients, but also sort of consume, if you will, our own services from those centers, which at this point in time, are sort of concentrated in the U.S. So both on what we do for ourselves and how we deliver to our clients, we will be using the global delivery model much more aggressively.

And the next question comes from Puneet Jain of JPMorgan.

So Ashok, like a lot of software vendors like Oracle, Salesforce are including AI-based chatbots in their core solution.

So what does that mean for Conduent's customer care business?

Does it reduce the addressable market or increase adoption rate?

Yes, so Puneet, as I was mentioning earlier, if you look at the sizable deals that we have done in the past 2 quarters, significant number of M&A -- I pointed out 50 of the new deals that we did in the third quarter were actually RPA-based.

So in terms of the improvement in performance of the entire customer experience value chain, some of it is remediation to the point Brian was making, but remediation also needs to be driven by a lot more technology so we are talking about replacing, if you will, people on the seats with bots on the seat -- in a -- from a technology perspective.

So clearly, when we go in for remediation and ask for an improved yield on the deals we are doing with our clients, they have the same expectations.

So it's either a higher degree of efficiency, a higher degree of productivity, all of that only can be achieved by deploying any kind of technology whether it's robotics, whether it's chatbots because a significant amount of our customer experience business is chat, is Web-enabled support et cetera not just picking up the phones.

Even on picking up the phones and the voice part of it, we're using a significant amount of AI.

We're using -- we've created a lab both in the U.S. as well as in Bangalore, India, which is focused on this particular aspect of the business.

So my view of the customer care business is twofold.

One is we need to go back and remediate with our clients, the kind of contracts that we have, the terms and conditions that we have therein, but also drive a higher degree of efficiency and productivity through automation, through robotics, through AI.

Now what it will do in the short term is that it will have an impact in terms of my labor number, but I do not think it will have an impact on my revenue number and definitely it will have a very positive impact on my profitability.

So we are all in.

Some of the names that you have mentioned are people that we are talking to.

This is a very large ecosystem.

We do not pretend to have all the answers or be able to create that level of technology competence within, but we are fortunate that we have a significant number of players who are willing to partner with us not only the names that you've mentioned, but also other companies much smaller in size, but with a -- with technology chops that are much superior to us.

Got it.

And divestiture target, obviously increased and you intend to deploy cash in strategic acquisitions, but as the run rate for divestiture increase, can you acquire fast enough to replace EBITDA and revenue impact from divestitures next year?

So the timing -- there will be a timing difference and we'll work acquisitions as quickly as we can, but they also have to be the right fit and has to be based on what's out in the market.

So there could definitely be a timing issue, but we -- it is part of our 2018 plan to acquire companies and we continue again, it will use cash that we generate, the free cash flow for that and proceeds from divestitures will be used for that or to opportunistically pay down debt, and the timing will be gated and what's available and what the opportunities are.

And our next question comes from Bryan Bergin of Cowen.

I wanted to start on cost takeup progress.

Can you detail how the year-over-year improvement is spread across your various categories?

And then relative to your plan, any positive surprises or more challenging areas anticipated as you start to think about 2018?

Yes, so the $430 million is on track for this year, and that's cumulative savings and $210 million incremental year-over-year.

The parts that are more positive, as we mentioned, it was real estate that was originally around a $35 million target and we overachieved that significantly.

We've talked about customer care, customer experience remediation taking longer and not yielding as much this year, and although we're making progress, that, that is still true given where we are in the year, a lot of the impact will be in Q4 and beyond.

So a lot of work this year around G&A and the support functions that's driving a lot of incremental year-over-year benefit in real estate.

Those will be the 2 areas I'd call out.

IT, we're making some progress but a lot of those benefits will come next year given it's a year of transition and there's a lot of transformation happening in the IT space.

Okay, can you just clarify on the guidance metrics for 2017, just as it relates to the dispositions and the 1% change on EBITDA versus in revenue?

Sure.

So on revenue, again, we're sticking with the 4.5% to 6.5% decline, but given trends to date and the impact of the Q4 divestitures, the divestitures being out of Q4, we're guiding to the lower end of that range.

On adjusted EBITDA, about 5% growth is the guidance and that is -- there's a $2 million impact in Q4 from not having those divested businesses any longer and then we had the $3 million impact from the hurricane in Q3.

If it weren't for those 2 items, we'd be at the higher end of our original range and so that's why we're calling it about 5%.

And next, we have a question from Jim Suva of Citi.

Brian and Ashok, could you maybe help me better understand or bridge the difference between total pipeline seemed to meaningfully increase yet total signed contract value, even if you adjust for the contract that slipped into Q4 for closing, it still looks like it's down meaningfully year-over-year and quarter-over-quarter.

How should we think about that and was the $200 million the combination of both of those contracts or $200 million each?

Yes, so the $200 million was in total, new business TCV for the 2 contracts.

We're making progress on our sales transformation.

This was the first quarter we actually increased the number of salespeople we have.

We're also doing a lot of work to clean up that pipeline and to progress the pipeline.

So we had decent new business progress in the first half of the year.

The third quarter was a little bit light because we had these 2 deals slip, but we expect a strong Q4 and those 2 deals are now signed, but there's been a lot of work to realign the sales force in industry verticals and we've finally made progress in actually incrementing the number of salespeople we have.

So we feel comfortable where we are with the sales transition and it was just the light quarter given the 2 deals.

Okay.

And then a quick follow-up, as you mentioned, you increased your headcount, but I thought I heard seasonal.

So was that increase just purely due to seasonal such as open enrollment and seasonal trends?

Or was it due to increased total signings and new business?

So 2 things, one is that the overall headcount for the company on a sequential basis went up because of seasonal business like enrollment as well as travel and retail industry.

I think what Brian was pointing out more specifically and one we are excited about is finally, our net sales headcount that is both net new salespeople as well as engagement management team has for the first time in 24 months become positive.

So we are much more excited about that.

We are also ramping up in anticipation for the deals that will happen in Q4, again, around enrollment as well as around the travel and hospitality industry, but what is most exciting for us is that our net head sales count both on the sales side as well as the client engagement side has gone up.

And next, we have a question from Keith Bachman from Bank of Montréal.

I apologize for the background noise.

I'm over in Europe today.

I had a question on revenues particularly for calendar year '18.

I was hoping you could at least provide some directional metrics associated with it and then break it down in a couple of different areas.

A, organic revenue.

What do you think your base business will kick, be kind of be a positive number?

B, I assume that you're going to have what you called strategic actions where effectively, you're going to continue to walk away from business you can't make profitable because some -- presumably, some of these deals will come up in calendar year '18 as well as '17.

Is that going to be an impact in '18?

And then the last question is the net between divestitures and M&A.

If you could just -- I didn't quite hear the number about what the impact of that's going to be in calendar '18, and then I have a follow-up.

Yes.

So Keith, directionally, we feel good about our positioning and the transformation program that we have embarked on, which is not just about cost savings, but reorienting the way we go-to-market, the capabilities we build are the kind of solutions that we sell into the market.

I believe we are on track.

As it's typical, we intend to provide the official '18 guidance on our Q4 earnings call in February.

But having said that, that's also a result of some of the things that you mentioned.

There will be an impact as a result of the transactions that we closed out in the short term.

It will be impacted by some of the decisions that we will take especially around long tail and strategic decisions around deals that we do not want to entertain as and when they come up for renewal.

But keeping in mind, all of these portfolio actions, which are part of our plan, they are tracking to our expectations.

We believe that our longer-term targets that we have established remain unchanged, but we will give a much more clearer picture as we come into our Q4 earnings call in February.

Okay, but just to be clear, is there probably be strategic actions that impact top line growth?

It's a fair assumption that we're assuming for calendar year '18 as well?

So clearly, anything we divest will impact us and as we go through contract remediation, if there are decisions we take to exit, there will be impacts.

Some of that has been contemplated in our modeling and again, we are getting to the point where a lot of these discussions are getting behind us and we're making progress, but we have to see how the rest of them go.

Okay.

And then my follow up and then I'll cede the floor is on the previous comments surrounding EBITDA growth, making these decisions stick to get out of business that, I think, is entirely appropriate.

But we'd have to adjust our EBITDA assumptions for next year, for calendar year '18, so the growth potential, as you said, there's going to be a timing difference between M&A and perhaps dispositions.

So probably have to adjust that down, I would assume.

For the transactions completed to date, the EBITDA impact, if you trend it out is $7 million.

And again, we said few million of an impact in Q4, and that's on revenue of about $80 million if you trend the revenue out, so it's about an 8.5%, 8.7% EBITDA margin, which is lower than the company average.

So those are the transactions to date.

As we progress the additional transactions we're working as we get closer to having final deals and complete transactions, we'll give those impacts.

And there will be a timing difference and we'll start to look at the business with and without those transactions and show you both views when we get into '18.

This concludes our question-and-answer session.

I would like to turn the conference back over to Ashok Vemuri for any closing remarks.

Yes.

Thank you, and thank you, everybody, for joining us for the Q3 call.

I would actually characterize our Q3 journey to be fairly exciting.

I'm very pleased with the performance on our Commercial business.

We've seen our cross-selling, our service line penetration metric really improve.

The fact that we were able to close out our contract remediations with 2 of our very large clients in a sort of a troubled service sector -- service segment, excuse me, has been very gratifying.

We've signed quality deals, albeit, 2 slipped over into Q4 signings.

These are substantially large and we're excited that we were able to close that.

We've made significant progress on our strategic transformation.

We highlighted real estate and finally glad that we've got our sales and engagement team in place.

Obviously, that number will only increase as we go forward and as we redefine and implement our go-to-market strategy.

Divestments, and we talk a lot about divestments, but we wanted now to start talking more about amplifying our core because we don't want to -- not only tell you the business we don't want to be in, but also talk a little bit about the amplification of the businesses that we believe we are in.

So with that, it's been a satisfying quarter and I'm happy that I was able to clear the air about myself so I think, which is -- which could have been a distraction.

But thank you again, very much, for joining us on this call, and hope to see you and talk to you in the quarter.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.