CONDUENT Inc Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Divestitures: Completed initial phase of divestiture program, deploying 75% of the $1 billion targeted for debt prepayment and share repurchases. Focus on moving toward 2025 exit rates of lower debt, sequential margin improvement, etc.
• Leadership: Hired 3 key executives (Mike McDaniel, Anna Siever, Scott Copeland) to lead commercial, government, and transportation tolling businesses respectively.
• Business Trends: Commercial outperforming Government this year; strong sales pipeline, particularly in commercial offshoring for efficiency. Transportation progressing well with large project in Australia.
• Portfolio: Diverse portfolio with 90% recurring revenue, strong client relationships. Ongoing opportunities for portfolio rationalization to enhance balance sheet and focus.

Segment Performance

• Commercial segment: Q3 2024 adjusted revenues were $385 million, down 3% year-over-year. Adjusted EBITDA was $35 million, up approximately 21% year-over-year, with an adjusted EBITDA margin of 9.1%, up 180 basis points year-over-year, driven by sales ramp and cost efficiency.
• Government segment: Q3 2024 revenues were $255 million, down approximately 12% year-over-year. Adjusted EBITDA was $60 million, down 37% year-over-year, influenced by discrete drivers and short-term elevated expenses.
• Transportation segment: Q3 2024 adjusted revenues were $141 million, down approximately 2% year-over-year. Adjusted EBITDA was breakeven in Q3 compared to $3 million in Q3 2023, driven by revenue mix and operational performance changes.

Guidance

• Full year 2024 adjusted revenue expected in the range of $3.185 billion to $3.215 billion, down approximately 3% year-over-year.
• Adjusted EBITDA margin expected 3.75% to 4%, towards the top end of prior guidance.
• Net ARR expected to finish the year around $100 million. Plan to continue toward 2025 exit rates of lower debt, sequential margin improvement, less capital intensity, and top line growth.

Risks

• Potential impact of political or policy swings on Government segment, though generally minimal.
• Lumpiness in sales performance by quarter.
• Stranded costs and operational inefficiencies in Transportation segment that could affect performance.

Question and Answer

Q: Thoughts on how election results affect business units?

A: Generally unaffected, with little differentiation between Republican and Democratic administrations in terms of revenue and sales impact.

Q: Thoughts on MMIS business and RFP timing?

A: Opportunities in MMIS modules with RFPs coming out separately; focus on technology and relationships to secure sales when RFPs drop.

Q: Views on portfolio rationalization and divestitures?

A: Ongoing opportunities for portfolio rationalization to narrow the portfolio, with proceeds used to strengthen balance sheet; still see value in the portfolio.

Q: Drivers of margin expansion?

A: Stranded cost work, cost efficiency initiatives, pricing and mix levers (e.g., onshore/offshore mix), and top line revenue growth.

Q: High-impact contracts renewal and mitigation?

A: Churn rate improving, with focus on client retention; MMIS drivers baked into guidance, with line of sight to exit rates through growth and efficiency efforts.