Q3 2019 Earnings Call
Good afternoon, and welcome to the conduit third quarter 2019 earnings Conference call.
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I'd now like to turn the conference over to Alan Cats, Vice President of Investor Relations. Please go ahead.
Good evening, ladies and gentlemen, and welcome to conduits third quarter 2019 earnings call.
Joining me on today's call is clip Skelton conduit, CEO and Brian Walsh conduit 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 FCC. This afternoon, those slides as well as a detailed financial metric sheet are available for download on the Investor Relations section of the conduit website. We will also posted transcript later this week.
During this call conduit executives may make comments that contains 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 six 2019 and are subject to a number of doctors that may cause actual results to differ materially from those statements.
Information concerning these factors is included in conduits I know report on Form 10-K filed with the FCC.
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.
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 more 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 afternoon I must furnished to the FCC on form 8-K.
With that I will turn the call over to cliffs for his prepared remarks cliff.
Thank you Alan Good afternoon, everybody in August I was given the opportunity to become conduits CEO and be part of a team that takes conduit toward a new and improved chapter in our history.
I remain eager to help demonstrate the conduit as untapped potential.
And we remain optimistic regarding our company's future.
We've crafted the plan and our charting the course toward increased sales enhanced efficiency and improve quality, which in turn will manifest in topline growth EBITDA and an improved reputation in the marketplace over time.
On a previous call we discuss three critical levers that must be utilized to accomplish our goal.
Those levers are people, an organization process improvement and better and more predictable technology solutions.
On today's call, Brian and I will expand a bit on what's being done across those key leverage points.
But first let's go through the key takeaways for the quarter.
Our key financial metrics came in slightly ahead of our internal estimates revenue was about 1.1 billion slightly better than our internal expectations, but still down year over year.
The year over year decline has caused by previously discussed client losses price downs and missed sales opportunities.
Shortly I will discuss the tactics were deploying to address those outcomes. Adjusted EBITDA was 127 million again better than internal expectations, but also down year over year.
Given the quarterly performance and our Q4 expectations, we are reaffirming our latest fiscal year 2019 revenue and adjusted EBITDA guidance.
Brian will walk you through the details about the financials and our guidance in his remarks.
We're now seeing some very modest improvements on actions, we've taken thus far across our non financial metrics.
The other things we continue to look for efficiencies and simplification through improved head count spans and layers and offshoring.
Our quarterly renewal rate was 93%, which is inline with our expectations, but it is only one quarter of evidence.
Our pipeline also show some signs of improvement and we're seeing early signs of technology quality improvement.
Unfortunately, these are just indicators as a real improvement bellwether is new business signings and revenue growth.
Both which continue to be under pressure.
We've also made changes to our management and operating model and we're removing unnecessary functions and driving teamwork across our sales service operations and technology teams.
We have simplified reporting structures and we're a top grading talent across the board.
We will continue to remove unnecessary spans and layers and our sales and delivery teams to prevent client confusion and drive accountability. This work remains foundational for our future and top line improvement.
Finally, we've also made significant progress on the strategic and operational review.
So, let's turn to slide four to discuss that particular effort in more detail.
When we last spoke management in the board and just started the strategic and operational review process. The intention of this exercise is to simplify our value proposition take advantage of our market position in an industry expertise and position the company to grow revenue and improved profitability over time.
Building a high performing go forward company is our ultimate goal.
When we think about the businesses that could be suitable candidates for disposition consideration and I'll review.
We will weigh how the business is aligned with our go forward strategy and or which businesses complicate our overall value proposition as a company as well as businesses that are particularly attractive on the outside due to a combination of scale on scarcity.
We believe we could unlock significant value through such potential divestitures and are completing our strict chief strategic review to assess go forward plans.
We intend to complete our review in late Q4 2019.
Or early Q1 2020.
Depending on the outcome, we would anticipate taken any potential actions beginning in the first half of 2020.
The strategic review will also address our capital allocation strategy.
As part of this we will consider debt leverage ratio expectations potential stock repurchase and other internal and external investment opportunities or any of which could create value for shareholders.
Now, let's discuss more on slide five relative to current operational tactics inside the company in order to provide more detail.
Over the past three months, our team has begun making changes to our processes people and technology in an effort to boost sales improve the foundation and enhance our quality and drive efficiencies.
It's too early to see correlated impacts only directional but we're confident we're laying the groundwork to move us in the right direction.
Let's review some of these tactics starting with sales.
In order to maintain a strong client renewal rate sell new services to existing clients and improved sales to new logos, we've already begun strengthening our sales organization.
First we hired a proven chief sales officer and have begun to top grade the next level of sales talent.
Second we have de couple of our sales and delivery organizations to enable new logo and new product sales executives to sell and general management and account teams to deliver operate and improved client satisfaction.
Our clients are reacting positively to these moves.
Third we are also simplifying the go to market model and removing confusing layers and our organizational structures.
Our clients engage with us based on the services and solutions that we offer and we expect that increased focus some clarity within our orange structure will drive both sales and client retention.
Again, we're receiving a positive reaction from our client base.
Let's move on to discuss the upgrades were making to improve our foundation and enhance our quality.
We are focused on improving operational quality and reducing escalate penalties.
We've already begun top grading our technology talent.
We hired a new CIO and it has been building out his team and leading the charge and making many process improvements.
The first order of business for the team was to build out and improved centralized command center to boost proactive management and monitoring of our infrastructure.
This improved center of excellence and associated processes will leverage automation and machine learning to proactively reduce outages in fact, we're ready beginning to see improvements our performance metrics based on initial implementation of operational best practices, but again, it's very early and we have a long way to go.
The team is also rolled out a set of technology infrastructure protocols. These protocol support consistent responses to service and incident management and in turn will reduce the outage duration and improved client communication.
Last area of focus we want to highlight is efficiency.
Specifically centered on improving our cost structure and making the company more nimble through process improvements.
As I mentioned during the key messaging slide we've simplified the management organizational model. This simplification should enable more efficient decision making.
Additionally, we are revamping the sales to service continuum, which will enhance governance improve vessel a performance and result in better implementation management.
This effort will also reduce handoffs focus on client pain points and ensure mutual commitments are met.
The changes on this slide or few examples are the changes being made to help the company reaches potential.
While some of our metrics are beginning to turn we still have a long way to go to see consistent quarter over quarter improvement.
As I mentioned at the outset. This company has untapped potential in our client relationships, our current pursuit of excellence and our tactical endeavors to free up capital and win New business gives me optimism. Despite the early stages of our efforts.
Our employee base is becoming more and more confident that we will get there.
With that I will turn it over to Brian to review the financial starting on slide seven.
Thank you Cliff before I turn to slide seven ill note that throughout this presentation and in the exhibit in the appendix, we provide both GAAP and adjusted numbers, which provide a clean compare by removing the impact of the divestitures that we have completed.
Now, let's start on slide seven with an overview of the third quarter financial results, where I will review a few key financial metrics as Cliff mentioned in the quarter. We were pleased that our revenue and adjusted EBITDA results exceeded our internal expectations revenue for the quarter was approximately 1.1 billion down 3.9% compared with our third quarter results.
Last year adjusted for Divestures.
On a constant currency basis, adjusted revenue was down 3.5%.
This was driven primarily by client attrition price downs on renewals and inadequate new business impact.
When excluding the impact the divestitures adjusted EBITDA in the quarter decreased 11% year over year 227 million within adjusted EBITDA margin of 11.6% and 80 basis point reduction year over year.
Adjusted operating income for the quarter was 72 million down by 19% year over year, while we continued to make progress on cost reductions. These savings were more than offset in the current quarter by revenue pressure, resulting and declines to adjusted EBITDA and to adjusted operating income.
Not noted on the page, but an important metric restructuring spend for the quarter was 8 million. This was driven by both continued headcount related reductions and infrastructure consolidation. We now anticipate 70 million of full year restructuring as we continue to transform the organization.
As mentioned on our last call. We are taking a more balanced approach between investing for client delivery and cost savings. While we are still taking actions to address unnecessary spend and to streamline our operating model. We're also focused on adding necessary resources in order to improve performance for our clients, let's move on to slide eight to discuss our sales metrics.
As cliff discussed our renewal rate for the quarter returned to a more normalized level at 93%.
CV signings as a whole for the quarter were 746 million up 1% compared with the same quarter last year. This 746 million was made up of 234 million of new business signings down 11% year over year, and 512 million of renewal signings up 8% compared to the same quarter last year.
While renewal signings were strong we still have work to do on the new business front.
Of the 234 million and new business TCV signings $43 million nonrecurring revenue, which is generally project based revenue or change orders.
Our 12 month really new business pipeline improve this past quarter to 12 billion. This increase is primarily due to the addition of several early stage government deals keep in mind that the timing of government our fees in early stages can shift out. So we will continue to watch this metric, let's move onto our segment summary for the quarter on slide nine.
Our commercial business revenue declined 7% driven primarily by loss business price and volume pressure adjusted EBITDA was down 11% well adjusted EBITDA margin of 23.1% was down 110 basis points year over year. This was primarily driven by revenue pressure.
Our government business revenue declined by 5% for the quarter driven by pricing and lost business government adjusted EBITDA decreased by 5%, making margins flat year over year.
Our transportation segment revenue grew 9% compared to the third quarter results last year. This was primarily driven by new international business and higher volumes adjusted EBITDA was up 21% as compared with Q3 2018 impacted positively by increased revenue and reduced costs adjusted EBITDA margin for the quarter was 23%.
Up 220 basis points year over year, and the third quarter, our shared ITM corporate costs were 159 million, 3% higher than the prior year.
Let me move on to slide 10 to discuss the cash flow and balance sheet.
The operating cash inflow of 80 million in Q3 2019 compared to a use of 30 million in the same quarter last year Capex was 45 million for the quarter, a decrease of 15 million compared with last year, driven largely by timing of investments, we expect to spend four and a half the 5% of revenue on capex for the full year.
Adjusted free cash flow was an outflow of 27 million in the quarter 5 million better than the same quarter last year, given a typical seasonality of our business and our year on cash tactics, we expect to generate strong free cash flow in Q4, we expect adjusted free cash flow to convert as a percent of adjusted EBITDA at approximately 20% for the full year.
Our balance sheet continues to be healthy with 236 million of cash at the end of Q3. Our current net leverage ratio is two and a half turns our current guidance ranges suggest we expect to return to approximately two turns net leverage by the end of the year I'll note that our revolver remains undrawn and we have approximately 671 million of capacity of.
Level, given the outstanding letters of credit.
We have included a debt maturity table to give you a sense of timing for future debt payments as you can see we have a few years until we need to address the bulk of our debt our term loan a and term loan b are due in 2022 and 2023, respectively.
Turn our attention to 2019 full year guidance on slide 11.
Given our performance this quarter, we are reaffirming our revenue and adjusted EBITDA margin guidance for the year. We've included the previously provided walk, which bridges that 2018 reported results to our adjusted 2018 baseline normalizing for the impact of divestitures.
Our revenue outlook remains a decline of between four and 5%. Excluding divestitures. We also still anticipate our adjusted EBITDA margin to be within a 10.8% to 11.6% range.
We now anticipate adjusted free cash flow conversion will be approximately 20% of adjusted EBITDA for the full year, which is at the low end of our prior range.
Looking forward to 2020, given year to date signings expectations for signings in Q4, and the loss of the California Medicaid contract, we anticipate revenue to be down between six and 8% in constant currency next year normalizing for the completed divestitures, excluding three points from the California Medicaid contract at the midpoint, we would be declining 4%.
Which is consistent with current performance. Additionally, we still expect margins to be flat in 2020 as compared to 2019, driven by revenue pressure, bringing back certain employee costs offset by cost actions, including the removal of additional stranded costs.
I'm pleased with the progress this quarter. However, there is still a lot of work to be done we continue to point to new business signings as the best leading indicator as to when we will see topline turnaround and we look forward to showing progress on this metric in 2020.
We have a number of good things going on at the company and we look forward to providing additional updates at the next earnings call. We will now open up the lines for some questions operator.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
And our first question comes from Shannon Cross of Cross Research. Please go ahead.
Hi, Thank you very much I just had a question on cash flow at the lower end of the guidance is there anything specific or.
In terms of the investments that we should think about that would carry over into 2020.
And just kind of thinking about.
And I know that model is fluid at this point, but but what we should thank and then I've a follow up thank you.
Yes, a shana a couple points.
Cash flow being at the low end of the guidance were conversion perspective. This year's is based on our year to date performance in the back some of our EBITDA performance is noncash. This year as we think about going into next year, we'd expect to similar conversion and as EBITDA margins will be flat and then the items like cash taxes.
Cash interest Capex and restructuring and we look on collectively we believe there will be roughly the same from year over year perspective, So we'd expect some our conversion next year.
Okay. Thank you and then maybe.
Since you've been there about closings you, but there are about three months now can you maybe take a step back.
Provide a little more context on what you've seen within the business.
Maybe what's the price you on the positive or negative side and.
Clearly you're you're in the middle of the review, but I'd just be kind of curious as to.
Hey on your thoughts since the last time you addressed everyone. Thank you.
Yes, Thanks, Janet as I may have mentioned in the in the previous call companies got some great bones, we've got great relationships with clients.
We had a bunch of our clients in last week at a form here at headquarters in though and you can tell we've got we've got great relationships and great growth opportunity.
With some of the foundational efforts that are in place around sales technology.
Have caused us to just not be able to turn the company around from a from a pivot to growth as fast as we'd like and so we're putting all those foundational efforts in place.
Not surprising to me I have not surprised by it.
What I am what I am surprised with his and pleasantly surprise is how great. These relationships are which gives us great optimism that once we get some of these foundational efforts were once we get the right talent in place once the processes are in place where the for these sales teams.
We can get this very simple equation called new sales and topline growth.
Kind of spring boarded up where it were at that foundational rebuild place where the the spring board is still down at the bottom and as Scott has got great upward leverage.
And capabilities as we put these in place so I.
I don't think Theres any surprises you know I read all the press I knew I knew what I was getting into.
No surprises on the negative side and all positive surprises.
Great. Thank you very much.
You bet.
Our next question comes from my neck tendon of Needham. Please go ahead.
Thank you good evening.
I guess, so for Brian Brian looking at the different horizontal offerings just want to get your thoughts in terms of the trend line for next year, you gave us the overall topline growth forecast or on the decline in revenue that you are forecasting could you just talk about the various offerings within the three core segments, how you expect them to trend.
And then I guess, a broader question for cliff would be.
In terms of the review would you look to sell potentially the underperforming areas that we're seeing today or could it be a mixed bag of the ones that are outperforming and some underperforming as you sort of think about the.
Company Standalone not once you're done with a review.
Okay sure. So if we look at the segments and how they're performing today and how we think it will change as we get into next year. If we start with transportation, we have strong growth this quarter for both topline and profit perspective.
As we get into next year, we expect to the growth rate will moderate and we'll probably have a low single digit growth and transportation as we.
We as we lap some new business and as we have a couple of projects ramp down.
When it comes to commercial we expect that decline to moderate as we get into next year, but it will still be a decline in that's going to be as we lap some councils and one price down that we had at beginning of this year and then from a government perspective, we're going to get that trend lines going to get worse as the California Medicaid contract starts and pass.
Yes, I am and that'll start partially in Q4 and fully impact us starting in Q1 of next year. So thats, how we see the segments performing we're working on efficiencies.
To drive.
Overall progress on cost of but again, we expect overall flattish margins as we get into next year.
We expect that to be pretty consistent across the sector.
And Mike on your on your question on the strategic review, obviously I can't get into the details of the review as its still underway I can tell you. There's a lot of feverish efforts underway with a lot of.
Folks working on this on this that we will be improved for me to give you details on those outcomes. We're just not done yet in the board has an opined that are what I can tell you, though is that we've got some pretty specific guardrails as to what we're putting in place to try and understand.
The Dispositioning details.
Vis-a-vis the strategic review and that's you know as mentioned in the in the narrative. We're we're looking for opportunities, where there is scarcity value and high value outside a conduit.
As a guardrail, we're looking for.
Opportunities, where we're businesses aren't necessarily aligned with our go forward investment strategy and what we're trying to accomplish from an investment perspective, and then finally anything that that.
Further complicates our value prop we want more simplicity, we want we want to company we can grow.
And we don't want to be confused by that what that will look like on a go forward basis. So it's about as much as I can tell you at this stage more to come obviously in the next quarter.
And there's a lot of work.
Underway.
Sure I understand that's helpful. Thank you.
Yes.
Our next question comes from Bryan Bergin of Cowen. Please go ahead.
Brian Your line is open.
Hi, sorry, mute there I wanted to ask a little bit on the pipeline expansion the changes you're seeing there.
Hi.
How should we consider the mix of that pipeline today versus the current revenue composition and then also any any color you can give around mature qualified pipeline to give us a sense on how close you may be toward.
New business bookings and watching.
Yes so.
I would say that if you look at the pipeline and the movement from Q2 to Q3, a lot of it as I said in my prepared remarks was driven by government deals that are in the early stage and those dates can move around so we need to continue to watch the metric and then if you just look at the overall mix in the pipeline compared to the mix of the business I would say its heavier in transportation in government.
Versus commercial right now.
As we look at the mix compared to the the current revenue basis.
Okay, and the Brian as we think about fiscal 20.
Yes margin can you give us a sense of the expansion sources, we should be considering from here within potential the corporate structure and how should we be considering the investments that you're making in sales an IP as far as really trying to get to the root of can you sell funds. These initiatives or is it really dependent on turning the revenue base.
Yes, so when we look at the margin guidance for next year, we'll have a number of efficiencies and cost takeouts.
That we're already starting and working on and that will include some further stranded cost takeout.
Related to the prior Divestures.
And then we will be building back in employee costs that we had to reduce this year, which will be an offset and then we will have other resources will have to add.
To drive some of the improvements we've been talking about and we'll have the revenue pressure that we are going to have to deal with from a profit impact in those things. We believe all offset each other to flat margins as we get into next year.
Okay. Thank you.
Our next question comes from Penny Jane.
Jay P. Morgan. Please go ahead.
Hi, Thanks for taking my question, a nice to see revenue upside kids.
It was.
It was also good to see improvement in your renewal rate.
And you, making changes instead, its first to stimulate new business signings Holly's soon should we expect to see stabilization and eventually implementing a new business fattening metrics.
If needed it's a great question in as you know.
Both the pipeline as well as renewal rates are often moving targets and renewal rates are in dollars not.
So.
There is in with respect to pipeline.
The the contract dates can fluctuate month to month, but generally speaking what I would say the direct to answer your question is.
The bellwether here again as new sales in topline growth. We're we're seeing a lot of these sales foundational efforts.
Begin to take hold but Q4 is not going to be any better in terms of new business signings.
2020 is definitely going to be better it has to be better than 29 team and and the monetization in those efforts from that improvement really manifest that the energy at the into 2020 and into 2021. So.
I think I think what we need to start demonstrating to you all while Q4 is not going to be great from a new business signings perspective, renting and not any greater than anticipated.
You will start seeing a turn in.
In early 2020.
Okay and up and how are you going to track progress. So far all those operational changes internally and then should affect a foothold into.
Motivated.
For those changes in other words, how are you going to manage fiscal first that disruption from what actions announced today.
Great Great question, So I assume when you when you say stability in the in US when you say Footsoldiers you mean associate engagement associate satisfaction, how do you how you measure quality, how does that quality manifest in the reputation in the marketplace.
The one what we measured most distinctly is incident rates and uptime and we're already starting to.
To see a little bit of improvement there is way way too early to start declaring anything in the way of victory but.
We think the efforts that were putting in place we're already starting to see improvement we're already getting positive.
Feedback from many of our clients, including some of our government clients that they're feeling they're feeling the difference what we need to start seeing is.
Much improved incident rate.
Incident turnaround time uptime.
And client retention, all based on and CLI reputation in the marketplace, which will manifest in more sales. So all those things are kind of taking time, what we would save from an employee point of view is again it takes time were.
There are employees or what we're now calling associates are seen and feeling the change, but they're waiting in the waiting to see the waiting to see what we do and what the company can do and.
And there they are optimistic and we'll have a new associate engagement survey that's going to go out in January the last one was October of last year will measure the difference, but at the end of today. The measurement is what our clients think what our clients want to buy from us and how fast can we grow sales and revenue.
Got it thank you.
Our next question is from Stephane stick of BMO capital markets. Please go ahead.
Thank you Hello. My first question is around your year over year revenue decline after divestment I'm curious what shares due to lower pricing on renewals versus client attrition this quarter and if you could you talk about any more risk from pricing on renewals going forward. Thanks.
Yes, so I would say the majority of it will be from loss business. There is a there is an impact from price, but it's smaller than the loss business impact in this quarter and on a year to date basis, and then when we think about price when we do renewals, sometimes there are price downs, we try to offset them either by getting additional scope or at least from a margin perspective.
By taking cost actions to hold the margin stable, but it's something we have to deal with at the end of a contract. When there is an RFP there will sometimes be price downs.
Okay, Great and my second question. If you could you speak more to working capital management in the first nine months of this year and much weaker than same period last year.
Yes sure. So if you look at the year to date cash flow Amit is impacted by lower EBITDA. That's the biggest impact on working capital has been negative as well through the first nine months and then we've also had higher capex. So those things have depress the cash flow through.
The first three quarters as we think about Q4, we have plans in place to deliver the Q4 in the 20% conversion that we're calling for it's focused on DSO improvements flexion improvements on using some tactics as we've historically done in the fourth quarter to drive working capital plus year on year over year basis, We also see.
Lower capex compared to last year in Q4, and lower cash taxes year over year. So we're very focused on Q4 cash we have plans in place and we have to execute against them and that will get us to our 20% conversion for the year.
Great. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Cliff Skelton for any closing remarks.
In closing thank you all for listening today really appreciate Everybodys participation also like to additionally, recognize our 68000 teammates here conduit news. We appreciate everyone's perseverance in our pursuit of excellence in our pivot to growth. So thank you all very much for listening appreciate your participation today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.