Q3 2020 Conduent Inc Earnings Call
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This afternoon, those slides as well as the detailed financial metric sheet are available for download on the Investor Relations section of the conduit website. We'll also post the transcript later this week.
Of course conduit is no exception to that change.
Given that I'd be remiss, if I didn't just again say thank you to our over 60000 dedicated associates, most of whom continue to work from home and take care of our clients.
In our services business nothing works without a dedicated team so I'm very grateful to our team.
Regarding the quarter it was a strong one.
$1 billion at $1.041 billion in EBITDA of $141 million.
Brian will go deeper, but let's go over a couple of the highlights our government business performed well in Q3 primary.
Primarily driven by Koby 19 upside in the payments business and increased subsidy enrollment and eligibility activities.
Our transportation businesses continue to see a more muted impact from Cove in 19 than we previously anticipated.
In fact in some states volumes believe it or not we're pretty close to pre coated volumes.
In our commercial activities covered continues to create some downward pressure as anticipated, especially in our claims processing offerings and associated mailrooms gaining activities.
Regarding EBITDA, we saw even stronger performance with improved margins, primarily due to some over achievement in our cost and efficiency efforts and our mix of the revenue.
We'll remain quite flexible based on geography pandemic conditions et cetera.
So in terms of our office footprint, we don't ever really see ourselves getting exactly back to pre kobin models, but.
But at the same time, we likely won't stay where we are either.
<unk>, where.
But it is heavily dependent upon retention in overcoming the loss contracts in the past that ever run off tail.
We clearly think there are leading indicators for growth certainly one is client retention, where we see renewals up compared to 2018.
Volume shifts are also always important because in some of our contracts volume swings can come back and forth depending on performance in our case discretionary volume. This year is holding its own fine.
Finally, as mentioned new sales an AD on TV in annual recurring revenue are on track this year.
Leave in the dream they believe in the promise of the future and they're already adding value.
But our talent focus goes beyond the Cedar with senior leadership team.
We're also driving change to the corporate culture, we're encouraging teamwork open.
Openness and improved communication, all of which seems to be driving improvement to associate engagement and speaking of our associate engagement, we had a significant improvement in participation.
And we showed marked improvement in nearly every category so things are different and they continue to improve.
And I believe our clients are filling in as well.
That all said these are exciting and unique times and I look forward to continuing this journey with you and certainly with the team.
1.1% for the quarter. This was primarily driven by an increase in coated related volumes and the ramp of new business, partially offset by the loss of the California Medicaid contract.
I want to remind you that the beginning of the year, we had anticipated that the California Medicaid contract would have a three percentage point negative impact to total company year over year topline decline as stated on the last call. This is now expected to be closer to a two percentage point impact in 2020, as we continued to benefit from transition work. This year, we have a pro.
Ultimately $35 million transition revenue associated with this contract that will negatively impact the first three quarters of 2021 on a year over year basis.
Operating cash flow for the quarter was an inflow of 107 million and adjusted free cash flow was $72 million a $99 million improvement over the same quarter last year. This was driven primarily by working capital timing and a payroll tax deferral related to the cares Act Capex was $35 million for the quarter were 3.4% of rent.
Anew, we still expect to spend approximately $140 million in Capex in 2020 lets move to slide 13 to discuss our outlook for how we will end the year.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble the roster.
The first question today comes from Shannon Cross of Cross Research. Please go ahead.
Oh. Thank you very much. My first question is can you talk about the strong signings that you've had this quarter and it seems like you're on track for that.
And how we should think about how they'll roll through the TNL both for a minute. They you know startup cost perspective, as well as a revenue perspective, and maybe if you can give us an idea of sort of the the breadth and depth of where these contracts are coming from and then I've a follow up thank you.
Yeah sure well Shannon. Thank you you know as you can tell we doubled the the new business signings.
On a quarter over quarter basis, though the difference between Q2 Q3 is we had a lot more singles and doubles in Q3, and we didn't have these <unk>. We had one large contract signed in Q3.
But several signed in Q2 and so what we saw in Q3 is the is the duration of the contracts are about a year or less you know about for a little over four years versus a little over five years in Q2.
And what we really want to see is that continued singles and doubles because the home runs are somewhat episodic and that's exactly what we found in Q3, we want to repeat that in Q4.
No as it relates to the ramp up.
We see the smaller ones ramp faster a lot of times those big contracts are in the public sector space and they have a longer ramp.
The the exact ramp speed is.
Okay, how about a third of them are temporary so to your point as people get back on the road. There's you know the travel and all the other things that come with with running a business, where you're 75 per cent of your people I'm working from home.
Those costs as a temporary and will start to ramp back up as covid becomes less significant than we get back in the office.
A couple of think couple of components. There, we're never gonna probably get back to the same exact place we were pretty Covid will have more work from home, but we're not gonna have 75 per cent. It was working from home number one and so what were the other two thirds of the cost savings or permanent and those will migrate into 2021 as you would expect.
But we're not done with these efficiency place most of the cost savings and those permanent place. We had were associated with maintaining operating leverage as you can imagine with revenue coming down we can't afford to keep the same variable cost up so.
So we took some spans in layers out we change some of the people models to take some of the cost savings out and those are certainly permanent now as we get into 2021, we need to migrate into a more shared service operations environment, where we can leverage process improvement worried can leverage the scale of a shared service and get more marginal incremental.
Slowly, but surely cost savings call. It efficiency plays expense reductions as opposed to cost reduction. So it wasn't necessarily covid related to cause that is just where we are in are in in morphine the business to something that's not as siloed and it's in something that's more shared so we can leverage scale.
That's where the migration Thanksgiving Yep you bet okay.
The next question comes from <unk> I've, keeping Oregon. Please go ahead.
Hey, Thanks for taking my question very nice quarter, and it was paid to see Sonic bookings knocked us on it and yet basis, but also like a third Avenue base.
Uhm, but I wanted to ask about Avenue education, you mentioned, it's better than last year, but is it like a place where do you like it to be like <unk> about like the overall electrician leather takes pricing whether it's contract lost.
<unk> percentage of revenue right now, obviously, excluding yeah come Covid impact.
Yeah. So today, that's a great question and we think it was really unacceptable the amount of attrition remember attrition run off.
And that's in in some of these large scale businesses can take two and three years came this is a great example of that and so you know what we lost in 2019 was the the the accumulation of 2018 and 19 running off in 2020, what I can tell you is that the same run off kind of mm mm framework.
Is significantly lower between 2020 and 2021.
But it's a it's a churn you know we're you know we're renewing business, sometimes they're oppressed price reductions and you know the ramp from new business as a factor the volume swings in this business.
[noise] volume can swing quite significantly within any given contract and so what what what I would tell you is retention is better it will never be good enough any last contract any lost revenue is not good for us in our mind, but it's <unk>. It's.
It's significantly.
Better retention rates than we had in the previous years between 18 and 19 as opposed to 19 and 20. So all of that is back what I said to Shannon those are all contributors to this equation. We're we're trying to put together that we plan to brief you on in Q1, where we can look.
At this notion of a trailing 12 month revenue stream. So you can start to get a good view of recurring revenue and then we hope to have some estimates into forward looking for months. So we can have more of a predictive revenue uhm slope in in the future. Unfortunately, and all the things you just mentioned contribute to that unfortunate.
Covid, just throwing a significant wrench into it because it creates quite quite a bit of uncertainty and the assumptions, we put into the equation, but there'll be a lot more to talk about in Q1. Once we have more certainly from covid in which we have this equation drawn out but the bottom line answer to your question is much improved you know.
I don't want to commit to an exact amount, but let me just say retention is significantly improved on a year over year basis.
Got it and then your average contacted Asian, 40th let's face <unk> last P. S. <unk> all of second half now forget it was below T S.
<unk>, then like leather no contacted Asian, and and does it indicate a lot pricing pressures <unk> come a little bit more thought out.
I need to arrange any outlook. The you know kind of changes that calculus here uhm over the next few quarters.
Yeah. So it's Brian <unk>, what I would say is that you know we did have strong emergency and a quarter and that was helped by the government volumes. When we have a higher government mix that can put a higher margin and we had good flow through of our cost savings program. When we think about next year, we will continue to get through.
From the permanent savings, which are about two thirds of the you know.
Over $148 million of savings were driving this year for a minute and we think that's about $50 million of the benefit next year, but we also think it's covid starts to normalize the mix advantage will reverse and so based on those factors and it's really hard is cooked mentioned with the covid uncertainty too exactly get this right, but we think.
Around 11% margin.
Compared to 11.252 75 for this year, we we'd probably be closer to 11% margin, maybe a bit better next year.
Okay. That's.
That's good to know and then I guess, just a little bit the government business does there been any timing volatility that we need to keep in mind I know with you know some of the federal supplement through the FIMA program I know there was some kind of time to draw.
Rugs and delays in getting people some of those extra funds should we expect any kind of spillover benefit into fourthquarter as people kind of spend these balances down or is that not can be a factor in the upcoming quarter.
Yeah, Brian can fill in the gaps, but what I would say is there will be modest very modest deliver and is your guess is as good as ours as to what might change in the subsidy equation at the federal level as you may know most of our businesses at the state and local level.
But these federal subsidies flow through the state so.
You know the jury's still out on on one what's gonna happen, but there'll be some modest flow through Bryan B you want to comment further yeah, Oh I would say that in Q3, we benefited from one month to the federal supplement unemployment supplement which happened in July plus as you mentioned the female funds bill is that right.
Could you repeat in queue for so as a positive impact them Covid Uhm 824 from government is likely to be lower than Q3, Uhm, we still we'll see some benefit from snap and Pandemics now and from just uhm hiring appointment that it won't be as high we actually expect the net impact from covid to be negative.
And then.
The positive and that is the underlying business exclude covid, we expect a better trying to go in for 2324 should we expect the ready room, you declined to improve in queue for nurses queue, three just normalizing for comedy.
Alright, that's helpful. Thanks, guys next quarter.
Thank you.
The next question comes from Brian Burton Cowan. Please go ahead.
Alright. Thanks. This is Zack management and for Brian Uhm question on a couple of caution around the sales force how shall we think about investments over the coming quarters and also can you talk about the sales team attribution to Buckingham in Q3, and then you see more broad based contribution.
Yeah. So.
So is that the.
<unk> the sales journey here is both from my New business Global sales organization perspective, as well as an account management and add on.
Uhm basis, both of those are critical to our future and our success.
Think about.
Probably two thirds of the T. C V is coming from the GSO longer term kind of sales organization global sales organization and one third from the account management and add on but the inverse is true when it comes to impact revenue were same your revenue where two thirds of the impact revenue is coming from those account those account managers in that.
Add on revenue and one third of the impact revenue even there'll be here are is higher is coming from the global sales organization and so what we've been doing our journey has really been about leadership about discipline about oversight about focused concentration on sales. We're gonna finish the year worried about 110 sales <unk>.
<unk> today 100, and 910, we expect a launch into 2021 with about 120 with constant sort of improvement across the sales force resident.
Along the way and into the future and so we.
We see some pretty consistent performance coming out of our our sales force the in the investment if if you're if you're alluding to investment within sales as opposed to investments writ large are really now we think between 120 to 130 is kind of the right mix in given our portfolio the new investment.
So we're gonna be more around training around training protocols training software training discipline and consistency around account management and portfolio management. So it's a journey you know it starts with talent it moved to process and within that process and some of the the soft.
For that I, just discussed, but uhm, if if that's the investment you're referring to that's that's kind of what's next for us.
Yep good contract, thanks, and just a follow up our clients are to dictate the mix of remote services verses onsite delivery within new contracts or is it still too early to tell there.
You know it's it's an inch this is a very interesting question and an interesting dynamic when when code first hit you know it's it's so it's a weird journey one code first yet there was a lot of resistance to move from home to move to home and then all of a sudden everybody pants. Instead wondering what you know why isn't there more at home and now as we.
Start we've we've created a return to work from work kind of plan it won't be 75% from the office away. It was.
Right now or twenty-five percent you know you can't run a print facility from your home. So the 25% that we have a working from offices are really required personnel that need to be there that'll migrate to somewhere between where we are now in the 75 per cent work from office one of the ingredients is what you allude to is what is.
What is the client expectation in some cases some of the federal excuse me some of the public sector contracts we have they.
They require that we be in a facility in their state or in their community. It's all part of of the game that they have to play as as as the state later and I'm trying to get more business and more people to work in their state or the local community. So in some cases.
We're gonna need to migrate backed offices in some cases, the remote workforce is gonna be more allowed so if I were to guess I think it's somewhere in the middle there's more tolerance and we had before but in some cases there'll be contract requirements to be back in an office and that's all work underway as we speak.
Thanks again.
That.
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