Q3 2022 Conduent Inc Earnings Call
[music].
Good afternoon, and welcome to the conduit third quarter 2022 earnings announcement.
At this time all participants are in a listen only mode.
<unk> and answer session will follow the formal presentation.
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Please note that this conference is being recorded.
I will now turn the conference over to our host Giles Good Byrne Vice President Investor Relations. Thank you you may begin.
Thank you operator, and thanks, everyone for joining us today to discuss <unk> third quarter 2022.
We hope you had a chance to review our press release issued earlier this afternoon.
With me today is cliff Skelton, our president and CEO and Steve Wood, our CFO .
The agenda is as follows Chris will provide an overview of our results and a business update Steve will then walk you through the financials for the quarter. That's what it's providing a financial outlook. We will then take your questions.
This call is being webcast and a copy of the slides used during this call as well as the press release, what files with the SEC. This afternoon on form 8-K.
This information as well as the detailed financial metrics package are available on the Investor Relations section of the Companys website.
During this call we may make statements that are forward looking.
Forward looking statements reflect management's current beliefs assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially from those statements infill.
Information concerning these factors is included in <unk> 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.
For more information regarding definitions of our non-GAAP measures and how we use them as well as the limitations to their usefulness for comparative purposes. Please see our press release and <unk>.
Now I'd like to turn the call over to Cliff.
Thank you Joe welcome everybody glad to have you with us today.
Let me begin by saying that Q3 feel pretty good for US are adjusted revenue came in at $977 million.
Right, where we expected it to be an adjusted EBITDA of $105 million with a 10, 7% margin both slightly better than expected. So very pleased with our Q3 came out, especially given the economic condition. We're all experiencing these days.
Our new business ACB signings were quite strong at 191 million.
One of the best Q3s, we've had and so we like our overall sales performance, especially from our account management teams.
Net our activity continues to be positive at $70 million.
Now as I've discussed in the past that net they are activity metric is going to be lumpy from quarter to quarter.
We want to see as a positive number every quarter because it means we're selling more than we're off boarding or losing if you will.
One loss or when especially in the public sector.
Q any individual quarter, but not the historical trend.
In addition to having a strong sales quarter. We also see an expanding pipeline that bodes well for the future, especially in the public sector.
Steve is going to get into that here in a moment.
We're also optimistic because we've got a lot of big deals on the horizon again, especially in the public sector.
We expect to land a few of these which should be meaningful.
A couple of other key highlights in Q3 that we're quite proud of we were named as a leader in customer experience in all four categories examined by ISG.
These categories, where digital operations.
And analytics work from home and social media.
Just to put that in a little context, only four five customer experienced firms achieved leader in all four categories out.
Out of 25 plus companies reviewed.
Also Newsweek named conduit among its 2022 top 100, most loved workplaces.
If you think about it that's quite remarkable given the number of companies evaluated.
This is from all industries and all sectors. So to finish in the top 100 is quite a feat.
Now there are a lot of ups and downs on the horizon here to include what's happening in the economy.
It's happening with interest rates, what's happening with the notion of a recession and how it all impacts our clients and their end customers.
These macroeconomic factors are certainly considerations for future planning.
Nevertheless, we're at a point in time, where they're hard foundational work.
So necessary for reference ability and retention.
Transitions in some regard to our planned pattern of growth.
We've taken several tactical actions along this path.
We integrated our separate sales and marketing teams into our lines of business.
The idea here is that we're under leveraging our current client base and not utilizing strong relationships to expand our share of wallet from our client base.
And there is likely more integration to come.
We've stood up a strategic growth team.
Which consists of a team of business development product marketing and technology leaders to.
To penetrate new industries and established new logos.
To utilize relationships, especially in North America to open new doors of opportunity.
To characterize our technology led solutions is just that.
Unique technologies that exceed that of the competition and thus attracts new clients.
The bottom line here, we have in many cases technology solutions that are not getting the adequate light of day from companies or public entities that don't know us just yet.
Also we begin to roll out our digital payments capabilities.
<unk> real time payments and other forms not being utilized especially in the public sector.
Remember, we have millions of bill is running through our back office.
These are millions of opportunities for end customers to more easily pay their bills, while generating faster revenue and lower cost for our clients.
We've made changes to our leadership team to better align capabilities in our transportation business and our strategic growth team.
There are massive international and domestic opportunities in the public sector, specifically government health care and transit and tolling.
We have those on the near term horizon.
We also continue to see large opportunities and customer experience.
While retail volumes in some areas are feeling the pain. Other companies are now more open to outsourcing as a means to drive cost reduction and digitization.
And the products, we've struggled with in the past have been enhanced and are now selling especially in our commercial segment.
For example through Q3 2022, the human capital solutions business is closed six new logo deals across its offerings.
Going forward suffice it to say losses in stimulus or rolling off at higher margins.
Given price competition and the economic landscape, we have got to sell even more high value deals, especially in the public sector and non CX areas of commercial.
We are driving more rigorous implementation efforts as there is a backlog of sold revenue weighting on milestones to be completed.
When we win some of these big deals, which we will we must execute the implementation with near perfection.
Our sales to revenue process must go faster.
We're further streamlining expenses in our business and especially from our shared services.
While our real estate footprint is much reduced it must shrink further as we've settled into what is predominantly a work from home model.
Especially in the commercial sector.
Regarding the future, we expect the economic headwinds to be slightly stronger than the tailwind components in Q4 2022.
And in 2023.
And while we continue to be optimistic in our three year plan in no uncertain terms the next year will be challenging.
But in the printer and we expect to demonstrate our journey from a substantial decline to a business that is flat to slightly up in the next year or so.
Relatively speaking that represents significant progress.
And finally.
When it comes to strategy and capital allocation more to comment on our investor and analyst presentation, but we see the opportunity and the obvious areas of either debt and equity buybacks and or internal investments, which will stimulate growth.
We also see a few pruning events, we hope to describe to you soon.
We're fine tuning these decisions with our board and we'll be prepared as we previously discussed.
Deep with you in December and in the spring.
So a lot of work to do yet a lot of opportunity our teammates our clients and customers are resilient.
Wish us growth plan was moving a little bit faster than.
An external conditions were more accommodating.
But what we can control is achievable and we've come a long way from prior years of substantial revenue decline.
And we will continue to tell you what to expect from US and then we will achieve it.
With that let me ask Steve to take you through more detailed look at Q3 and beyond and thank you all for your time today Steve.
Thanks Cliff.
We have done in the past we are reporting both GAAP and non-GAAP numbers.
I'd like to point out that certain non-GAAP measures adjust for the minus divestiture.
This is similar to past practice, the reconciliations or in our filings and in the appendix of the presentation.
Let's turn to slide five and discuss our key sales metrics.
Our primary sales metric ACB grew 27% for the quarter as compared to Q3 2021.
It was also up approximately 6% sequentially and we have now posted sequential growth in this key sales metrics for the past five quarters.
Year to date, we are up 15% as compared to the first three quarters of 2021.
All three segments posted year over year increases in HCV sales attainment, and we will once again, particularly strong in the commercial segment with $114 million of ACD.
New business <unk> was up 3% as compared to Q3, 2021 and is up 1% year to date as compared to 2021.
Both the commercial and transportation segments are up quarter over quarter and year to date as compared to 2021 the.
The government segment is currently down but our late stage pipeline of opportunities remains extremely strong.
<unk> was also up approximately 3% as compared to Q3 2021.
The net activity metric, our combined to measure of wins losses pricing effects and other contractual changes was positive for the seventh quarter, but was down sequentially.
The reduction was driven by a renewal price adjustment on our longstanding client as well as a contract termination both within the government segment.
The combined impact of these discrete items on the metric was $75 million.
Both items were understood and anticipated and most importantly, they have already been built into how I guided the revenue expectation for the government segment for 2023 at the beginning of the year.
That is a mid to high single digit decline.
Their inclusion in the net IRR activity metric this quarter reflects the exploration of the protest period in the format and formal notice of termination in the latter.
Let's now turn to slide six and discuss some of the key sales metric trends.
As I mentioned earlier, our trend on new business HCV. Our primary sales metric is encouraging with HCV increasing sequentially for the past five quarters.
Our TCP will fluctuate significantly quarter to quarter as we have said in the past.
Given the change in mix of deals between segments commercial.
Segment deals average about three years, whereas those in the government and transportation segments are typically much longer in duration. This drives a lot of the variability in <unk> as well as average contract length.
It was a strong quarter for <unk> growing 30% sequentially and 56% year over year.
<unk> was up 3% year over year as compared to Q3, 2021 and is up 1% year to date as compared to 2021.
The sequential decline in <unk> compared to Q2 2022 is a function of a lighter year, so far for government contracts, which we expect to reverse in the coming quarters.
Now, let's turn to slide seven and discuss our Q3 2022 financial results.
Overall as Cliff mentioned earlier Q3 finished in line with where we expected it and.
Where we guided when we laid out our expectations to you during our Q2 earnings call.
Slightly better when considering more unfavorable exchange rates impacting our international transit and European commercial businesses.
This was a $5 million revenue headwind against that guidance during the quarter and an overall $14 million revenue headwind when compared to Q3 2021.
In terms of the numbers themselves adjusted revenue for Q3, 2022 was $977 million as compared to $1 2 billion in Q3 2021 down.
<unk>, four 1% year over year or down two 7% in constant currency.
The year over year headwind from the onetime government stimulus volumes from 2021 rolling off in the quarter was $68 million.
This is the largest quarter to roll off versus 2021 and next quarter. The number is expected to be approximately $34 million.
Within the quarter, we did get a $15 million revenue benefit from a minimum contractual revenue commitment from a large client which was anticipated and how we guided Q3.
But that will not repeat sequentially in Q4.
Adjusted EBITDA was $105 million for the quarter down 11, 8% as compared to Q3 2021.
And the adjusted EBITDA margin of 10, 7% was down 100 basis points year over year.
Again, largely driven by the margin loss from the onetime government stimulus volumes roll off from 2021.
Adjusted EBITDA was slightly ahead of our internal expectations for the quarter driven by ongoing cost efficiency work and a more favorable mix, which included interest rate impact and our benefit wallet business.
Let's now turn to slide eight and go over the segment results for.
For Q3 2022 commercial segment adjusted revenues were $504 million up two 2% year over year.
The segment benefited from the minimum volume commitment mentioned earlier.
Foreign exchange headwinds were $8 million in the quarter as compared to the prior year and we owned an incremental $8 million from higher interest rates on our benefit wallet business.
Adjusted EBITDA for the quarter was $68 million up 17% as compared to Q3 2021.
Adjusted EBITDA margin was 13, 5% up 540 basis points.
Both reflected the impact of the volume commitment noted earlier as well as higher interest rates positively impacting our benefit wallet business and cost efficiency programs.
Within the government segment adjusted revenues for the quarter with $291 million down 15, 9% year over year as compared to Q3 2021.
The year over year impact of the runoff of government stimulus revenues was $68 million in the quarter, which I noted earlier is the largest compare against 2021.
Removing that impact the underlying base business would have been higher by about four 8% year over year.
Adjusted EBITDA for the government segment in Q3, 2022 was $88 million down approximately 34% year over year, reflecting this runoff with government stimulus volumes, partially offset by operational efficiency initiatives.
The adjusted EBITDA margin of 32% was down 820 basis points year over year.
Transportation segment revenues in Q3, 2022 were $182 million up one 1% year over year, including a $6 million headwind from foreign exchange in the quarter impacting our international transit business.
For the transportation segment adjusted EBITDA for the quarter was $25 million up 13, 6% as compared to Q3 2021, and the adjusted EBITDA margin was 13, 7% up 150 basis points year over year.
Let's turn to slide nine and discuss the balance sheet and cash flow.
Our total liquidity position is very strong.
We ended the quarter with $587 million in total cash on the balance sheet.
And our $550 million revolving credit facility is almost completely unused at this point.
Our net leverage ratio was one seven tons, which we believe is below our normalized range of two to two and a half tons.
In addition to the strength of our total liquidity position our debt maturities are long dated and we have no significant debt repayments until 2026.
As Cliff noted in his prepared remarks, we see opportunities to refined capital allocation multi.
More to come as we get to a primer on our investor and analyst event.
But we come at it from a position of relative strength.
As I noted in our Q2 earnings call capital expenditure as a percentage of revenue decreased during the quarter to two 8%.
We expect Q4 to yield a similar percentage.
Let's turn to slide 10, and review our 2022 outlook.
As Cliff mentioned earlier, we are beginning to see some effects of economic headwinds.
More specifically, we're seeing discrete areas of volume softness that started in Q3 and will likely be a factor in Q4 and into 2023, largely within the commercial segment and more specifically in some of our travel and entertainment clients in the CX space.
The sizing this industry segment is less than 8% of continents commercial revenue base.
This volume softness is in addition to the call App. We made in Q2 earnings when we noted a couple of our larger clients experiencing a level of post pandemic normalization of that volumes.
Ping, an approximate 25 million to $30 million headwind this year.
We now expect this headwind to be approximately $40 million on a full year basis and slightly more next year.
As a point of clarity these client demand driven volume reductions are not part of our net <unk> activity.
Activity metric.
The combined impact of these in the fourth quarter, along with further headwinds from foreign exchange as well as timing of certain project revenues within the transportation segment means we now expect overall Q4 adjusted revenues to be in the range of $985 million to $995 million.
This would put us at or slightly above the low end of our previously guided full year range.
Therefore at the segment level, we now expect the commercial segment with these incremental impacts from volumes to be flat on a full year constant currency basis.
Within this we expect the effect of currency to be an approximate $23 million headwind.
We continue to expect the government segment to decline approximately 13%.
Which ignoring the onetime benefit from government stimulus programs in 2021 would have the underlying business growing slightly in 2022.
As a reminder, the year over year impact from the onetime government stimulus volumes is approximately $189 million.
We expect the transportation segment, we also approximately flat on a full year basis adjusted for constant currency.
The effect here, we estimate to be an $18 million FX headwind.
Some of the timing difference noted above on project revenues within the transportation business will likely catch up in 2023.
Adjusted EBITDA margin for Q4 is expected to be in the range of nine and three quarter to 10.25%, which would put us at the midpoint of our previously guided full year range.
We still expect to convert approximately 15% of adjusted EBITDA to adjusted free cash flow inclusive of paying off the remaining portion of the deferred payroll taxes under the cares Act.
Similarly, we are not changing our outlook on capex or restructuring charges.
Finally, we are continuing with our long range strategy and planning efforts.
We'll inform into our expected an investor analyst event later in Q1, 2023, and it's prime at upcoming in December .
Our current view and outlook for 2023 without adjusting for further interest rate or exchange rate variability.
Is that we are expecting adjusted revenue for 2023 to be about flat for the total company.
With modest growth in commercial and transportation being offset by the previously messaged decline in government.
The volume effects noted earlier, a part of that change to the outlook I will talk more about those in December in terms of how that informs into our thinking around other things capital allocation.
Expect to hear more from us in the coming weeks around the exact timing for both of these communications.
That concludes our financial review for Q3 2022.
And I'll hand, it back to cliff for some more closing comments before we then take some questions.
Thanks, Steve we'll turn it over to the operator for some questions here in just a minute, but I want to reemphasize a couple of key takeaways, it's Steve just discussed.
First Q3 was strong.
Q4 retail volumes have some modest headwinds and it put in a slightly above the lower end of our previous guidance.
And recessionary conditions will have a small effect on 2023 volumes likely creating a flattish 2023.
Now we have some big sales expectations in Q4 and into 2023.
Creating what we hope will be breakthrough expectations potentially influencing the out years.
That all said please remember a couple of things we.
We said in 2020 that this would be a three to five year journey.
Now after three years, our year over year growth has progressed from.
Year over year growth decreases of nearly negative 8% to flat in.
Even more impressive when normalized for the influences of Covid, both positive and negative.
Yes.
The expectation is for sustained positive year over year growth and that remains the journey. We are on in this next phase but.
But we should first contextualize that from where we started.
Meanwhile, our balance sheet is in tremendous shape.
Not only do we retained more than reasonable net leverage ratios as Steve discussed.
But we have over $1 billion of total liquidity.
Condor is a different company than it was just three short years ago amidst the pandemic of a century and unparalleled political climate rising interest rates in a recession or recessionary like conditions that are not fully manifested.
We're definitely proud of our progress.
So with that let's open it up for questions operator.
Thank you and.
And ladies and gentlemen at this time, we will conduct a question and answer session.
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Our first question comes from Bryan Bergin with Cowen. Please state your question.
Hi. Thanks. This is exactly is Matt on for Brian First question is one on the macro on the pipeline how much has macro uncertainty impacted client behavior. At this point and also can you characterize current deal cycle cadence and how that informs early views into calendar 'twenty three.
Yeah, we're not seeing a ton of macroeconomic influence over the pipeline in any negative way in fact, the pipeline is stronger than it's ever been.
Especially as I mentioned earlier in the government and transportation businesses.
Transportation being more international government being primarily in the government health care business, where we see where we see a ton where we do see those macroeconomic influences. If you will is more on the retail volume space that Steve mentioned in his prepared remarks, where call center volume specifically in the travel industry.
Is causing some reduced revenue headwinds.
And in some of our technology space, but that certainly will recover.
As we get through these recessionary like environments with respect to deal cycle time.
In the model I would break it into two.
Two parts one we are seeing some delays from let's call. It an announcement of a deal.
To the signing of a deal.
In the government space, specifically and also a little bit in transportation not so much in commercial what we've got to do and that we can control is when we when we implement we've got to implement on the timeline, we committed to with near perfection as I mentioned in my remarks, because every milestone represents revenue.
So.
We're all over that.
We see we still upside to be honest with you as it relates to <unk>.
To the pipeline.
Got it that's helpful and a follow up is on the net IRR metric.
Can you just shed a bit more color on the underlying dynamics here. It sounds like it was embedded in the original guide, but perhaps you could talk about the metrics and how it's performed relative to expectations. Excluding these select.
Volume of loss.
Yeah, Zach Steve I'll take this.
I think the.
Yes.
The the metric is largely performing the way we expected it to what you see in the effect of the quarter is obviously the two.
The two deals that I referenced, causing it to be down sequentially.
And on a trailing 12 months basis in the quarter.
But as you said those will those who are already things.
We fully anticipated and so they've been baked into the guidance and then to how we were thinking about the outlook.
So this is this is one of those odd examples where.
We've got out a little bit in front of that in terms of how we we've.
Message how the government segment is going to perform in 2022 and into 2023 and this is the metric a little bit catching up on that.
So overall, our expectations is that that metric continues to be positive.
Cliff Cliff talked about the fact that we've got a very strong late stage pipeline in the government health care business and.
At the point at which.
Those deals.
Hopefully get inked in the next coming quarters, then we will likely to see that that net IRR metric spike up again, yeah I.
I wouldn't I wouldn't react.
Two I mean as long as that number is positive and the slope is upward. It's a good sign I wouldn't react to the.
The lumpiness in a slightly low quarter and I wouldn't overreact in a positive way due to the lumpiness of a really big number quarter.
Had one deal.
Rolled off.
And the timing that we thought it would have.
You would've seen a much higher number and youre likely to see a much higher number in the future. That's also not something we should overreact to what we want is a trend not any individual quarter number.
Very helpful.
Thank you.
You bet. Thank you.
Thank you and that's all the time, we have for questions today, I'll hand, the floor back to Cliff Skelton for closing remarks.
Well listen thank you everyone for joining us as I mentioned there is a lot to do there is a lot of opportunity.
Theres a lot to be proud of when we consider as I mentioned, where we started this journey three years ago, when we're experiencing that negative 8% year over year growth rate.
And unstable operating environment and uncertain future, it's definitely a different company now.
I'd like to thank our associates, our clients and our shareholders for their continued support along the journey I appreciate everybody joining us today and here's to a great finish in 2022. Thank you very much.
Thank you and that concludes today's conference all parties may disconnect have a great day.