Conduent Incorporated Q1 2023 Earnings Call

Greetings and welcome to the conduit first quarter 2023 earnings announcement at this time all participants are in a listen only mode. If anyone should require operator assistance. During the conference. Please press start zero on your telephone keypad.

As a reminder, this conference is being recorded or not.

To turn the conference over to your host Giles Good burn Vice President of Investor Relations.

Thank you up right, Sir and thanks, everyone for joining us today to discuss condones first quarter of 2023.

You had a chance to review a press release issued earlier this morning.

Joining me today is cliff Scouten, Ah President and CEO , Steve Wood S. C S I.

Today's agenda is as follows.

This call is being webcast and a copy of the slides used German this cold as well as the press release mcfalls with the S. C. C. This morning on phone H K.

This information as well as the detailed financial metrics package are available on the Investor Relations section of the conduit website.

Okay.

These forward looking statements reflect management's current beliefs assumptions and expectations and are subject to a number of factors that may cause actual results.

Materially from those statements.

Information concerning these factors is included in Condiments annual report on Form 10-K falls with the S E C.

We do not intend to update these forward looking statements as a result of new information of future events will developments, except as required by law.

The information presented today includes non-GAAP financial measures.

You liked it in accordance with U S. Scott they should be viewed in addition to and not as a substitute the companies reported results.

For more information regarding definitions of a non-GAAP measures and how we use them as well as the limitations to the usefulness for comparative purposes.

Press release.

And now I would like to turn the call over to Cliff.

Thank you Giles and good morning, everyone. Thanks for joining conduits Q on earnings call. We appreciate you being here today.

Revenue EBITDA sales et cetera, and Steve of course will go into a bit more depth as you can tell we've shifted our perspective here as we migrate to a new set of cell site analysis.

Will forgo immediate questions following their names, but as always folks should feel free to reach out to our investor relations team with any kind of follow up questions.

But first let's start with a quick view of the numbers. Despite some one time events, Steve will talk about those.

Q1, Cor run rate revenue treat our internal expectations due to increased volume specifically in our government and commercial businesses, partially offset by client driven revenue milestone changes in our transportation business and a prior period adjustment in our government business.

Both of which somewhat muted that positive growth in volume. These.

These volume trends if continued and we do believe they will.

Bolster the remainder of 2023.

[noise] again, Steve will get into the details, but this is all part of the top line growth expectation that we previewed in our investor briefing in late March.

As we've discussed in the past that net a R. R number which was higher year over year again at $108 million.

Leading indicator regarding our growth trajectory.

We're certainly and especially pleased with improvements in client retention.

However out running that government stimulus volume from 2021, and 2020 to take some time slowed.

Slowly, but surely without running the past and landing in that sweet spot growth range. We previously laid laid out for Ya.

Regarding EBITDA, we exceeded our internal expectations.

Against stable talked about the puts and takes regarding the segments of note are the changes in the transportation business I look at those is essentially discrete primarily client driven milestone adjustments and a little bit of pain before the gain exercise.

Our new leadership team in transportation installed more operational discipline.

As we level set that project portfolio.

New business sales were predictably lower year over year as we referenced in queue for earnings and our Investor briefing.

Cause you know when we discussed Q4 was quite strong and.

And we expect a bracket Q1 with enhanced sales performance.

Some opportunities pushed a Q2 and beyond.

We do see some late large opportunities to give us a promise and Q2 and Q3. However.

As you know the timing of contracts, especially in the public sector can have some back and forth to it based on contracting regulations, but Meanwhile, overall park pipeline is strong and building across the entire segment base.

No I'm often asked whether the economic slowdown is affecting our sales.

Answer is we don't see a reduction in appetite certainly not appetite to outsource in the commercial sector or fewer rfps in the public sector.

But we do see a slower timeline to contract.

It's simply taking a little more time to put ink on paper and decision makers are more cautious.

Steve will discuss there's always the details of our balance sheet, but as strong liquidity didn't leverage ratios remain strong with a consistent capital allocation appetite and very modest ranges.

Regarding the future raw enforced as we described in late March.

Are based business is within the rail such do you have described and we continue to see significant opportunities, especially in government health care in real time payments in fact, we're rolling out some new real time payment and disbursement solutions as we speak.

We continue to also believe in the portfolio rationalization opportunities, we discussed and while it's a multiyear journey.

Definitely underway.

Finally.

Each quarter, we've become increasingly proud of our progress related to culture diversity and being a great place to work.

As you know employees flocked to stay with none of business or brand, but with a culture and its people and its leadership.

We work hard every day to take care of our 60000 hard working associates across the globe and I'm most appreciative of their efforts I'm also thankful for.

For a strong client base and I look forward to great remainder of 2023.

I will now turn it over to Steve for more detailed view of the financials Steve.

Thanks Cliff.

We have done in the past where reporting both gap of non-GAAP numbers and the reconciliation rental filings in in the appendix of the presentation.

Let's turn to slide five and discuss key sales metrics.

Q1 sales results were as expected through thick into the patent we're anticipating playing out in 2023.

And in line with how we messaged our expectations for sales growth in a recent investor briefing.

Q for earnings presentation, and again in our Investor briefing in Q1, I referenced the expectation that Q1, 2023 sales would be lighter than the prior year <unk>.

As we saw on cold out a slower build and some of our next quarter or near term pipeline and.

And Additionally, we were managing a tough companion from a very strong Q1 2022.

This slow a pipeline build with specific to a commercial segment, which we partially attributed to macro factors as we saw some commercial clients adjusting their budgets and slowing but importantly, not stopping that procurement activities.

Similarly in government and transportation, where we typically no the timing of RFP driven deals we expected the first quarter to be liked.

Before I talk about the quarter, let me give you a flavour as to where we're expecting Q2 to land and how that plays into the first half because as we've.

Said before individual quarters can be lumpy.

We expect Q2 ACB sales to grow over Q2, 2022 somewhere in the range of 8% to 10%.

This would put us just behind our first half performance from 2022.

But with a strong pipeline of late stage deals, which we would expect to close in the second half of 2023.

Keeping us on target to achieve the sales growth expectations, we laid out in the investor briefing.

In the first quarter stand alone new business, ACB was $125 million down 25% as compared to Q1 2022.

There are some additional impacts from a handful of deals that slipped into Q2.

T C V signings at $244 million were also down 47% against the very strong compassion in Q1 2022.

Most of this impact within the commercial segment.

In the prior year, we signed some launch on long term expansion business.

European in APAC CX businesses.

Annual recurring revenue or IRL with similarly down 43% as compared to Q1 2022.

The same drivers were at play in terms of this being anticipated.

The <unk> activity metric.

Combined measure of wins losses pricing effects and other contractual changes was again positive for the quarter at $108 million.

As a reminder, this trailing 12 month measure does not predict the timing of revenue.

Based on the time, given notification and as such will fluctuate from quarter to quarter.

Turning to slide six we've covered many of the metrics on the previous slide, but just a couple of extra points us here to comment on.

One recurring revenue Oriental raw was up slightly as compared to Q1 2022.

And I'll always driven by both add on sales into existing accounts as well as non recurring revenues such as implementations on certain categories of new deals.

Are out on business into existing accounts was strong in the quarter.

Like the lower levels of new logo sales.

Our average contract length in the quarter was 2.9 years, reflecting the lack of large deals signings in the quarter.

Let's now turn to slide seven and discuss all Q1 2023 financial results.

Adjusted revenue for Q1, 2023 was $922 million as compared to $960 million in Q1, 2022 down 4% year over year or 3.7% in constant currency.

And given a couple of discrete items that will cover when we double click into the segments. This was slightly ahead of our internal expectations.

It's still a little bit of a year over year headwind in the quarter from the tail of government stimulus and some one time is affecting the compact to Q1 2022 in aggregate approximately $40 million.

So that was offset with about $20 million a positive impact from interest rates on our benefit wallet business and a couple of smaller items.

So net net if you Peel those back the underlying business is within $20 million of being flat, which is consistent with what we've said.

But we're in the period now when transitioning from a long downward trajectory through a transition that will take most of this year and then sequentially moving towards the growth ranges, we outlined for you in our Investor briefly.

Adjusted EBITDA was $19 billion for the quarter as compared to 107 million in Q1 2022.

Adjusted EBITDA margin of 9.8% was down 1.3 points year over year as compared to Q1 2022.

There were some unusual items in the quarters, you'll see in a minute when we deep dive the segments, but.

In aggregate, it's in line with what we expected for the quarter and how we laid out the margin progression for you. When we gave guidance on the quarterly progression and are fully of 2022 earnings call.

Let's turn to slide eight.

Over the segment results.

But Q1 2023.

Commercial segment adjusted revenues were $508 million down, 8% as compared to Q1 2022.

Smoothly flashing constant currency.

As I said earlier benefit wallet drove an 18 million increase year over year.

And a new business ramp was healthy.

But offset with a tougher comparison losses.

<unk> did the final quarter of some business that went away in the second quarter of 2022 due to a bank merger.

That was a 17 million dollar effect and this drops out of the compare next quarter. When we expect to show modest year over year top line growth in the commercial segment.

Adjusted EBITDA for the commercial segment in Q1, 2023 with $65 million up 20% as compared to Q1 2022.

The adjusted EBITDA margin of 12.8% was up 230 basis points year over year.

Clearly the full through from benefit wallet was a significant contribution along with continued work on operational efficiency.

So the government segment, Q1, 2023 revenues with $264 million down seven 7% as compared to Q1 2022.

The year over year impact of the runoff with government stimulus was $14 million in the quarter.

Revenue in the quarter also contains announced with period adjustment to correct an error that originated in 2020 and impacted all quarterly periods through December 31st 2022.

This adjustment, which the company considered immaterial was a reduction to revenue of $7 million in the quarter.

The balance of the result for the quarter was the effect of prior year losses.

Set with strong volumes and our government payments business and sales ramp from implementations and our government health care business.

Adjusted EBITDA for the government's segment in Q1, 2023 was $83 million flat year over year.

Yeah.

This however included the benefit from a portion of a legal settlement recognized in cost of services of $17 million.

Normalized for the removal of this item and the announcement period adjustment the decline and adjusted EBITDA reflected reduced full through from the high margin government's stimulus volumes.

Packed with loss business.

Transportation segment revenues in Q1, 2023 were $150 million down 7.4% year over year.

With the majority of the impact relating to certain discrete items, which we believe are largely behind us now.

During the quarter, we revised certain timelines for some influent projects due to changes in client requirements, leading to a downward adjustment to revenue of approximately $10 million, which largely explains the variance euro per year.

This revenue will be recognized over subsequent quarters as projects are delivered along the revised timelines.

Additionally, we expect to the conclusion of the projects to be able to recoup certain revenues.

<unk> with the changes in scope, but the timing on this is uncertain.

For the transportation segment adjusted EBITDA for the quarter was $3 million.

Compared to $17 million in Q1 2022.

The adjusted EBITDA margin was 2%.

Given by these discrete items noted above which will revenue adjustments with 100% full through to EBITDA.

We expect the transportation segment margin to recover next quarter and to normalize in the second half of the year as we transition a number of these projects Foucault life.

Let's turn to slide nine and discuss the balance sheet and cash flow.

Our total liquidity position remains strong with a combined $1.1 billion in cash and available revolving credit facility.

We ended the quarter with approximately $547 million of total cash on the balance sheet and.

$550 million revolving credit facility is almost completely unused at this point.

On net leverage ratio increase sequentially to 2.1 tonnes, but as comfortably inside our target range of two to two and a half tons.

Our debt maturities of long dated and we have no significant debt repayments until 2026.

Capital expenditure in the first quarter was 2.7% of revenue as.

As I noted in the Investor briefing. We've updated this metric now to include capital spent on products software, which hits operating cash flow.

On slide 10, you'll see that we have updated this in our modeling considerations update.

Updating the 2022 full year compact as well as our outlook related to this measure.

We are still awaiting a $29 million federal tax refund related to 2018, which we continue to expect to receive in 2023.

Let's turn now to slide 10.

A full year 2023 guidance ranges are unchanged at this point.

We have no material changes to our view of the annual segment level growth trajectories, we called out in a full year 2022 earnings update.

Our view at this point in the year is that all three businesses have multiple parts to that full year revenue targets.

Except for the update to include investments and product software to our Capex metric our outlook on all the other modeling considerations is also unchanged at this point.

You'll note from our reconciliations in the appendix of the presentation, but we took a disproportionate amount of the full year outlook on restructuring charges during the first quarter.

This was planned.

In terms of the second quarter, we're expecting adjusted revenue to be in the range of $900 million to $910 million.

And adjusted EBITDA margin, probably slightly below affiliate guided range.

Q2 is the low quarter for revenue and margin in 2023.

And this pace a first half revenue has us remaining on course for the full year.

Last year, we owned around 49% of our full year revenue in the first half and 51% in the second half.

And we expect this to be similar this year.

We also expect the impact of several cost initiatives to be Molly accretive to margin through the second half of the year.

In conclusion, Q1 had some discrete items, but when peeled away, we exceeded our overall expectations.

In line with how we planned our full year outcomes of 2023.

That concludes our financial review for Q1, 2023, and I'll hand, it back to cliff for any closing comments cliff.

Thanks, Steve that concludes our view of Q1 2023.

You to everyone for joining.

As I have consistently said this is a journey we've come a long way in the past few years, we continue to see a bright horizon ahead.

Thank you for being with us.

This concludes today's conference you may now disconnect. Your lines at this time. Thank you for your participation and have a great day.