Q3 2023 Conduent Inc Earnings Call

2023.

Joining me today is <unk>, President and C E O.

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Today's agenda is as follows police will provide an overview of our results in a business update stable them walk you through the financial quarter as well as providing a financial outlook click with and provide these closing comments.

This call is being webcast and a copy of the slides Jews. During this cool as what is the press release will fall to the F. C. C. This morning on form ice K.

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

During this cool we may make make statements that are forward looking.

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 incumbents annual report on Form 10-K F. C C.

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

The information presented today, including non financial measures.

Because these measures are not calculated in accordance with the U S gas they should be viewed in addition to and not as a substitute for the companies reported results.

For more information regarding definitions of a non-GAAP matches, and how we use them as well as the limitations to their usefulness comparative purposes. Please say a press release.

And now I'd like to turn the cold I bet Cliff.

Thank you Giles welcome everyone to condoms Q3 earnings call.

Well these are certainly interesting and not always positive times, we live in so I hope you and your families are well.

I'll turn it over to Stephen a moment for the detailed financials, but let me first say that today March my 18th quarterly earnings since arriving here a conduit.

I can tell you have come a long way since August 2019.

It will always feel like work in progress.

But since then we've accomplished a lot.

We upgraded our systems stabilized or environments, where.

We optimized our infrastructure, including reducing our data center footprint by 80% with around 29 data center closures.

We've re-engineered our sales team sustaining 2020th two X improvement in T. C V.

We know retain and sell more business than we lose.

[noise] demonstrated barnett number each quarter.

Our net promoter score increased by 30 points and.

And we received several supplier excellence awards from clients.

<unk> availability is 392 plus.

And we're now almost entirely a cloud enabled company.

We've upgraded and continue to upgrade talent.

Wherever the healthy culture built on teamwork and personal accountability and.

And we're finally beginning to outrun the revenue lost from the days of poor quality.

The journey has now shifted to new challenges not yet satisfied.

We need a more nimble portfolio of solutions and go to market capabilities and that is underway.

We need to double down on our best technologies and solutions and continue to grow in areas. We've always excelled that were on that.

We need to capitalize on breakthrough capabilities like immediate payments and we're certainly on that.

We communicated these imperatives in March of this year.

And we continue to execute on those commitments.

But we have more to do before the fruits of our labor will be rewarded further.

We are systematically executing on the strategy, we outlined to make conduit or more nimble technology led business solutions provider known for delivering experience performance and value for a commercial government and transportation clients.

Each quarter brings with it timing issues episodic events macro trends and more.

That said, we're fortunate to have a more healthy portfolio diversity than most of our competitors, which is necessary to whether those issues. This quarter was no different.

Overall.

Revenue and even exceeded expectations for Q3, and 932 million in 92 million respectively.

With a strong quarter and our government segment offset by milestone timing and transportation.

Contract directed milestone attainment, and both government and transportation can bring with it variation.

Based on a combination of needs of the client.

Implementation performance and a jointly held clear understanding their requirements.

Some of that played out positively and negatively in Q3.

Our commercial business is less influenced by Back-load and milestones.

But it is more correlated to volume and buying trends.

Often associated with macro economic conditions and circumstances.

In that regard sales and commercial lagged slightly.

Offset by a strong and consistent sales quarter and transportation and government.

When it comes to sales strong quarters are often buoyed by a single large deal as we've seen in the past.

However, consistent singles and doubles are critical in.

In Q3 reflected that theme with 154 million of a C V and a continued positive net a R a $103 million.

The mission is to continue our trajectory of strong sales.

Better retention and out running the long tail of past losses, while at the same time focusing on pipeline.

New business pipeline is stronger than ever and grew 13% quarter over quarter.

Now as I mentioned, the toll hold for our future.

We describe back in March at our Investor Griefing.

Where we outlined three key themes among other things.

First rationalize and optimize the portfolio to create a more nimble and constantly growing company.

Goal of this rationalization is to create a more synergistic portfolio of technology led business solutions.

As you were aware, we recently announced the disposition of our benefit wallet business, which is scheduled to close beginning in Q1 2024.

And our work continues with focus and rigor.

Second we described our confidence in our government health care suite of solutions and the uniqueness of that cloud native platform.

We continue to see traction there exemplified by award by the state of Texas for the C. M. D S solution.

The horizon is bright for continued success.

Third we described it very unique capability for immediate payments utilizing both the real time payment network Rail's as well as the fed now network with a unique switching capability in partnership with being why I'm Melanie.

We're the only company of our kind with such capabilities.

Where there are bills or disbursements there are opportunities.

We're beginning to capitalize across all three segments with the first wins coming from government and transportation.

More to come there is states municipalities and.

And a few large companies begin to socialize and operationalize their plans.

Immediate payments is a bit like Jan AI, which were also drive and especially in our customer experience business.

Everyone sees the value.

But the system is nation and monetization of the concepts take time.

Steve will go deeper on the financials to include cash flow timing and the outlook for the rest of the year.

As well as provide explanations for the Lumpiness here and there.

As a situation is for all public companies that publicly described quarter is important.

But belief in the journey and tactics are critical.

It's now clear to me that we had the right previous tactics in place whereby shoring up the foundation first had to be exactly that first.

It remains a journey and will continue to stay the course.

Our culture remains strong we.

We continue to refine our structure and our talent set for the future.

While at the same time driving improvements in partnerships and excellence.

Our leadership team received recognition from comparably demonstrating that cultural strength and we launched a very important partnership with Charles Schwab and our benefits outsourcing space.

Meanwhile, retention in our workforce is the strongest since I arrived.

And improving.

We must be and are focused on efficiency across the business as we rationalize our portfolio starting with the divestiture of benefit wallet.

As we progress along this journey.

I'd like to recognize or 60000 strong workforce for their resilience and resolve along the way.

I'd like to now turn it over to Steve for a deeper dive on the financials.

We won't have the opportunity today for follow on analyst questions. Please feel free to reach out to our I R team for questions.

Over to you Thanks Cliff asked.

We have done in the past, we are reporting both gap and non-GAAP numbers the.

The reconciliations around a press release and in the appendix of the presentation, let's.

Let's turn to slide five.

Go over some of the key themes from a sales metrics.

The punch line for Q3 is that our sales performance mirrored what we saw in the first two quarters of 2023 with.

With the government and transportation segments generally outperforming the prior year compares an.

In offsetting this we've continued to see some softness in parts of commercial segment sales as.

Is cliff mentioned, there's plenty of deal activity in commercial but that's smaller deals clicked refer to them as singles and doubles and at least to date. This year. We're lacking the same quantity of larger deals we saw in 2022.

Cause I said last quarter and the commercial segment, we're seeing longer decision, making cycles and slightly more cautious buying behavior. We think driven by brought a macro concerns consistent with others in our industry. The pipeline is still strong but deals that taking a little longer than expected to close and it's changed our likely.

X a full year sales as we don't necessarily see this correcting itself in the next couple of quarters.

In Q3 overall HCV, it was $154 million as compared to $191 million in Q3 2022, yet.

Year to date or at 91% of last year's a C V attainment through the first three quarters.

<unk> with $316 million in the quarter as compared to 347 million in Q3 2022.

<unk> get to date, where at 160% of last year's attainment through the first three quarters of 2023.

Driven primarily by the Lodge Longterm transit deal in Australia, which we announced in the second quarter in which we are now under way with implementing.

We had a very strong fourth quarter of 2022 with some launch government deals signing late in the quarter and this year path to a strong Q4 will also depend on the timing of a couple of these larger government deals where there can be some of them predictability around time between award and signing of deals.

The net or activity that trick are combined to measure of wins losses pricing effects and other contracts or changes was again positive for the quarter at $103 million.

As a reminder, this trailing 12 month measure does not predict the timing of revenue, but is based on the timing of notification and as such will fluctuate from quarter to quarter.

Overall, we are pleased with the sales pipeline development in the government and transportation segments.

Segment level variability as a function of the breath of our business, we believe our government and transportation businesses have strong defensive characteristics against some of the broader macro trends, we're seeing impacting our commercial segment in the short term.

And as a reminder, as Cliff said earlier, our overall HCV pipeline stands at approximately $4.2 billion, which is at its highest level for some time.

With strong representation and some of our key strategic growth areas like government health care.

Very briefly on slide six as a reminder, you can see the impact of the Australia Dale in transit and what that had on our second quarter sales results. It represented around $1 billion of T. C V 65 million of Asap and.

And we expect to recognize approximately $200 million to $250 million and implementation revenues over a period of up to four years with most of that benefiting 2024 through 2027.

Let's now look at the financial results for the quarter.

Turning to slide seven adjusted revenue for Q3, 2023 was $932 million as compared to 977 million in Q3 2022.

Down for 6% year over year or 5.3% in constant currency.

This was slightly better than how I laid it out for you in last quarter's earnings due to a stronger performance in the government segment.

As always our quarters have discrete items that impact the individual segments on I'll cover those when we double click into the segment results individually.

In total that's about 30 million of headwinds from these items in the compared this quarter.

Putting those aside overall wins and revenue ramped from new clients and expanded client relationships outpaced lost business.

But consistent with the last couple of quarters. This was offset primarily by Lois CX volumes from some larger clients. While we continue to see softness in specific vertical like travel logistics and telecom.

We continue to believe these are predominantly macro related and as such should reverse over time.

Thinking about our revenue holistically.

We're in the period now where we're transitioning from a long downward trajectory through a period that will take us into the early part of next year, where we expect wins and ramped revenue to generally outpaced lost business.

And we're seeing these losses begin to normalize into the range as we outlined in our box invest debriefing.

Meanwhile, we expect volumes from installed clients to be a headwind in the short term while there's the macro related pressures that we are not those of C. But over time they should dissipate.

Adjusted EBITDA was 92 million for the quarter as compared to $105 million in Q3 2022.

The adjusted EBITDA margin at 9.9% was down 80 basis points year over year as compared to Q3 2022.

This was in line with our expectations and how I laid it out that I lost earnings call.

Most of the year over year impact is driven by the discrete items are covered when we go through the segments.

Before I move on to discuss the segments. There are a couple of other comments on the gap results for the quarter.

First on September 26, we announced that we've entered into a definitive agreement for the transfer of a benefit wallet HSA portfolio for.

Approximate purchase price of $425 million.

The transaction, which is treated as an asset sale is expected to close during the first half of 2024 several tranches.

Operator: to discuss Conduent's third quarter, 2023 earnings. We hope you had a chance to review our press release issued earlier this morning.

Consequently, this was identified as a triggering event that required us to evaluate the commercial segment goodwill for impairment and resulted in an impairment charge of $287 million, primarily due to this deal.

Operator: Joining me today is Cliff Skelton, our president and CEO, and Steve Wood, our CFO.

Operator: Today's agenda is as follows. Clifford provides an overview of our results and a business update.

Operator: Steve will then walk you through the financials for the quarter as well as providing a financial outlook.

When the deal closes in 2024, we will record an approximate pretax gain a $425 million.

Operator: Clifford then provides his closing comments. This call is being broadcast and a copy of the slides used during this call, as well as the press release, were filed with the SEC this morning on Form 8K. This information, as well as the detailed financial metrics package, are available on the investor relations section of the Conduent website. During this call, we may make statements that are forward-looking. 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 to dismissal from those statements.

Secondly, as we continue to evaluate and refine our capital portfolio strategy, we took a non-cash impairment charge of $25 million related to two software projects.

Both items are consistent with our strategic priorities to rationalize the portfolio and narrower investment focus.

Operator: Information concerning these factors is included in Condent Annual Report on Form 10K, as 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-gap financial measures, because these measures are not calculated in accordance with US Gap. They should be viewed in addition to and not as a substitute for the company's reported results.

Tend to slide eight and go over the segment results.

The Q3 2023 commercial segment adjusted revenues were $465 million down seven 7% as compared to Q3 2022.

Benefit wallet drove the $12 million increase year over year.

Ah Nonrepeating items were combined headwind of $28 million.

New business ramp and add on sales outpaced losses for a combined $21 million benefit to revenue.

The balance of the walk on revenue was negative volume impacts from some large clients predominantly in the CX space, where we are continuing to see software outlooks and industries, including travel logistics of telecom, which.

Operator: For more information regarding definitions of our non-gap measures and how we use them, as well as the limitations to their usefulness for comparative purposes, please see our press release.

Which we believe a macro related and therefore likely temporary.

Adjusted EBITDA for the commercial segment in Q3, 2023 was $57 million down 16% as compared to Q3 2022.

Giles Goodburn: And now I'd like to tell you the cool habits, Cliff. Thank you, Jiles.

The adjusted EBITDA margin of 12.3% was down 120 basis points year over year.

Clifford Skelton: Welcome, everyone, to Condent's Q3 earnings call. Well, these are certainly interesting and not always positive times we live in, so I hope you and your families are well. I'll turn it over to Steven a moment for the detailed financials, but let me first say that today marks my 18th quarterly earnings since arriving here at Condent. I can tell you have come a long way since August of 2019. It will always feel like work in progress, but since then we've accomplished a lot.

The mountain impact on the Nonrepeating items in the prior year compare as well as the noted volume impacts were both headwinds and they will partially offset from increased full through on benefit wallet, along with continuing work on operational efficiency.

For the government segment Q3 hundred 2023, adjusted revenues with $290 million.

Down three of a percent as compared to Q3 hundred 2000 2002.

Clifford Skelton: We upgraded our systems and stabilized our environments. We optimized our infrastructure, including reducing our data center footprint by 80% with around 29 data center closures. We've re-engineered our sales team, sustaining 2020's 2X improvement in TCV. We now retain and sell more business than we lose, as demonstrated by our net AR number each quarter. Our net promoter score increased by 30 points, and we received several supplier excellence awards from clients. Our tech and app availability is 39 plus, and we're now almost entirely a cloud-enabled company.

Included in that was the year over year impact of the runoff of government stimulus of $11 million in the quarter.

We had strong volumes and our government payments business and sales ramp from implementations and our government health care business.

Where a contractual change to a client implementation also drove an incremental revenue benefit.

This discreet item was worth $7 million in the quarter top and bottom line.

Adjusted EBITDA for the government segment in Q3, 2023 was $95 million up 8% year over year.

The adjusted EBITDA margin was 32.8% up 260 basis points year over year and benefited from the margin full through on the contract change.

Clifford Skelton: We've upgraded and continued to upgrade talent, where the healthy culture built on teamwork. And personal accountability. And we're finally beginning to outrun the revenue lost from the days of poorer quality. The journey is now shifted. The new challenge is not yet satisfied. We need a more nimble portfolio of solutions and go to market capabilities and that is underway. We need to double down on our best technologies and solutions and continue to grow in areas we've always excelled at, we're on that.

Moving onto transportation before we get into the numbers, specifically, you'll recall that I've set in prior quarters that we expect to see a sequential improvement during the yet both in revenues and launching outcomes as we transition certain clients on launch long running implementations through go live.

From a timing perspective has proved a little too optimistic some of these programs have gone live during the second and third quarters. However, others are experiencing extended completion timelines many times driven by increased or changing client scope and requirements as we near the end of these multiyear programs.

Clifford Skelton: We need to capitalize on breakthrough capabilities like immediate payments and we're certainly on that. We communicated these imperatives in March of this year and we continue to execute on those commitments. But we have more to do before the fruits of our labor will be rewarded further. We are systematically executing on the strategy. We outline to make Condent a more nimble technology led business solutions provider known for delivering experience, performance and value for our commercial government and transportation clients.

Which caused more of a drag on revenue in margins during the third quarter.

Transportation segment adjusted revenues in Q3, 2023, where $177 million down.

Down to 7% year over year, driven by losses, and the aforementioned impacts of lower implementation revenue as compared to Q3 2022.

For the transportation segment, adjusted EBITDA for the quarter with $7 million as compared to $25 billion in Q3 2022.

Clifford Skelton: Each quarter brings with it timing issues, episodic events, macro trends and more. That said, we're fortunate to have a more healthy portfolio diversity than most of our competitors, which is necessary to weather those issues. This quarter was no different. Overall, our revenue in EBITA exceeded expectations for Q3 and 932 million and 92 million respectively, with a strong quarter in our government segment, offset by milestone timing and transportation. Contract, directed milestone attainment in both government and transportation can bring with it variation based on a combination of needs of the client, implementation performance and a jointly held clear understanding of requirements.

The adjusted EBITDA margin was 4% significantly down on Q3 2022 because of these extended implementation timelines.

Were intently focused on the implementation discipline and a new senior leadership within this segment continues to work to return the business to more predictable revenue and more acceptable margin trajectories.

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

Our total liquidity position continues to remain strong with around $1 billion in cash and available revolving credit facility we.

We ended the quarter with approximately $455 million a total cash on the balance sheet.

Clifford Skelton: Some of that played out positively and negatively in Q3. Our commercial business is less influenced by back load in milestones, but is more correlated to volume and buying trends, often associated with macroeconomic conditions and circumstances. In that regard, sales and commercial lags flightly, offset by a strong and consistent sales quarter in transportation and government. When it comes to sales, strong quarters are often buoyed by a single large deal as we've seen in the past.

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

Net leverage ratio increased slightly to two three tons, but it remains comfortably within our range of two to two and a half tons of.

That maturity's along data than we have no significant debt repayments until 2000 2006.

Capital expenditure in the third quarter was 3% of revenue, we're continuing to find opportunities to drive efficiencies and a capital investment programs and as you will see on the next slide we've again revised down our full year expectations on Capitol spend.

Clifford Skelton: However, consistent singles and doubles are critical, and Q3 reflected that theme with 154 million of ACV in a continued positive net AR of 103 million. The mission is to continue our trajectory of strong sales, better retention, and outrunning the long tail of past loss as well at the same time focusing on pipeline. Our new business pipeline is stronger than ever, and grew 13% quarter over quarter.

We're still expecting are $29 million federal tax refund related to 2018 to be received this year.

We launched our initial share buyback program late in the second quarter and repurchased approximately 2 million shares during the quarter.

And as at the end of Q3 with purchased approximately $2 2 million shares at an average price of $3.32.

As a reminder, the initial approved scheme is a three year program for an aggregate of $75 million.

Clifford Skelton: Now, as I mentioned, the toll hold for our future is in what we described back in March at our investor briefing, where we outline three key themes among other things. First, rationalize and optimize support folio to create a more nimble and constantly growing company. The end goal of this rationalization is to create a more synergistic portfolio of technology led business solutions. As you are aware, we recently announced the disposition of our benefit wall of business, which is scheduled to close beginning in Q1 2024, and our work continues with focus and rigor.

Now turn to slide 10 to look at our 2023 outlook.

We expect fourthquarter adjusted revenue to be in the range of $935 million to $945 million, resulting in a full year outlook of between three seven and $3 72 billion.

As I said last quarter, there's a mix shift of new business bookings in our backlog now with a higher relative sheriff governments and transportation deals that will take slightly longer to come out to a backlog as compared to commercial deals which ramp to revenue more quickly.

Clifford Skelton: Second, we described our confidence in our government health care suite of solutions and the uniqueness of that cloud-native platform. We continue to see traction there, exemplified by our award by the state of Texas for the CMDS solution. The horizon is bright for continued success. Third, we described a very unique capability for immediate payments, utilizing both the real-time payment network rails, as well as the FedNow network, with the unique switching capability in partnership with BNY Melon.

For adjusted EBITDA margin, we expect a full year outcome to be approximately 10% <unk>.

We are revising down are expected full year outcome for adjusted free cash flow as a percentage of adjusted EBITDA.

The extended completion timelines I referenced in the segment results are now likely to result in some significant milestone payments moving into the early part of 2024.

I'll get more detail on that when we guide expected 2024 cash flow outcomes.

But we're in a period now where we have several large implementations across government and transportation on a higher relative share of cash flows is now tied into billing milestones, which is creating more unpredictable than usual.

Clifford Skelton: We're the only company of our kind with such capabilities. Where there are bills or disbursements, there are opportunities, and we're beginning to capitalize across all three segments with the first wins coming from government and transportation. More to come there, as states, municipalities, and a few large companies begin to socialize and operationalize their plans. Immediate payments is a bit like Gen AI, which we're also driving, especially in our customer experience business. Everyone sees the value, but the systemization and monetization of the concepts take time.

By way of an example of this and our transit business. Excluding the recent Australia deal with completing several large implementations that have been ongoing for some time.

And we've got approximately $70 million of revenue left to recognize on these deals on $150 million, one billing milestones to both invoice and collect hall.

So this $18 million gap is larger than usual and as a function of where we are in the latter stages of these implementations and that's creating these milestone gas and there's some of this going on in logic governments implementations as well as.

Clifford Skelton: Steve will go deeper on the financials to include cash flow timing and the outlook for the rest of the year, as well as provide explanations for the lumpiness here and there.

As I said before there's more ongoing implementations then for some time, including the large transit project in Australia, and so that's going to create some lumpiness that will lead to lay out carefully for you when we think about guiding 2024.

Clifford Skelton: As a situation is for all public companies, the publicly described quarter is important, but belief in the journey and tactics are critical. It's now clear to me that we had the right previous tactics in place, whereby shoring up the foundation first had to be exactly that first. It remains a journey and will continue to state a course. Our culture remains strong. We continue to refine our structure and our talent set for the future, while at the same time driving improvements in partnerships and excellence.

So cliff without I'll conclude my financial review for Q3, 2023, and I'll hand, it back to you for any closing comments.

Thanks, Steve as mentioned, we're pleased with the top line revenue even Ah in Q3 with more consistent performance expected ahead of us.

Meanwhile, we appreciate your attention amidst very trying times in the world.

It's times like this where all you can do as a company to stay the course.

Clifford Skelton: Our leadership team received recognition from comparably demonstrating that cultural strength, and we launched a very important partnership with Charles Schwab in our benefits outsourcing space. Meanwhile, retention in our workforce is the strongest since I arrived and improving. We must be and are focused on efficiency across the business as we rationalize our portfolio, starting with the divesture of benefit wallet.

Execute against the stated strategy focus and keep optimistic.

In fact, we do feel optimistic about the work we're doing in 2023 and how it impacts the remainder of the year into 2024, and our ability to hit the 2025 financial exit right, Steve articulated in our marched investor briefing.

The journey is in full swing.

Thanks again for being here today is that concludes our Q3 2000 twenty-three conduit earnings call.

Clifford Skelton: As we progress along this journey, I'd like to recognize our 60,000 strong workforce for the resilience and resolve along the way.

Thank you.

Concludes today's conference disconnect your lines at this time, thank you for your participation.

Clifford Skelton: I'd like to now turn it over to Steve for a deeper dive on the financials. We won't have the opportunity today for follow-on analyst questions, but please feel free to reach out to our IR team for questions.

Stephen Wood: Steve, over to you. Thanks, Cliff. As we have done in the past, we are reporting both gap and non-gap numbers. The reconfiliations are in our press release and in the appendix of the presentation. Let's turn to slide five and go over some of the key themes from our sales metrics. The punchline for Q3 is that our sales performance mirrored what we saw in the first two quarters of 2023, with a government and transportation segments generally outperforming the prior year compares.

Stephen Wood: On offsetting this, we've continued to see some softness in parts of commercial segment sales, as Cliff mentioned, there's plenty of deal activity in commercial, but there's smaller deals Cliff referred to them as singles and doubles, and at least to date this year we're lacking the same quantity of larger deals we saw in 2022. I first said last quarter, in the commercial segment we're seeing longer decision-making cycles and slightly more cautious buying behaviour.

Stephen Wood: We think driven by broader macro concerns consistent with others in our industry, the pipeline is still strong, but deals are taking a little longer than expected to close and it's changed our likely mix of full-year sales as we don't necessarily see this correcting itself in the next couple of quarters. In Q3 overall ACV was 154 million as compared to 191 million in Q3 2022, year-to-date were at 91% of last year's ACV attainment through the first three quarters.

Stephen Wood: TCV was 316 million in the quarters compared to 347 million in Q3 2022, and for TCV year-to-date were at 160% of last year's attainment through the first three quarters of 2023, driven primarily by the large long-term transit deal in Australia, which we announced in the second quarter and which we are now underway with implementing. We had a very strong fourth quarter in 2022 with some large government deals signing late in the quarter, and this year our path to a strong Q4 will also depend on the timing of a couple of these larger government deals, where there can be some unpredictability around time between award and signing of deals.

Stephen Wood: The net ARR activity metric, our combined measure of wins, losses, pricing effects and other contractual changes, was again positive for the quarter at 103 million. As a reminder, this trailing 12 month measure does not predict the timing of revenue, but is based on timing of notification, and as such, we'll fluctuate from quarter to quarter. Overall, we're pleased with the sales and pipeline development in the government and transportation segments, and segment level variability is a function of the breadth of our business.

Stephen Wood: We believe our government and transportation businesses have strong defensive characteristics against some of the broader macro trends we're seeing impacting our commercial segment in the short term. And as a reminder, as Cliffed earlier, our overall ACV pipeline stands at approximately 4.2 billion, which is its highest level for some time, with strong representation in some of our key strategic growth areas, like government health care. Very briefly on slide six, as a reminder, you can see the impact of the Australian deal in transit, and what that had on our second quarter sales results.

Stephen Wood: It represented around a billion dollars of TCV, 65 million of ACV, and we expect to recognize approximately 200 to 250 million in implementation revenues over a period of up to four years with most of that benefiting 2024 through 2027. Let's now look at the financial results for the quarter. Turning to slide seven, adjusted revenue for 2, 3, 2023 was 932 million, as compared to 977 million in Q3 2022, down 4.6 percent year over year, or 5.3 percent in constant currency.

Stephen Wood: Lee. This was slightly better than how I laid it out for you in last quarter's earnings due to a stronger performance in the government segment. As always, our quarters have discrete items that impact the individual segments, and I'll cover those when we double click into the segment results individually. In total, there's about 30 million of headwinds from these items in the compare this quarter. Putting those aside, overall winds and revenue ramped from new clients and expanded client relationships outpaced lost business.

Stephen Wood: But consistent with the last couple of quarters, this was offset primarily by lower CX volumes from some larger clients where we continue to see softness in specific verticals like travel, logistics and telecom. We continue to believe these are predominantly macro related and as such should reverse over time. Thinking about our revenue holistically, we're in the period now where we're transitioning from a long downward trajectory through a period that will take us into the early part of next year where we expect winds and ramped revenue to generally outpaced lost business.

Stephen Wood: And we're seeing these losses begin to normalise into the ranges we outlined in our March investor briefing. Meanwhile, we expect volumes from installed clients to be a headwind in the short term, while there's the macro related pressures that we and others are seeing. But over time, they should dissipate. Adjusted EBITDA was 92 million for the quarter as compared to 105 million in Q3 2022, and the adjusted EBITDA margin of 9.9% was down 80 basis points year over year as compared to Q3 2022.

Stephen Wood: This was in line with our expectations and how I laid it out at our last earnings call. Most of the year over year impact was driven by the discrete items I'll cover when we go through the segments. Before I move on to discuss the segments, there are a couple of other comments on the gap results for the quarter. First, on September 26th, we announced that we'd entered into a definitive agreement for the transfer of our benefit wallet, HSA portfolio, for an approximate purchase price of 425 million.

Stephen Wood: The transaction, which is treated as an asset sale, is expected to close during the first half of 2024 in several tranches. Consequently, this was identified as a triggering event that required us to evaluate the commercial segment Goodwill for impairment and resulted in an impairment charge of 287 million, primarily due to this deal. When the deal closes in 2024, we will record an approximate pre-tax gain of 425 million. Secondly, as we continue to evaluate and refine our capital portfolio strategy, we took a non-cash impairment charge of 25 million related to two software projects.

Stephen Wood: Both items are consistent with our strategic priorities to rationalize the portfolio and narrow our investment focus.

Stephen Wood: Let's turn to slide eight and go over the segment results. For Q3 2023, commercial segment adjusted revenues were 465 million down 7.7% as compared to Q3 2022. The benefit wallet drove a 12 million increase year over year, and non-repeating items were a combined headwind of 28 million. New business ramp and add-ons fails outpace losses for a combined 21 million benefit to revenue. The balance of the walk-on revenue was negative volume impacts from some large clients, predominantly in the CX space where we're continuing to see softer outlooks in industries including travel, logistics, and telephone, which we believe are macro-related and therefore likely temporary.

Stephen Wood: Adjusted EBITDA for the commercial segment in Q3 2023 was 57 million, down 16% as compared to Q3 2022, and the adjusted EBITDA margin of 12.3% with down 120 basis points year over a year. The margin impact on the non-repeating items in the prior year compare as well as the noted volume impacts were both headwinds and they were partially offset from increased fall-through on benefit wallet along with continuing work on operational efficiency.

Stephen Wood: For the government segment, Q3 2023 adjusted revenues were 290 million, down 0.3% as compared to Q3 2022. Included in that was the year over year impact of the runoff of government stimulus of 11 million in the quarter. We had strong volumes in our government payments business and sales ramp from implementations in our government health care business where a contractual change to a client implementation also drove an incremental revenue benefit. This discrete item was worth 7 million in the quarter, top and bottom line.

Stephen Wood: Adjusted EBITDA for the government's Fagment in Q3 2023 was 95 million, up 8% year over year. The adjusted EBITDA margin was 32.8% up 260 basis points year over year and benefited from the margin fall-through on the contract change.

Stephen Wood: Moving on to transportation and before we get into the numbers specifically, you'll recall that I've said in prior quarters that we expect to see a sequential improvement during the year, both in revenues and margin outcomes, as we transitioned certain clients on large long-running implementations through GoLive. From a timing perspective, this proved a little too optimistic. Some of these programs have gone live during the second and third quarters, however others are experiencing extended completion timelines.

Stephen Wood: Many times driven by increased or changing client scope and requirements, as we nearly ended these multi-year programs, which caused more of a drag on revenue and margins during the third quarter. Transportation's Fagment adjusted revenues in Q3 2023 were 117 million, down 2.7% year over year. Driven by losses and the aforementioned impact of lower implementation revenue was compared to Q3 2022. For the transportation segment, adjusted EBITDA for the quarter was 7 million, as compared to 25 million in Q3 2022, and the adjusted EBITDA margin was 4%.

Stephen Wood: Significantly down on Q3 2022, because of these extended implementation times. Lines. We're intently focused on implementation discipline and our new senior leadership within this segment continues to work to return the business to more predictable revenue and more acceptable margin trajectories.

Stephen Wood: Let's now turn to slide 9 and discuss the balance sheet and cashflow. Our total liquidity position continues to remain strong with around $1 billion in cash and available revolving credit facility. We ended the quarter with approximately 455 million of total cash on the balance sheet, and our 550 million revolving credit facility is almost completely unused at this point. Our net leverage ratio increased slightly to 2.3 turns, but it remains comfortably within our range of two to two and a half turns.

Stephen Wood: Our debt maturity is elongated and we have no significant debt repayments until 2026. Capital expenditure in the third quarter was 3% of revenue. We're continuing to find opportunities to drive efficiencies in our capital investment programs, and as you'll see on the next slide, we've again revised down our full year expectations on capital spend. We're still expecting our 29 million federal tax refund related to 2018 to be received this year. We launched our initial share buyback program late in the second quarter and repurchased approximately 2 million shares during the quarter, and as at the end of Q3, we purchased approximately 2.2 million shares at an average price of $3.32. As a reminder, the initial approved scheme is a three-year program for an aggregate of 75 million.

Stephen Wood: Let's now turn to slide 10 to look at our 2023 outlook. We expect fourth quarter adjusted revenue to be in the range of 935 to 945 million, resulting in a full year outlook of between 3.7 and 3.72 billion. As I said last quarter, there's a mixed shift of new business bookings in our backlog now with a higher relative share of government and transportation deals that will take slightly longer to come out of backlog as compared to commercial deals which ramp to revenue more quickly.

Stephen Wood: For adjusted EBITDA margin, we expect the full year outcome to be approximately 10%. We are revising down our expected full year outcome for adjusted free cash flow as a percentage of adjusted EBITDA. The extended completion timelines I referenced in the segment results are now likely to result in some significant milestone payments moving into the early part of 2024. I'll give more detail on that when we guide expected 2024 cash flow outcomes.

Stephen Wood: But we're in a period now where we have several large implementations across government and transportation and a higher relative share of our cash flows is now tied into billing milestones which is creating more unpredictabilities than usual. By way of an example of this, in our transit business, excluding the recent Australia deal, we're completing several large implementations but have been ongoing for some time. And we've got approximately 70 million of revenue left to recognize on these deals and 150 million of billing milestones for both invoice and collect.

Stephen Wood: Skelton. So this 80 million gap is larger than usual and is a function of where we are in the latter stages of these implementations. And that's creating these milestone gaps. And there's some of this going on in larger government implementations as well. As I said before, there's more ongoing implementations than for some time, including the large transit project in Australia. And so that's going to create some longiness that we'll need to lay out carefully for you when we think about guiding 2024.

Clifford Skelton: So Cliff, with that I'll conclude my financial review for Q3 2023 and I'll hand it back to you as Ronnie closing comments. Thanks, Steve. As mentioned, we're pleased with the top-line revenue in EBITDA in Q3 with more consistent performance expected ahead of us.

Clifford Skelton: Meanwhile, we appreciate your attention amidst very trying times in the world. It's times like this where all you can do as a company is state of course, execute against a stated strategy, focus, and keep optimistic. In fact, we do feel optimistic about the work we're doing in 2023 and how it impacts the remainder of the year into 2024 and our ability to hit the 2025 financial exit rate, Steve, articulated in our March and Vester briefing. The journey is in full swing.

Clifford Skelton: Thanks again for being here today.

Operator: That concludes our Q3 2023 conduit earnings call. Thank you.

Operator: This concludes today's conference. We disconnect your lines this time. Thank you for your