Q2 2024 Conduent Inc Earnings Call

Speaker Change: Welcome to the Conduit second quarter 2024 earnings conference call. At this time all participants are in a listen-only mode.

Operator: At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Giles Goodburn, Vice President, Investor Relations. Thank you. You may begin.

Speaker Change: A question and answer session will follow the formal presentation.

Speaker Change: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Giles Goodburn, Vice President, Investor Relations. Thank you.

Giles Goodburn: Thank you, operator, and thanks, everyone, for joining us today to discuss Conduent's second quarter 2024 only. I'm joined today by Cliff Skelton, our President and CEO, and Steve Wood, our CFO.

Giles Goodburn: We hope you had a chance to review the press release issued earlier this morning. This call is being webcast, and a copy of the slides used during this call, as well as the press release, was filed with the SEC this morning on Form 8K. This information, as well as the detailed financial metrics package, is available in the Investor Relations section of the Conduent website. During this call, we may make statements that are forward-looking.

Speaker Change: This information, as well as the detailed financial metrics package, are available on the Investor Relations section of the Conduent website.

Giles Goodburn: 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 differ materially from those statements. Information concerning these factors is included in Conduent's 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.

Speaker Change: During this call, we may make statements that are forward-looking.

Speaker Change: 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.

Giles Goodburn: 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.

Speaker Change: The information presented today includes non-GAAP financial measures. Because these measures are not calculated in accordance with the U.S. GAAP, they should be viewed in addition to and not as a substitute for the company's reported results.

Speaker Change: 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.

Giles Goodburn: And now, I'd like to turn the call over to Cliff.

Clifford Skelton: Thanks, Giles, and welcome, everyone, to our Q2 Earnings. This earnings today will be just a little bit different. We'll have Steve begin with the financials today, and I'll follow with a strategic discussion regarding progress on our strategy framed by the categories of people and organization, our processes and objectives, and our products and our technology. But in summary, Q2 adjusted revenue and adjusted EBITDA were $811 million and $29 million, respectively, at a 3.6% margin, all exceeding expectations. New business signings were $142 million, up sequentially and flat year-over-year, net of the large state of Victoria deal last year in our transportation bill.

Speaker Change: Thanks, Giles, and welcome, everyone, to our Q2 earnings.

Speaker Change: This earnings today will be just a little bit different. We'll have Steve begin with the financials today and I'll follow with a strategic discussion regarding progress on our strategy framed by the categories of people in organization, our processes and objectives, and our products and our technology.

Steve: But in summary, Q2 adjusted revenue and adjusted EBITDA were $811 million and $29 million respectively at a 3.6% margin, all exceeding expectations.

Speaker Change: New business signings were $142 million up sequentially and flat year-over-year in net of the large state of Victoria deal last year in our transportation business.

Clifford Skelton: This was all characterized by some recent strength in commercial sales, some weakness in government, and a transportation business holding its own. Finally, the net ARR number was negative for the first time, representing a low point due to the timing and sequence that Steve will discuss in a moment. All of this points to a consistent theme. When we're at the low point in our journey, in the trough, as we say, we continue to be exactly where we said we'd be. In fact, a little better in terms of revenue and EBITDA.

Speaker Change: This was all characterized by some recent strength in commercial sales, some weakness in government, and a transportation business holding its own.

Speaker Change: Finally, the net ARR number was negative for the first time representing the low point due to the timing and sequence that Steve will discuss in a moment.

Clifford Skelton: And we've said all along that this is part of a continued path to a 2025 exit rate parameter, lowered net debt leverage ratios, sequential margin improvement, and less capital intensity. Meanwhile, our divestiture activity is progressing as planned, allowing us to deleverage our balance sheet and buy back some of our own stock, including that formerly owned by Carl Icahn, which has also allowed us to simplify and streamline our board and, in fact, create some new strategic dialogue. Steve will explain the effect of those divestitures and discuss where we are in that revenue EBITDA cycle. So, let me hand it over to Steve. Steve? Thanks, Cliff.

Steve: And we've said all along that this is part of a continued path to a 2025 exit rate parameter, lowered net debt leverage ratios, sequential margin improvement, and less capital intensity.

Steve: Meanwhile, our divestiture activity is progressing as planned, allowing us to deleverage our balance sheet and buy back some of our own stock.

Steve: Steve will explain the effect of those divestitures and discuss where we are in that revenue EBITDA cycle. So let me hand it over to Steve. Steve? Thanks, Cliff.

Stephen Wood: As we have done in the past, we're reporting both GAAP and non-GAAP numbers. The reconciliations are in our filings and in the appendix of the presentation. Now, let's turn to slide five.

Stephen Wood: I want to highlight again the progress that we're making towards our billion dollars of deployable capital exiting 2025 that we've previously laid out for you in our investor events and earnings updates. We've made significant progress with rationalizing our portfolio. During the quarter, we completed the second and final tranches of the benefit wallet transfer, receiving the remainder of the $425 million in proceeds. The curbside and public safety divestiture closed on April 30th, for which we received $174 million at close, with a further $61 million deferred over the next nine months.

Stephen Wood: Also in the quarter, we announced the sale of our Casualty Claims Solutions business for a price of $240 million, subject to certain purchase price adjustments, which we anticipate will close later in Q3. These combined proceeds, along with an updated and more favorable view on the tax drag associated with these divestitures, puts us in the upper quartile of the $600 million to $800 million of targeted net proceeds. To date, of the billion dollars of targeted deployable capital, we've deployed around 66%, or $660 million, against debt prepayment and share repurchase. During the quarter, we prepaid $300 million of our Term Loan B and repurchased approximately 43.3 million shares. I'll cover more detail on this later in my presentation.

Steve: Also in the quarter, we announced the sale of our Casualty Claims Solutions business for a price of $240 million, subject to certain purchase price adjustments, which we anticipate will close later in Q3.

Speaker Change: These combined proceeds, along with an updated and more favorable view on the tax drag associated with these divestitures, puts us in the upper quartile of the $600 to $800 million of targeted net proceeds.

Speaker Change: During the quarter, we prepaid $300 million of our Term Loan B and repurchased approximately 43.3 million shares. I'll cover more detail on this later in my presentation.

Stephen Wood: Suffice to say, we're where we said we'd be vis-a-vis this key component of our overall strategy. We've made significant strides in reducing our debt against a business that was traditionally too highly levered, and even post these initial divestitures, Conduent retains a rich portfolio of assets that we continue to believe have strategic value, and Cliff will talk about a number of different aspects of that later in the call, but first, let's get through the earnings part of the narrative. Our reported numbers have started to deviate from the guide that we laid out at the beginning of the year because of the two closed divestitures.

Speaker Change: We've made significant strides in reducing our debt against a business that was traditionally too highly levered.

Speaker Change: And even post these initial divestitures, Conduent retains a rich portfolio of assets that we continue to believe have strategic value.

Speaker Change: Our reported numbers have started to deviate from the guide that we laid out at the beginning of the year because of the two closed divestitures.

Stephen Wood: And so consistent with the approach I outlined then, we are reporting Q2 numbers on an adjusted basis, fully backing out the divestitures, as well as providing a guide for the remainder of 2024 for adjusted revenue and adjusted EBITDA. I'll also give you our expectations as to how this will look for Q3, consistent with our past practice of guiding the upcoming quarter. We have published a full set of historical adjusted financials in our investor metrics file, which you will find in the investor section of the Conduent website.

Speaker Change: And so consistent with the approach I outlined then, we are reporting Q2 numbers on an adjusted basis, fully backing out the divestitures, as well as providing a guide for the remainder of 2024 for adjusted revenue and adjusted EBITDA.

Stephen Wood: In our Q3 earnings, we'll likely be updating our full-year guidance once more to adjust for the closure of the casualty claims solutions business. It's important to note here once again that we will continue to work on the removal of stranded costs through 2024 and into 2025, and so the annualization of these won't be fully reflected in our numbers until the back end of 2025. Finally, we'll continue to provide you with an updated walk to our 2025 exit rate so you can bridge between our Actuals, our 2024 Adjusted Guide, and the 2025 Exit Rate Outlook we've laid out. Let's get into the slides, turning to slide six and reviewing our key sales metrics.

Speaker Change: Let's get into the slides, turning to slide 6 and reviewing our key sales metrics.

Stephen Wood: As you look at all of the sales metrics on slides six and seven, it's important to note that we've adjusted all of these to exclude the two completed divestments. As I prefaced in Q1 earnings, Q2 sales rebounded from the soft start to the year, with ACV coming in at $142 million as compared to $97 million in Q1 and $205 million in Q2 2023. As a reminder, Q2023 was the quarter in which we signed the State of Victoria Transit Deal, which contributed about 65 million ACV and over a billion TCV.

Speaker Change: As a reminder, Q2023 was the quarter in which we signed the State of Victoria Transit Deal, which contributed about 65 million of ACV and over a billion of TCV.

Stephen Wood: While pleased with our rebound in Q2 sales, we're looking to continue improvement in the second half of the year. Adjusted for the effect of the two completed divestitures, we're expecting a full year outcome of between 525 and 575 million ACV. We have some bigger deals in our public sector markets during the second half, where precision in predicting timing can be an issue.

Stephen Wood: Within commercial, we're expecting to see the strong second quarter continue into the second half of the year. Double-clicking on the Q2ACV number, as I stated last quarter, we see renewed urgency to address cost and drive technology upgrades and business transformation through outsourcing, both in the CX and BPAS spaces, where we play strongly with a broad set of offerings. This translated to strong Q2ACV sales attainment in our commercial segment of 82 million ACV.

Speaker Change: This translated to strong Q2ACV sales attainment in our commercial segment of 82 million of ACV.

Stephen Wood: We've had an encouraging start to the third quarter, and we're making some targeted investments to expand delivery capacity in some of our strategic global locations. Our government and transportation segments achieved strong add-on business from our existing clients, which drove an increase in NRR in the quarter. The government health care business continues to have a strong pipeline relating to the requirements for states to modernize and modularize their Medicaid technology environment.

Speaker Change: The government healthcare business continues to have a strong pipeline relating to the requirements for states to modernize and modularize their Medicaid technology environments.

Stephen Wood: Turning to slide seven, we've covered many of the metrics on the previous slide, but just a couple of extra pointers here to comment on. The net ARR activity metric turned negative this quarter, consistent with how I expressed in last quarter's earnings, at a negative $49 million. Adjusted for the two closed divestitures, we expect the metric to stand at around $80 to $90 million by the end of 2024, with a recovery to a positive number in the third quarter.

Speaker Change: Turning to slide 7, we've covered many of the metrics on the previous slide, but just a couple of extra pointers here to comment on.

Speaker Change: The net ARR activity metric turned negative this quarter, consistent with how I messaged in last quarter's earnings, at negative 49 million.

Stephen Wood: The reason that it was negative in the quarter, as I said previously, is that there was pronounced asymmetry in our notified losses last year, with them being far more weighted to the back half of the year. These will roll out as the trailing 12-month view in the coming quarters, and additionally, we have confidence in the sales pipeline for the remainder of 2024. And really, that's what's driving this porpoising effect that you're going to see in this metric while this asymmetry remains.

Speaker Change: The reason that it was negative in the quarter, as I said previously, is that there was pronounced asymmetry in our notified losses last year, with them being far more weighted to the back half of the year.

Stephen Wood: Now let's turn to slide 8 and discuss our Q2 2024 financial results. Adjusted revenue for Q2 2024 was $811 million as compared to $851 million in Q2 2023, down 4.7% year-over-year and down 4.6% on a constant currency basis, slightly ahead of our internal expectations. I'll cover the segment level detail in a minute, but the overall view is that we continue to make progress in our commercial and transportation segments. However, the trajectory of recovery in our government segment will continue into 2025.

Speaker Change: slightly ahead of our internal expectations. I'll cover the segment level detail in a minute, but the overall view is that we continue to make progress in our commercial and transportation segments.

Speaker Change: However, the trajectory of recovery in our government segment will continue into 2025. Adjusted EBITDA was $29 million for the quarter as compared to $64 million in Q2 2023.

Stephen Wood: Adjusted EBITDA was $29 million for the quarter as compared to $64 million in Q2 2023, and the adjusted EBITDA margin was 3.6% for the quarter as compared to 7.5% in Q2 2023. This conforms to the low single-digit margin I guided for Q2. We're anticipating a sequential climb now each quarter as we progress through the remainder of 2024 and into 2025, and the drivers of this are threefold. Firstly, the cost efficiency work that we built into our original 2024 guide to compensate for the losses and contract roll-offs naturally has more impact as we get deeper into the year and continues to add incremental benefit in 2025 as it annualizes. We're in good shape with these cost efficiency programs, with over 90% of the target having been achieved as we head into the second half of the year.

Speaker Change: and the adjusted EBITDA margin was 3.6% for the quarter as compared to 7.5% in Q2 2023. This conforms to the low single-digit margin I guided for Q2.

Speaker Change: We're in good shape with these cost efficiency programs, with over 90% of the target having been actioned as we head into the second half of the year.

Stephen Wood: These cost efficiency programs were baked into how we originally built our 2024 guide of an 8 to 9% adjusted EBITDA margin, and we'd still be in that range without taking out these divestitures, albeit probably at the low end of that range. Secondly, you've got our stranded cost and additional margin expansion work, which we're just getting started on. We're anticipating around $15 million of that $100 million to manifest in 2024, with more in 2025 and clearly annualizing to that $100 million as we exit 2025, consistent with how we laid out the walk for you in our exit rate outlook that we've been sharing. Finally, there's a little bit more revenue in the third and especially the fourth quarters from RAMP and Open Enrollment in our Healthcare Virtus. So now, let's turn to slide 9 and go over the segment results.

Speaker Change: These cost efficiency programs were baked into how we originally built our 2024 guide of an 8 to 9% adjusted EBITDA margin, and we'd still be in that range without taking out these divestitures, albeit probably at the low end of that range.

Speaker Change: Secondly, you've got our stranded cost and additional margin expansion work, which we're just getting into.

Speaker Change: So now let's turn to slide 9 and go over the segment results.

Stephen Wood: For Q2 2024, Commercial Segment Adjusted Revenues were $425 million, down 3.8% as compared to Q2 2023. The top line story for the commercial segment this quarter continues to be one of working off the effect of some prior year lost business. We still expect the growth gap to narrow due to improving sales performance and retention and the segment coming closer to flat as we exit 2024. Adjusted EBITDA for the commercial segment in Q2 2024 was $ 41 million, down 12.8% as compared to Q2 2023, and the adjusted EBITDA margin of 9.6% was down 100 basis points year over year, driven by the impact of losses and some volume fluctuation.

Speaker Change: For Q2 2024, commercial segment adjusted revenues were $425 million, down 3.8% as compared to Q2 2023.

Speaker Change: Adjusted EBITDA for the commercial segment in Q2 2024 was $41 million, down 12.8% as compared to Q2 2023.

Stephen Wood: As a reminder, commercial segment EBITDA margins have reset due to the high margin nature of the benefit wallet business we divested, which is now not in these adjusted numbers. Obviously, you'll recall that this business was totally dependent on high interest rates.

Speaker Change: As a reminder, commercial segment EBITDA margins have reset due to the high margin nature of the benefit wallet business we divested, which is now not in these adjusted numbers.

Speaker Change: Obviously, you'll recall that this business was totally dependent on high interest rates.

Stephen Wood: Over time, this will be offset through our work to remove stranded costs, other operational efficiencies, and improved operating margin, as well as margin mix, as the segment begins to move towards growth. We expect some modest sequential improvements to EBITDA margin as we move through the next few quarters. For the government segment, Q2 2024 revenues were $245 million, down 9.3% as compared to Q2 2023. The decreases you see this quarter, and as we progress and lap them going into 2025, are driven by three very discreet items. Firstly, there's the effect of the government health care contract we referenced in February, where the contract was terminated for reasons other than performance.

Speaker Change: Over time, this will be offset through our work to remove stranded costs, other operational efficiencies, and improved operating margin, as well as margin mix, as the segment begins to move towards growth.

Speaker Change: The decreases you see this quarter and as we progress and lap them going into 2025 are driven by three very discreet items.

Speaker Change: Firstly, there's the effect of the government health care contract we referenced in February , where the contract was terminated for reasons other than performance.

Stephen Wood: We'd hoped to retain some scope of work there, but that didn't materialize, and so the revenue ran off at the end of the first quarter. The effect then in Q2 was approximately 4.5 points of the 9.3% year-over-year decline. In Q3, this is going to be approximately 6 points of decline and in Q4, 5 points of decline, both as compared to the prior year. This effect is then lapped as we move into 2025

Speaker Change: The effect then in Q2 was approximately 4.5 points of the 9.3% year-over-year decline.

Speaker Change: In Q3, this is going to be approximately 6 points of decline, and in Q4, 5 points of decline, both as compared to prior year. This effect is then lapped as we move into 2025.

Stephen Wood: Secondly, there are lower SNAP volumes in our government payments business, as fewer states continue with the supplemental programs due to the change in funding structure, as well as a lost client. This is about two to three points of revenue decline in the quarter and when compared against the prior year for the remaining quarters of 2024, it's about the same.

Speaker Change: Secondly, there's lower SNAP volumes in our government payments business, as fewer states continue with the supplemental programs due to the change in funding structure, as well as a lost client.

Speaker Change: This is about two to three points of revenue decline in the quarter, and when compared against prior year for the remaining quarters of 2024, it's about the same. This effect is then similarly lapped as we move into 2025.

Stephen Wood: This effect is then similarly lapped as we move into 2025. Finally, there's a price down on a large state eligibility program that started to take effect here in Q2, contributing around 1.5 points of revenue decline in the quarter. It will be two to three points of decline per quarter as compared to the prior year until we lap this effect midway through Q2 2025. Just so that you can complete the picture on this one, there's about a point of all other growth in Q3 revenue and three points of growth assumed in Q4, both as compared to the prior year.

Speaker Change: Just so that you can complete the math on this one, there's about a point of all other growth in Q3 revenue and three points of growth assumed in Q4, both as compared to prior year.

Stephen Wood: And that will get you to an overall 9% down in Q2 and an expected 11-12% down in Q3 and 6-7% down in Q4 against prior year comparisons, with only the price down on the large state program having any annualization of impact into 2025. Overall, this adjusts our fully expected outcome for government revenue to be down about 7.5% in 2024 versus 2023. We previously expected to be able to make up some of this with new business, but, as previously discussed,

Speaker Change: Overall, this adjusts our fully expected outcome for government revenue to be down about 7.5%, 2024 versus 2023.

Speaker Change: We previously expected to be able to make up some of this with new business, however as previously discussed, sales performance has lagged expectations so far this year and so the revenue from new business in the government segment will likely now manifest in 2025.

Stephen Wood: Sales performance has lagged expectations so far this year, and so the revenue from new business in the government segment will likely now manifest in 2025. It's important to reiterate it's driven by a few items, and absenting these, we feel good about the base revenue, with a lot of pipeline opportunity to convert in front of us. The government segment makes up a disproportionate amount of our forward pipeline of 4.2 billion ACV.

Speaker Change: It's important to reiterate it's driven by a few items, and absenting these we feel good about the base revenue, with a lot of pipeline opportunity to convert in front of us.

Stephen Wood: Adjusted EBITDA for the government segment in Q2 2024 was $49 million, down 36% year-over-year. The above-mentioned three discrete items are again most of what drives this, as well as some short-term elevated expenses related to a couple of implementations in flight that should normalize later in the year. Transportation segment adjusted revenues in Q2 2024 were $141 million, up 1.4% year-over-year.

Speaker Change: Adjusted EBITDA for the government segment in Q2 2024 was $49 million, down 36% year-over-year.

Speaker Change: Transportation segment adjusted revenues in Q2 2024 were $141 million, up 1.4% year-over-year.

Stephen Wood: The implementation ramp from our large transit project in Australia was $22 million, however, almost completely offset by a long-anticipated reduction in scope and pricing adjustment for our large, long-term client and our tolling business. For the transportation segment, adjusted EBITDA for the quarter was $3 million, as compared to $9 million in Q2 2023, and the adjusted EBITDA margin was 2.1%. The primary driver here was revenue mix, specifically between the two contracts noted previously, and partially offset by improved operational performance.

Speaker Change: For the transportation segment, adjusted EBITDA for the quarter was $3 million as compared to $9 million in Q2 2023, and the adjusted EBITDA margin was 2.1%.

Speaker Change: The primary driver here was revenue mix, specifically between the two contracts noted previously, and partially offset by improved operational performance.

Stephen Wood: There's been a margin reset within transportation because of the divestiture of the curbside and public safety business, and this is one area where we have several initiatives underway to remove stranded costs, drive incremental operating efficiency, and continue to build scale back into our tolling and transit business. In the next couple of quarters, you are going to see EBITDA margin in this sort of range, absenting any effect from discrete items. But our path forward is the letters that I highlighted above, and these should drive incremental improvement as we progress through 2025.

Speaker Change: There's been a margin reset within transportation because of the divestiture of the curbside and public safety businesses.

Speaker Change: This is one area where we have several initiatives underway to remove stranded costs, drive incremental operating efficiency, and continue to build scale back into our tolling and transit businesses.

Speaker Change: But our path forward is the letters that I highlighted above, and these should drive incremental improvement as we progress through 2025.

Stephen Wood: Let's turn to slide 10 and discuss the balance sheet and cash flow. We ended the quarter with approximately $307 million of total cash on the balance sheet, and our $550 million revolving credit facility was largely undrawn at the end of the quarter. In the quarter, we made payments on debt of $328 million, including voluntarily pre-paying $300 million on our term loan bid.

Speaker Change: In the quarter, we made payments on debt of $328 million.

Speaker Change: including voluntarily pre-paying $300 million on our term loan bid.

Stephen Wood: We have additional authority to repay debt up to $200 million from future divestiture proceeds, which would deal with our near and mid-term maturity. In the quarter, we deployed approximately $150 million in repurchasing 43.3 million shares at an average price of $3.46. This included the opportunity to repurchase all the shares owned by Carl Icahn through certain of his affiliates, for an approximate aggregate purchase price of $132 million.

Speaker Change: In the quarter, we deployed approximately $150 million in repurchasing 43.3 million shares at an average price of $3.46.

Speaker Change: This included the opportunity to repurchase all the shares owned by Carl Icahn through certain of his affiliates.

Speaker Change: for an approximate aggregate purchase price of $132 million.

Stephen Wood: You've seen from our work on how we've deployed the billion dollars of capital that we think our steady-state cash need in the business is somewhere around the $350 million mark. We ended the quarter a little bit below that because of the opportunity to enter into the repurchase of the ICON shares. If we look forward over the coming quarters, we're expecting to receive net proceeds of approximately $200 million in relation to the expected closure of the sale of the Casualty Claims Solutions business and an additional $61 million of deferred purchase consideration on the sale of our curbside and public safety business.

Stephen Wood: The combination then of a stronger outlook for the second half of the year on operating cash flow as we reach several important billing milestones on some large contracts, as well as the inflows from our divestiture program, has us in good shape to continue to prepay debt as desired, manage our leverage, and maintain our desired level of liquidity. Our net leverage decreased to 1.7 turns, below our previous target range of 2 to 2.5 turns.

Stephen Wood: You'll see in our exit rate outlook for 2025, our medium-term target, considering some additional debt prepayment, is around one turn of net leverage. Capital expenditure in the second quarter was 3.6% of revenue, and we expect to be at about 3% of revenue or slightly below that for full year 2024.

Speaker Change: You'll see in our exit rate outlook for 2025, our medium-term target, considering some additional debt prepayment, is around one turn of net leverage.

Stephen Wood: Let's turn now to slide 11 and cover our outlook for 2024. You heard me say earlier that within the government segment, we expect the revenue decline to be in the 7% to 8% range for 2024. But overall, I'd say that we're still above the midpoint of our original guide on revenue for 2024, had we not divested the two businesses, with Commercial and Transportation doing slightly better, and for EBITDA, again, as I said earlier, my sense is that we'd be somewhere around the lower end of the guided range we laid out then, about 8% without taking out these divested businesses.

Speaker Change: with commercial and transportation doing slightly better. And for EBITDA, again, as I said earlier, my sense is that we'd be somewhere around the lower end of the guided range we laid out then, about 8%, without taking out these divested businesses.

Stephen Wood: As you now look at our adjusted outlook on this page, you'll see that the basis for our guidance has been restated to adjust for the two closed divestitures. We expect full-year adjusted revenue to be in the range of $3.325 billion to $3.375 billion. At the midpoint, that's about 3% down year-over-year.

Stephen Wood: And we expect the adjusted EBITDA margin to be in the range of 4% to 5%, with sequential improvement from Q2 here on. We expect these ranges to be further adjusted in our Q3 earnings for the anticipated close of the Casualty Claims Solutions business, which will equate to approximately $150 million of revenue and about one point of reduction in EBITDA. In terms of some of our other modeling considerations, we expect adjusted free cash flow as a percentage of adjusted EBITDA to be around zero.

Speaker Change: We expect these ranges to be further adjusted in our Q3 earnings for the anticipated close of the Casualty Claims Solutions business.

Speaker Change: which will equate to approximately $150 million of revenue and about one point of reduction in EBITDA margin.

Stephen Wood: This is due to the loss of adjusted EBITDA from the divested businesses from the point of closure, partially offset by cost efficiency work and a substantial reduction in our interest expense. However, to reiterate, this is not a fully adjusted metric.

Stephen Wood: We don't break out discrete cash flows at the level of these divested assets, so we've moved it down in the table here and are removing it from our fully adjusted guide for the time being to present it as an additional modeling consideration. Finally, you'll see CAPEX reducing here with the effect of the divestitures, with more to come when we complete the Expected Casualty Claims Solutions divestiture in the third quarter. Moving on to slide 12.

Stephen Wood: This continues to be an important view, giving you a walk to that exit rate in 2025, and remains how we think about the journey we're on over the next 18 months or so. You will notice that we've added incremental detail here to complete the 2025 exit rate view. We've also made some minor adjustments to this walk.

Stephen Wood: Firstly, we've reduced the divested revenue from $500 million to 450 million to account for some revenue streams that we've retained from the three announced divestitures versus those originally contemplated. The three announced transactions account for approximately $400 million of divested revenue, and the loss of EBITDA from these three divested businesses is approximately $135 million. With more clarity related to the proceeds from the three announced divestitures and, more specifically, a reduction in the anticipated tax drag, we're increasing the net proceeds from the three announced transactions to $750 million, an increase of $50 million, and in the upper quartile of our targeted range of $600 to $800 million of after-tax proceeds.

Speaker Change: We've also made some minor adjustments to this walk. Firstly, we've reduced the divested revenue from $500 million to $450 million to account for some revenue streams that we've retained from the three announced divestitures versus those originally contemplated.

Speaker Change: The three announced transactions account for approximately $400 million of divested revenue.

Speaker Change: With more clarity related to the proceeds from the three announced divestitures and more specifically a reduction in the anticipated tax drag

Speaker Change: We're increasing the net proceeds from the three announced transactions to 750 million, an increase of 50 million, and in the upper quartile of our targeted range of 600 to 800 million of after-tax proceeds.

Stephen Wood: We've refined our margin expansion assumption to be in the range of 2% to 2.5%, reflecting certain expected pricing and contractual outcomes on a large federal contract renewal within our government payments business. As many of you know, we run the card processing for the federal government's direct express program on behalf of a large regional bank.

Speaker Change: Many of you will know we run the card processing for the federal government direct express program on behalf of a large regional bank.

Stephen Wood: It's been informally reported that this contract is being negotiated with another bank and processing vendor and that negotiations will continue through this year. At this stage, we have not included this as a notified loss in our net ARR metric for the full year 2024, as we understand that the notification was both informal and preliminary. Nor does it adjust our 2025 revenue outlook, as we minimally expect to have this revenue in 2026, given the likely long transition timeline needed to move this complex program that we've run for over 15 years.

Speaker Change: It's been informally reported that this contract is being negotiated with another bank and processing vendor and that negotiations will continue through this year.

Speaker Change: At this stage, we have not included this as a notified loss in our net ARR metric for the full year 2024, as we understand that the notification was both informal and preliminary.

Speaker Change: Nor does it adjust our 2025 revenue outlook, as we minimally expect to have this revenue into 2026, given the likely long transition timeline needed to move this complex program that we've run for over 15 years.

Stephen Wood: At this point, the margin refinement in our walk removes the incremental pricing we intended to achieve on this renewal in order to make this contract attractive for us to retain. For size, it's approximately $100 million of revenue and is very marginally profitable and dilutive to the government segment as currently priced. Our capital allocation plans include an additional $200 million of board authority to prepay debt. Over time, as EBITDA recovers sequentially, this will drive our net leverage ratio towards our new target range of approximately one.

Speaker Change: For size, it's approximately $100 million of revenue and is very marginally profitable and dilutive to the government segment as currently priced.

Speaker Change: Over time, as EBITDA recovers sequentially, this will drive our net leverage ratio towards our new target range of approximately one term.

Stephen Wood: Interest expense will be approximately $38 million on $600 to $700 million of debt, and this results in an adjusted free cash flow range of between 25 and 30 percent. The strength of our sales pipeline and proven programmatic approach to cost reduction, already underway, gives us confidence to remain committed to achieving these 2025 exit rate targets, as well as our ability to generate and deploy the billion dollars, of which 66 percent is already deployed.

Speaker Change: Interest expense will be approximately $38 million on $600 to $700 million of debt. And this results in an adjusted free cash flow range of between 25 and 30%.

Speaker Change: The strength of our sales pipeline and proven programmatic approach to cost reduction already underway.

Speaker Change: gives us confidence to remain convicted in achieving these 2025 exit rate targets, as well as our ability to generate and deploy the billion dollars of which 66% is already deployed.

Stephen Wood: In terms of Q3, adjusted for the two divestitures completed, we are expecting adjusted revenue to be in the range of $815 million to $825 million. And we would expect to see a sequential improvement in adjusted EBITDA margin for the third quarter to be in the range of 3.75 to 4.25 percent as we continue our work on our cost efficiency programs and remove stranded costs. That concludes my financial remarks for the quarter, and I'll hand it back over to Cliff for the broader business update, because there's a lot going on there as well.

Speaker Change: In terms of Q3, adjusted for the two divestitures completed, we are expecting adjusted revenue to be in the range of $815 million to $825 million.

Speaker Change: And we would expect to see a sequential improvement in adjusted EBITDA margin for the third quarter to be in the range of 3.75 to 4.25% as we continue our work on our cost efficiency programs and remove stranded costs.

Speaker Change: That concludes my financial remarks for the quarter, and I'll hand it back over to Cliff for the broader business update, because there's a lot going on there as well. Cliff. Thanks, Steve. Let's turn to slide 14 and spend some time talking about the business and where we are with respect to this journey.

Clifford Skelton: Thanks, Steve. Let's turn to slide 14 and spend some time talking about the business and where we are with respect to this journey. As you may recall, five years ago, we embarked on an operational and technological stabilization and optimization, and while never perfect, that outcome is largely intact. And then, just over a year ago, in March of 2023, we outlined a three-year plan that would build on our strengthened foundation to create a more nimble technology-led business process solutions company, different leaders, lower debt, on a clear and charted path to

Cliff: different leaders, lower debt, less capital intensity, and a clear and charted path to market-driven growth.

Clifford Skelton: That growth would be enabled by focusing on client success to further penetrate existing and prospective clients, doubling down on strategic initiatives for each of our businesses, and continuing to strengthen our leadership and our culture. The narrative also discussed how we would leverage our cloud-based and AI-infused technology platforms across our core competencies in order to grow in both the commercial and public sector markets. We talked about our portfolio diversity as a strength and an offset to the economic cycle. We discussed how we would continue to optimize our business by rationalizing our portfolio, allocating approximately $1 billion of deployable capital in the most optimal manner.

Cliff: The narrative also discussed how we would leverage our cloud-based and AI-infused technology platforms across our core competencies in order to grow in both the commercial and public sector markets.

Speaker Change: We talked about our portfolio diversity as a strength and an offset to economic cycles.

Cliff: We discussed how we would continue to optimize our business by rationalizing our portfolio, allocating approximately $1 billion of deployable capital in the most optimal manner.

Clifford Skelton: Fifteen months into this three-year plan, I can tell you that we have made and continue to make strong and steady progress with more to do. We're on track to deliver against those commitments, and our Q2 results demonstrate for those that have been following our journey that we continue to be where we said we would be. Let's turn to slide 15 to give you a representation of the changes we've made tactically to advance that three-year plan.

Cliff: Fifteen months into this three-year plan I can tell you that we have made and continue to make strong and steady progress with more to do.

Cliff: We're on track to deliver against those commitments.

Cliff: And our Q2 results demonstrate, for those that have been following our journey, that we continue to be where we said we would be.

Cliff: Let's turn to slide 15 to give you a representation of the changes we've made tactically to advance that three-year plan.

Clifford Skelton: First, we continue to strengthen our people in our organization. We've simplified our operating model and now operate the commercial and public sectors with new group presidents leading them. That will help reduce the corporate overhead and the overlap, but we'll still measure ourselves and lead those more granular businesses individually. But from a corporate point of view, we have streamlined our service. Adam Appleby, formerly President of Transportation, will now lead our public sector organization.

Cliff: First, we continue to strengthen our people and our organization.

Cliff: We've simplified our operating model and now operate the commercial and public sectors with new group presidents leading them.

Cliff: That will help reduce the corporate overhead and the overlaps.

Cliff: We'll still measure ourselves and lead those more granular businesses individually, but from a corporate point of view, we have streamlined our syringe services.

Cliff: Adam Appleby, formerly president of

Clifford Skelton: And we will very soon welcome a new head of Government Solutions who is a seasoned industry veteran to lead that very important growth business for us within the public sector. That announcement will come in the next week or two.

Cliff: And we will very soon welcome a new head of government solutions who is a seasoned industry veteran to lead that very important growth business for us within the public sector.

Clifford Skelton: For the commercial sector, Mike McDaniel is the new group president. Mike joined us in July from DXC, where he was president of DXC's Modern Workplace Business. Prior to DXC, Mike spent 14 years at Accenture in senior positions, including leading their North America sales organization.

Cliff: That announcement is coming in the next week or two.

Cliff: For the commercial sector, Mike McDaniel is the new group president.

Cliff: Mike joined us in July from DXC, where he was president of DXC's Modern Workplace Business.

Mike McDaniel: Prior to DXC, Mike spent 14 years at Accenture in senior positions, including leading their North America sales organization.

Clifford Skelton: As you can see, we're reaching outside the organization to onboard known and proven growth leaders who know the client base and have experienced what great growth companies do well. We've also created a dedicated Chief Client Officer role to focus entirely on client retention and drive expanded wallet share. Randall King will move from his role leading the commercial businesses to this role uniquely targeted at our top revenue-producing clients and their customers.

Speaker Change: As you can see, we're reaching from outside the organization to onboard known and proven growth leaders who know the client base and have experienced what great growth companies do well.

Mike McDaniel: We've also created a dedicated Chief on Client Retention and Drive Expanded Wallet Share.

Clifford Skelton: Again, to leverage portfolio diversity as a strength, we must penetrate and retain that group of clients that represent high outsourcing needs. And we have some very impressive clients with some very important opportunities to pay attention to. With regard to our culture, we've been recognized by both Newsweek and the Disability Equality Index.

Mike McDaniel: Again, to leverage portfolio diversity as a strength, we must penetrate and retain that group of clients that represent high outsourcing needs.

Clifford Skelton: We're particularly proud to have been named for the second year running in Newsweek's Global Top 100 Most Loved Workplace. It may be cliche, but in our business, our people are our strength, because clients will buy from people they trust, and we're certainly proud of our team. Regarding our processes and our objectives, we're making strong progress. We're beginning to see strong sales momentum broadly across our commercial solutions, especially our offshore and nearshore delivery models, and we're investing in additional capacity in several locations to meet demand as we see an increased propensity to outsource from existing clients and new logos.

Mike McDaniel: It may be cliche, but in our business, our people are our strength, because clients will buy from people they trust, and we're certainly proud of our team.

Mike McDaniel: Regarding our processes and our objectives, we're making strong progress.

Mike McDaniel: We're beginning to see strong sales momentum broadly across our commercial solutions, especially our offshore and nearshore delivery models. And we're investing in additional capacity in several locations to meet demand as we see increased propensity to outsource from existing clients and new logos.

Clifford Skelton: When economic conditions require improved efficiency, opportunity comes our way, especially when our geographic model can differentiate. Interestingly, we're also seeing cross-segment opportunities as we drive sales and partnership opportunities in key public sector markets for human capital solutions. Finance, Accounting, and Procurement Solutions, as well as our customer experience solution. For example, we have multiple opportunities in various states for a human capital solutions pension plan administration, and we're seeing consolidation across the reinsurance industry, thus creating the need for scale in the administrative space, in Finance, Accounting, and Procurement, we have several states interested in our Fast Cap solution, which provides a comprehensive analysis of an organization's procurement data, to deliver insights into accounts payable to uncover cost savings opportunities, such as automatically detecting duplicate or erroneous payments and analyzing tails.

Mike McDaniel: Interestingly, we're also seeing cross-segment opportunities as we drive sales and partnership opportunities in key public sector markets for human capital solutions, finance, accounting, and procurement solutions, as well as our customer experience solutions.

Mike McDaniel: For example, we have multiple opportunities in various states for a Human Capital Solutions Pension Plan Administration.

Mike McDaniel: And we're seeing consolidation across the reinsurance industry, thus creating the need for scale in the administrative space.

Mike McDaniel: In Finance, Accounting, and Procurement, we have several states interested in our Fast Cap solution, which provides a comprehensive analysis of an organization's procurement data.

Clifford Skelton: And recently, RDW, a toll collector in the Netherlands, engaged Conduent to provide customer support for a new toll road in the Netherlands, which is opening at the end of the year. The bottom line is that while governments buy differently than commercial businesses...

Mike McDaniel: And recently RDW a toll collector in the Netherlands engaged Conduent to provide customer support for a new toll road in the Netherlands which is opening at the end of the year.

Clifford Skelton: Many of our products are ubiquitous. As Steve mentioned, a hallmark of our strategy is our portfolio rationalization effort and the use of proceeds from those divestitures in large part to pay down debt, demonstrating our commitment to a lower net leverage ratio and a strong balance. We got in another important use of capital in the quarter, as I mentioned. We repurchased all shares previously owned by Carl Icahn and affiliates. We believe that this decision was a very important one that will help streamline decision making and capital allocation planning.

Mike McDaniel: The bottom line is that while governments buy differently than commercial businesses.

Mike McDaniel: Many of our products are ubiquitous.

Mike McDaniel: and the use of proceeds from those divestitures in large part to pay down debt, demonstrating our commitment to a lower net leverage ratio and a strong balance sheet.

Mike McDaniel: We garnered another important use of capital. In the quarter, as I mentioned, we repurchased all shares previously owned by Carl Icahn and affiliates.

Clifford Skelton: Finally, in the third column, we made considerable progress with our products and our technology. Now, cybersecurity is on the front burner for every CEO and every board of directors. We were named a leader in CX Transformation, HR Transformation Services, and healthcare payer operations by Nelson Hall, demonstrating continued solution leadership. Finally, we've made some modest adjustments to some of our exit rate assumptions that Steve talked about as we move through 2024 and into 2025. Operator. Thank you. We'll now be

Mike McDaniel: We are continuing to progress our generative AI initiatives.

Mike McDaniel: We worked on real use cases in a methodical manner, and we're excited to share that several of our pilots are showing promising results that will create unique value for our clients and open new adjacencies.

Speaker Change: We completed a successful pilot on improving fraud detection related to account takeover where we applied traditional rules-based AI combined with Gen AI.

Speaker Change: And we believe we can increase the volume of fraud detection by up to 150%.

Speaker Change: Using Gen-AI paired with traditional OCR technologies, we can provide classification of the document at a more granular level.

Speaker Change: Finally, we made some modest adjustments to some of our exit rate assumptions as Steve talked about as we move through 2024 and into 2025.

Speaker Change: And we're confident that Conduent is on the right trajectory in moving our business to sustain top-line growth, sequential margin improvement, less capital intensity, and improved cash flow conversion.

Operator: A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start button. One moment, please, while we poll for your question. Our first questions come from the line of Pat McCann with Noble Capital. Please proceed with your questions.

Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Speaker Change: One moment, please, while we poll for your questions.

Speaker Change: Our first questions come from the line of Pat McCann with Noble Capital. Please proceed with your questions.

Patrick McCann: How does that affect the decision-making process for you guys going forward? Does that really simplify your strategic decisions?

Patrick McCann: Any color you could provide would be great.

Speaker Change: Yeah, Pat, it's Cliff. Thanks for the question. As many know, Carl, as an activist, had three board members.

Clifford Skelton: out of our eight. And as you can imagine, when you go from eight to five, decision making certainly gets easier. You get eight, you get an extra three, and you've got a lot of cooks in the kitchen, for sure.

Speaker Change: out of our eight.

Clifford Skelton: And from time to time, activists will have a little bit of a different agenda. Vis-a-vis things like how much how much capital do you want to keep inside a company? How much capital do you want to distribute on what timeline, etc. As everybody knows, a board's primary job is governance, and of course, keeping or not keeping a CEO is front and center. But in addition to that, capital and asset allocation, and M&A strategy are always going to be a primary concern of boards.

Clifford Skelton: And frankly, that just got easier for us. And, you know, I can't tell you what it means in terms of actual decisions that are going to happen, but I can tell you the process is easier now. And we feel a little bit, I might call it, a little bit liberated in some ways.

Speaker Change: And, you know, I can't tell you what it means in terms of actual decisions that are going to happen, but I can tell you the process is easier now, and we feel a little bit, I might call a little bit liberated in some ways.

Patrick McCann: Great, thanks for that. And then my second question was just if you could give a little bit of commentary, additional commentary to what you've already said about how you, you know, where your confidence comes from for your full-year target, given the results you reported for Q2.

Speaker Change: Great, thanks for that. And then my second question was just if you could give a little bit of commentary, additional commentary to what you've already said about how you, you know, where your confidence comes from for your full year target given the results you reported for Q2.

Stephen Wood: I think our confidence in terms of the full year is really resident in the walk through 2025, right? We've talked about the fact that we've got these cost efficiency programs underway, that we're heavily through that work.

Speaker Change: Well, I think, Pat, our confidence in terms of the full year is really resident in the walk through 2025, right? We've talked about the fact that we've got these cost efficiency programs underway, that we're heavily through that work.

Stephen Wood: It's going to become more resident in the second half of the year as we get into that, and we're going to see this sort of modest sequential improvement in EBITDA as we progress through the year. And there's a little bit of an incremental kind of sales ramp again, resident in the guide in the second half of the year. But I think, probably most important to that, just to reiterate, right, we now see this as a sequential journey that we're going to see quarter over quarter as we process through the remainder of 2024 and then quarterly through 2025 to get back to that exit rate outlook that we've outlined. And, you know, we've got a high degree of confidence that we've got the plans and the execution in place to deal with both the revenue side and the cost efficiency side as we work through that.

Speaker Change: It's going to become more resident in the in the second half of the year as we get into that

Speaker Change: And we're going to see this sort of modest sequential improvement in EBITDA as we progress through the year. And there's a little bit of incremental kind of sales ramp again, resident in the guide in the second half of the year.

Speaker Change: But I think probably as important to that, just to reiterate, right, we now see this as a sequential journey that we're going to see quarter over quarter as we process.

Speaker Change: through the remainder of 2024 and then quarterly through 2025 to get back to that exit rate outlook that we've outlined and you know we've got a high degree of confidence that we've got the plans.

Clifford Skelton: and the execution in place to deal with both the revenue side and the cost efficiency side as we work through that. I think that's absolutely right, Steve. You know, the lag effect of the cost reduction efforts is going to manifest a little more in the back half.

Speaker Change: Some of the sales efforts are beginning to ramp up. A little bit of a slow start in government that we think is going to finish, we hope will finish strong compared to the first half. All those will affect our impact revenue and our eBidder for the second half of the year.

Speaker Change: Right, and if you don't mind if I could squeeze in one more. It just it seems as though You know given the divestiture trees. You've already announced your

Speaker Change: You made significant progress there, and it seems as though the march forward is towards the other side of the divestiture efforts, if you will, seems to be coming into focus now. I was just wondering, though, if there are, you know, how you view the possibility for any other, maybe minor, divestitures, you know, if there are more opportunities there.

Speaker Change: Should we expect more announcements in the future before you're done?

Speaker Change: I think, Pat, the way we would look at it, and Steve can fill in any gaps he sees fitting, you know, we don't see any major, you know, compartmented divestiture activity on the horizon. There are a couple small things we might consider.

Pat McCann: But as you may recall, the whole...

Steve: process was center posted on.

Steve: How do we get as many synergies with RemainCo as we can get?

Steve: How do we take scarce assets from the outside point of view and monetize those to pay down debt primarily?

Speaker Change: And then how do we grow what's remaining as fast and as well as we can? And we think we're, you know, we're kind of over that target. There's some puts and takes there, but we think we're over that target in terms of carve-outs, if you will.

Speaker Change: Yeah, just one thing further to add, Pat, if you think about the divestitures we've made, we've targeted businesses that met a couple of different criteria. We thought they had scarcity value on the outside. We thought they weren't necessarily sort of 1 plus 1 equals 3 businesses inside of the portfolio.

Speaker Change: But we have a still have a very rich portfolio of assets that have

Speaker Change: strategic value either by themselves or in combination and so we like the way that the portfolio is shaping up, we like our commercial and I'd say our public sector markets to kind of give balance to the business.

Stephen Wood: And I think the mission will continue to work strategically, as Cliff has outlined, to drive all of those businesses towards growth, to drive towards those exit rates that we've outlined. But that doesn't necessarily take off the table the possibility that there might be some attractive offer that comes along on the outside for a particular discrete asset that we would accommodate and entertain as needed. But, as you can see, we are towards the top end of the range of what we've outlined for divestiture proceeds, but we're not at the top end of the range. And so it gives us room to do more if we deem it to be in the best interest of what we're trying to get done. Yeah, I mean,

Speaker Change: and I think the mission will continue to be...

Speaker Change: to work strategically, as Cliff has outlined, to drive all of those businesses towards growth, to drive towards those exit rates that we've outlined.

Speaker Change: But that doesn't necessarily take off the table that there might be...

Speaker Change: Some attractive, you know offer that comes along on the outside for a particular discrete asset that we would you know

Speaker Change: We would accommodate and entertain as needed.

Speaker Change: But as obviously you can see, we are towards the top end of the range of what we've outlined for divestiture proceeds, but we're not at the top end of the range, and so it gives us room to do more if we deem it to be in the best interest of what we're trying to get done. Yeah, I mean, the way I would...

Speaker Change: The radar is still open and operating in terms of opportunistic ideas, but we believe we've got a portfolio we can grow, and if you look at these assets,

Speaker Change: Some of them we're going to double down from a capital perspective, some of them we're going to optimize and get more efficient, and some of them we're going to continue to just drive as is. And so we see what we have is what we need.

Patrick McCann: Great. Thanks, guys, for the thoughtful commentary. I'll pass the floor on.

Speaker Change: Great. Thanks, guys, for the thoughtful commentary. I'll pass the floor on.

Pal: Okay, thanks, Pal.

Speaker Change: Thank you. Our next questions come from the line of Mark Riddick with Sidoti and Company. Please proceed with your questions.

Mark Riddick: Thank you, and good morning.

Speaker Change: and Mark.

Mark Riddick: So, really appreciate all the detail that was put into this and provided us. I wonder if you could talk a little bit about earlier in the year, there was the announcement of the...

Speaker Change: the deal with Microsoft on AI. And I was wondering if you could talk a little bit about the partnership, I should say, and if you could talk a little bit about maybe what you're seeing from client receptivity and what your early read is on that.

Clifford Skelton: Yeah, it's a good question. Look, I mean, you can't turn the TV on without those two letters coming up everywhere.

Speaker Change: Yeah, it's a good question. Look, I mean, you can't turn the TV on without those two letters coming up.

Speaker Change: everywhere. I think the hype is starting to settle.

Clifford Skelton: I think the hype is starting to settle into real execution. We tried to kind of weather that storm and find our way into some pilots and some early partnerships, including Microsoft. Some of those pilots, as I mentioned in my prepared remarks, are starting to bear fruit, especially around fraud and scanning and indexing. You know, healthcare has got some real opportunities. So, and, of course, everybody is focused on what we can do in the call center space.

Speaker Change: into into real execution. We tried to kind of weather that storm and find our ways to some pilots.

Speaker Change: and some early partnerships, including Microsoft. Some of those pilots, as I mentioned in my prepared remarks, are starting to bear fruit, especially around fraud and scanning and indexing.

Speaker Change: You know, healthcare's got some real opportunities. So, and of course, everybody's focused on what we can do in the call center space.

Clifford Skelton: So, we're using those pilots. And also, what I mentioned about cyber, we think is a great new idea. There's an AI implication there as well. But what I would say is Microsoft is leading the charge in many ways in the industry, and they've got a lot of partners that they can select from or not. And we've done some work. I met with their head of North America just last week.

Speaker Change: So we're using those pilots and also what I mentioned about cyber we think is a great new idea.

Speaker Change: There's an AI application there as well. But what I would say is Microsoft is leading the charge in many ways.

Speaker Change: in the industry, and they've got a lot of partners that they can select from or not. And we've done some work, I met with their head of North America just last week.

Speaker Change: to talk about what we can do from a go-to-market perspective with respect to AI. And the horizon is very bright, but we're going to be narrowly focused.

Speaker Change: initially on those things that I just talked about. The partnership with Microsoft obviously is beneficial for them because they can use Azure for a lot of the hosting. But their sales force.

Speaker Change: is quite strong, obviously, and we want to make sure that we can partner up as much as possible. But again, we're going to stay narrowly focused on those three or four or five

Speaker Change: proven pilots that we've already executed on and we're going to we're going to move forward with those initially and that's that's where we're going along with the partnership with Microsoft and I go to market perspective.

Speaker Change: Okay, great. And then I wanted to just sort of follow up on the status of the government direct express contract and sort of your thoughts there. Is there a sense of...

Speaker Change: I guess maybe just maybe if you could maybe put a little more color around around that and then I have one final final follow-up around cash prioritization

Speaker Change: Well, look, Steve told you in his prepared remarks what we don't know, which is we don't know where this thing is going because we don't have any official messaging at all. We have what our bank partner told us is a negotiation with another

Speaker Change: Another bank, and they have their own technology partner that is the equivalent of ours.

Speaker Change: But here's what we do know.

Speaker Change: We do know that after 15 years, this is a very, very complex arrangement, and it's very risky for the government. We've got 1.6 billion dollars of deposits that happen every month for, you know, Social Security recipients, VA recipients.

Speaker Change: And we, our technology distributes those disbursements, and the fraud risk is inordinately high.

Speaker Change: The Operational Risk.

Speaker Change: is inordinately high, and it's been attempted to shift to other partners in the past and failed. So I would say the risk is significant to a conversion, and we're, you know, notwithstanding the fact that

Speaker Change: It probably takes a year or two for that to manifest, even if it does happen. You know, we think there's a high probability that this thing could be retained. But we don't have formal messaging on...

Marc Riddick: And then the last thing for me, it's certainly when you're looking at the walk that you have there and sort of getting to certainly reduce leverage and the like, can you sort of maybe talk about, and it might be a little early for this, but maybe future thoughts on returning capital to shareholders and sort of, you know, whether that would take the form of, you know, on thoughts around the potential dividend share repurchase, that type of thing, any thoughts or early thoughts on sort of when you sort of get to the other side of the walk, how that might evolve.

Speaker Change: Okay and then the last thing for me it's certainly when you you're looking at the walk that you have there and sort of getting to certainly

Speaker Change: Reduced leverage and the like. Can you sort of maybe talk about, and it might be a little early for this, but maybe future thoughts on returning capital and shareholders and sort of, you know, whether that would take the form of

Speaker Change: you know, thoughts around the gentle doobin and share repurchase, that type of thing. Any thoughts or early thoughts on sort of when you should get to the other side of the walk, how that might evolve, thanks.

Stephen Wood: Yeah, Mark, I'll take that. So if you think about the billion dollars of deployable capital that we've talked about generating and deploying, and we're 66% through that, but if you piece together the various comments that we've made and think about debt that we've already prepaid, authority to pay down more debt that we've got from the board, the repurchase of the ICON shares and then the other share repurchases that we've been making, we're sort of upwards of $880 million of that billion dollars already sort of earmarked, I would say, for deployment.

Speaker Change: that we've got from the board, the repurchase of the ICON shares and then the other repurchases that we've been making.

Speaker Change: We're sort of upwards of eight hundred and eighty million dollars

Speaker Change: of that billion dollars already earmarked, I would say, for deployment. So there's about $120 million to $140 million to go that we haven't been declarative on.

Stephen Wood: So there's about $120 to $140 million to go that we haven't been declarative on. And so right now, I feel that we're pretty good being in that situation. I think we've got to work through the remainder of the divestitures and get those stuff done. Clearly, we've got to, which is kind of reflected in how we're thinking about the second half of the year, we've got to get operating cash flow moving in the right direction.

Stephen Wood: And then, you know, we've got about $120 million that at some point in the medium term, short to medium term, we'll be able to start thinking about deployment. But I think we feel good right now with the path to generating a billion dollars. And I think we feel pretty good about having allocated and earmarked, you know, around $880 million of that, reducing the leverage, giving out, you know, a target, you know, and Paul Kalinsky.

Speaker Change: Giles Goodburn, Clifford Skelton, Stephen Wood

Clifford Skelton: I think that's right, and I think, you know, a lot of those are certainly board decisions, and what I would say is Steve's got it exactly right. In the near term, we're going to stay, of course, as Steve outlined.

Marc Riddick: Excellent. Thank you very much.

Operator: Thank you. Our next questions come from the line of Gaushi Sree with Singular Research. Please proceed with your question.

Speaker Change: Excellent. Thank you very much.

Speaker Change: Thank you. Our next questions come from the line of Gaushi Sree with Singular Research. Please proceed with your questions.

Gaushi Sree: Good morning, guys. Can you hear me?

Clifford Skelton: Yep, gotcha. Thank you. In the last call, I think you mentioned healthcare as a sector where you see increased outsourcing. Is that the only sector you wanted to highlight, or is it across the board that you're seeing an increased interest in outsourcing?

Gaushi Sree: In the last, previous call, I think you mentioned healthcare as a sector where you see increased outsourcing. Is that the only sector you wanted to highlight, or is that across the board you're seeing an increased interest in outsourcing?

Gaushi Sree: We're seeing this certainly in health care, certainly in logistics. Certainly anywhere where they, in turn, are being squeezed from an efficiency point of view, we're starting to see increased interest in outsourcing, and not just outsourcing, in many cases, refinement of the outsourcing relationships we already have, and an increased appetite, believe it or not, for nearshore and offshore capabilities, which is obviously where the margins are quite a bit stronger for us, and we'd be far more interested in pursuing. And that's across the product spectrum of certainly CX, but also scanning, indexing, some FAMP, but we, you know, I would say primarily healthcare and logistics. But I don't think it's contained only in those.

Speaker Change: We're seeing, we're seeing, certainly in healthcare, certainly in logistics.

Speaker Change: from an efficiency point of view.

Speaker Change: We're starting to see increased interest in outsourcing, and not just outsourcing. In many cases, refinement of the outsourcing relationships we already have, and an increased appetite, believe it or not, for nearshore and offshore.

Speaker Change: Capabilities, which is obviously where the margins are quite a bit stronger for us and we'd be far more interested in pursuing. And that's across the product spectrum of certainly CX.

Speaker Change: but also scanning, indexing, some FANP, but we, you know, I would say primarily healthcare and logistics.

Speaker Change: But I don't think it's contained only to those two, Steve.

Gaushi Sree: I think, Gaushi, the other thing I would add on is think about Cliff's remarks about how we're seeing new opportunities to deploy.

Clifford Skelton: some of the solutions that we've traditionally thought about, commercial solutions, into our public sector markets. And so I think we think of that as an interesting market adjacency that's where we're seeing a good fit for some of the solutions that we've traditionally thought of as being just in the commercial market. In addition to logistics and healthcare, we've traditionally had strong positions in the travel and entertainment sector and also in the automotive sector. And so I think we're seeing that propensity to address cost and transformation pretty broadly across many of the verticals that we operate in. That's a really good point.

Speaker Change: some of the solutions that we've traditionally thought about, commercial solutions, into, you know, our public sector markets.

Speaker Change: And so, I think we think of that as an interesting, you know, market adjacency that's...

Speaker Change: I think, you know, in addition to logistics and healthcare, we've got kind of strong, we've always, you know, Krishna has strong positions in the travel and entertainment sector and also in automotive. And so I think we're, we're seeing

Clifford Skelton: We're seeing that propensity to address cost and transformation pretty broadly across many of the verticals that we operate in. That's a really good point. I think one of the secret...

Stephen Wood: I think one of the secret sauces here is to stop thinking in silos, in terms of product suites and sectors. In other words, you know, we have massive call center capabilities that could be deployed in the public sector. We have accounts payable and procurement capabilities that state and local governments need. There's a lot of cross functionality here that has not been tapped. So I think, you know, it's not confined or contained to any one industry. And it also involves the public sector. So, it's coming from everywhere. We just got to execute on it.

Clifford Skelton: Sauces here, gauchos.

Speaker Change: Just stop thinking in silos in terms of product suites.

Speaker Change: and Sectors. In other words,

Speaker Change: You know, we have massive call center capabilities that could be deployed in the public sector. We have accounts payable and procurement capabilities that state and local governments need.

Speaker Change: There's a lot of cross-functionality here that heretofore has not been tapped, so I think it's not confined or contained to any one industry, and it also involves the public sector.

Speaker Change: It's coming from everywhere. We just got to execute on it.

Gaushi Sree: We also mentioned that when clients are considering offshoring to countries that they hadn't previously considered, what new geographic markets are emerging as attractive outsourcing destinations, and do you guys have capability in those regions?

Speaker Change: We also mentioned that when clients are considering offshoring to countries that they hadn't previously considered, what new geographic markets are emerging as attractive outsourcing destinations and do you guys have capability in those regions?

Clifford Skelton: I think there's a little bit of, and Steve runs a lot of our geographies in terms of country managers, so I'll let him comment as well, but I think there's some experimentation going on.

Steve: I think there's a little bit of, and Steve can, you know, Steve runs a lot of our geographies in terms of country managers, so I'll let him comment as well, but I think there's some experimentation going on. I mean, there's...

Steve: You know, there's quick looks at places like South Africa and Egypt. You know, I don't think there's any widespread movement in those directions. The traditional places...

Steve: remain strong. Philippines remain strong. India remain strong. We've got a large presence in Guatemala and Jamaica. And so, you know, I think we're seeing certainly some growth in the Philippines, for sure, and a resurgence in India. But, Steve, what do you think?

Stephen Wood: Yeah, only a little bit really to add there. I think that's right.

Stephen Wood: I think the key clearly is to have a mix of nearshore capability and offshore capability, and I think we like our geographic mix. I think, as I said in my remarks, we're adding some capacity in a couple of places there because we're seeing an increase in demand. I think there is. Giles Goodburn, Clifford Skelton, Giles Goodburn, Clifford Skelton, and, you know, we're seeing continued demand for those geographies.

Steve: Yeah, only a little bit really to add there. I think that's right. I think the key clearly is to have a mix of nearshore capability and offshore capability, and I think we like our geographic mix.

Speaker Change: I think, as I said in my remarks, we're adding some capacity in a couple of places there because we're seeing increase in demand. I think there is, that there can be a tendency to want to go off and explore.

Speaker Change: slightly more esoteric geographies.

Speaker Change: But I think the key in our business is building scale in key markets and driving cost efficiency in those locations, which is what we're focused on. So I think we're very happy with our geographic mix. I think it's a nice balance.

Speaker Change: and, you know, we're seeing continued demand for those geographies. Yep.

Gaushi Sree: Thank you. Just one last question, since I'm relatively new to this name. Just in case, I'm trying to understand how a typical revenue model with the Gen AI Microsoft collaboration would work. What would a typical engagement be like, and how does that collaboration revenue model work for you?

Speaker Change: Thank you. Just one last question.

Speaker Change: Since I'm relatively new to this name, just in case, I'm trying to understand how would a typical revenue model with the Gen AI Microsoft collaboration work? What would a typical engagement be like and how does that collaboration revenue model work for you?

Clifford Skelton: Well, it all starts with a go-to-market capability. Look, I mean, as you know, Gen-AI takes a lot of compute power, which means data centers being built everywhere and a lot going into the public cloud and specifically Azure. And so Microsoft's interest in the partnership, which, by the way, is very early in terms of what we hope to achieve, would be, look, the more business we get, the more business they get, because the business is going to be hosted in the public cloud, in Azure.

Speaker Change: Well, it all starts with a go-to-market capability. Look, I mean, as you know, Gen-AI takes a lot of compute power, which means data centers being built everywhere, and a lot going into the public cloud and specifically Azure. So Microsoft's interest in the partnership.

Speaker Change: which by the way is very early in terms of what we hope to to achieve, would be look more business we get the more business they get because the business is going to be hosted in the public cloud in Azure and so that that's a you know that's a growth

Clifford Skelton: And so that's a growth strategy for the company, for their company. In our case, we want to get more Gen AI out in the marketplace, and we want to prove that our products can be enhanced with Gen AI. So it's not like there's an exchange of revenue back and forth. It's basically, you know, it's basically we both went at the same time. That's sort of the model. I don't know if that got to what you were after, Gachi, so maybe ask it again if I didn't answer it exactly. I think I...

Gaushi Sree: I think I understand. That's all I have for right now. Thank you guys for taking the time to answer my question.

Speaker Change: Clifford Skelton, Stephen Wood

Speaker Change: with AI, so it's not like there's an exchange of revenue back and forth.

Speaker Change: It's basically, you know, it's basically we both win at the same time is sort of the model. I don't know if that got to what you were after, Gashi, so maybe ask it again if I didn't answer it exactly.

Speaker Change: I think I understand. That's all I have for right now. Thank you, guys, for taking my question. Sure. All right, Yoshi, thanks.

Operator: Thank you. This does conclude the question and answer session. And with that, today's teleconference is over. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

Speaker Change: Thank you. This does conclude the question and answer session. And with that, concludes today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

Speaker Change: Clifford Skelton, Clifford Skelton, Stephen Wood