Conduent Incorporated (NASDAQ:CNDT) Q4 2023 Earnings Call Transcript February 14, 2024
Conduent Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Conduent Q4 2023 Earnings Announcement. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Giles Goodburn, Vice President, Investor Relations. Thank you. You may begin.
Giles Goodburn: Thank you, operator. And thanks, everyone, for joining us today to discuss Conduent’s Fourth quarter and full year 2023 earnings. We hope you had a chance to review our press release issued earlier this morning. Joining me today is Cliff Skelton, our President and CEO; and Steve Wood, our CFO. Today’s agenda is as follows: Cliff will provide an overview of our results and a business update. Steve will then walk you through the financials for the year as well as providing a financial outlook. Cliff will then provide his closing comments. This call is being webcast, 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 8-K. 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 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. Because these measures are not calculated in accordance with U.S. GAAP, they should be viewed in addition to and not as a substitute for the company’s reported results.
For more information regarding definitions of our non-GAAP measures and how we use them, as well as the limitations to their usefulness for comparative purposes, please see our press release. And now I would like to turn the call over to Cliff.
Clifford Skelton: Thanks, Giles, and thank you all for joining Conduent’s Q4 and year-end 2023 earnings call. Hopefully, this will be the last call, earnings call where we don’t have Q&A at the end. We’ve been working to establish a sell-side group to help provide services so that we have Q&A on the next call. But let me start by saying, like everyone else, a lot’s happened in our company since the last Q3 earnings call, both from within our own portfolio and our clients. As you know, Conduent retains a very diverse platform of products and services, spanning the myriad of industries in both commercial and the government space across federal, state and local levels. At times, we take advantage in the times we suffer through the changing financial pressures, our commercial clients’ experience and oftentimes, the changing landscape, political and otherwise, that our government partners experience.
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Q&A Session
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But regardless of all that, the diversity of our offerings can be both a blessing and oftentimes, a headwind. On one hand, we’re positioned to capture more opportunities than most because of our diversity. On the other hand, that diversity requires horizontal bandwidth and with that, sometimes, comes opportunity cost. This is all to say, we continue to be very focused on narrowing the company’s scope. We want to be more nimble. We want to be more growth oriented. And you’ll see in today’s presentation a description of how we’re progressing against this rationalization efforts you’ve heard us talk about in the past, and Steve Wood, our CFO, will take you through the resulting financial expectations, particularly indexed on a 2025 exit rate. We see this as described previously in our Q1 2023 investor briefing as a 3-year journey.
And we just finished year 1 of that journey in a year where we announced 2 divestitures with expected net proceeds just shy of $500 million. Both of those expected to close in increments in the first half of 2024. You might have noticed, we also announced a $75 million share repurchase program in 2023. Meanwhile, let’s begin with the results in 2023. Steve will, of course, take you through all the details. But Q4 and 2023 with large finished pretty strong for us. When compared to the outlook we presented in Q3 earnings, we exceeded expectations across adjusted revenue, EBITDA and EBITDA margins. Adjusted revenue for Q4 was $953 million and $3.7 billion for the full year. Adjusted EBITDA was $103 million and $378 million for Q4 and full year, respectively, and our adjusted EBITDA margin was 10.8% and 10.2%, respectively.
Again, all these measurements exceeded our expectations for Q4 and the full year. However, regarding sales for the year, our performance was a bit of a tale of 2 cities. On 1 hand, our new business, ACV was down slightly year-over-year and quarter-over-quarter, but roughly flat sequentially. On the other hand, TCV, total contract value, an indication of future long-term growth, exhibited the best achievement since we became Conduent, up 20% to $2,257 billion. Meanwhile, revenue retention in 2023 was slightly better year-over-year. However, sales really, especially in the commercial space, created a sequential reduction in our net ARR number. As you might recall, our main focus is to keep that net ARR number positive and increasing to the new normal.
And it doesn’t take into account volume changes associated with market conditions or small shifts in the portfolio. But much like many of our commercial competitors experienced, market buying trends were slower in 2023. Steve will talk about that here in a minute. But it did add headwind to our sales performance. Net-net, 2023 from a financial perspective was stronger than most of our recent predictions but certainly had room to improve in both sales and cash generation. Speaking of cash, Steve will take you through the details, but the timing of our expected tax return, implementation milestone achievements in our Transportation business, both made for a year, we expect to improve upon in 2024. Regarding 2024, it’s going to be a difficult or at least a different kind of compare.
Again, Steve will provide an analysis of 2024 absent divestiture activity. But the fact is there will be a lot of divestiture activity and the revenue, expense changes, proceed increments and other predictions will have to include some level of predictability in 2024 expectations or flexibility anyway. For the last 3 earnings, we referred you back to the investor event we had in March. I’m not going to disappoint as I’ll mention that yet again, as it does remain the linchpin for our go-forward strategy and execution plan. We’ve always stated that a rationalized portfolio will tee up several levers for the future. Let me talk about a couple of those levers. First and importantly, we expect to generate roughly $1 billion in capital to be used for highest and best future benefit.
Some of that capital allocation will have timing components to it with increasing flexibility and optionality over time. That would include the obvious return to shareholder options and debt reduction as well as acquisition or internal investment options. Of course, there’ll be more to come on that as the proceeds begin to flow in here later in March. Second, a more nimble, more global portfolio platform. Third, a narrower scope of products and capabilities that allow for better management bandwidth allocation while retaining that defensive nature we enjoy with a diverse portfolio. Fourth, better cash flow conversion rates and an enhanced valuation. Now as I mentioned, we announced the first 2 of our anticipated divestitures, which are expected to close and monetize as I also said in the first half of 2024.
There are others in process as well. Again, the mission is to land on a $3 billion-ish, 3% to 5% growing company with reduced debt and an enhanced valuation at that 2025 exit. Steve will detail some components of that plan, but it’s all of our job to make it happen. Lastly, we compete every day out in the market like everyone else, whether it’s for new business or new talent in our workforce. Our team moved 59,000 associates worked very hard in 2023 to improve every aspect of our performance against that competitive landscape, and I’m proud of what we accomplished. Whether it’s in the financials or the culture improvements or the industry recognition or the strong improvement in our client relationships, we made significant progress. And that progress takes time to bear fruit, but the foundation is built, and the next level of achievement is clearly on the horizon.
So with that, I’ll thank you in advance. And now I’ll turn it over to Steve for the details. Steve?
