Conduent Incorporated — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Conduent provides technology-led business process services across Commercial, Government and Transportation markets.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $932 million | $977 million | $2,769 million | $2,872 million |
| Net income (loss) | $(289) million | $15 million | $(302) million | $151 million |
| Diluted EPS | $(1.34) | $0.06 | $(1.42) | $0.66 |
| Adjusted EBITDA and margin | $92 million; 9.9% | $105 million; 10.7% | $275 million; 9.9% | $301 million; 10.5% |
| Operating cash flow | Not separately presented for the quarter | $(33) million | $93 million |
Q3 revenue declined 5%; nine-month revenue declined 4%. The Q3 net loss included a $287 million non-cash goodwill impairment. Depreciation and amortization also included $25 million of software write-offs. Interest expense rose to $28 million for the quarter and $82 million year to date, principally reflecting higher rates on variable-rate debt. Nine-month restructuring costs were $49 million versus $24 million in the prior-year period.
At September 30, cash and cash equivalents were $451 million, compared with $582 million at year-end 2022. Principal debt was $1.326 billion, including $40 million due within one year. The company had no revolver borrowings and $548 million available under its revolving facility; it reported compliance with debt covenants. Management said cash, expected operating cash flow and available borrowing capacity should cover expected obligations for at least the next 12 months.
Material changes and operating trends
- Commercial: Q3 revenue fell to $465 million from $504 million. Segment profit was $6 million versus $44 million, and adjusted EBITDA was $57 million versus $68 million. Lower volumes and the absence of prior-year revenue from a large client’s minimum-volume commitment weighed on results; higher BenefitWallet interest income and cost efficiencies partly offset declines.
- Government: Q3 revenue was broadly flat at $290 million. Segment profit rose to $84 million from $79 million, and adjusted EBITDA increased to $95 million from $88 million, helped by a contractual change affecting implementation revenue and new-business ramp.
- Transportation: Q3 revenue decreased to $177 million from $182 million. Segment profit was a loss of $4 million versus profit of $16 million; adjusted EBITDA fell to $7 million from $25 million. Extended implementation timelines delayed revenue recognition.
- Q3 total adjusted EBITDA margin declined to 9.9% from 10.7%. For the nine months, adjusted EBITDA fell to $275 million from $301 million, and margin declined to 9.9% from 10.5%.
- Nine-month operating cash flow was $126 million lower year over year. Management cited the adverse change in receivables sales, absence of prior-year insurance recoveries, higher cash interest, lower days payable outstanding and higher restructuring payments. Investing cash flow was $(64) million, versus $216 million provided in 2022, when Midas divestiture proceeds contributed $326 million.
Outlook, significant items and risks
- BenefitWallet transfer: Conduent agreed to transfer its health and medical savings account portfolio to HealthEquity. Closing is expected in tranches during the first half of 2024, subject to customary conditions. Management estimates a pre-tax gain of approximately $425 million. The portfolio generated $32 million of Q3 2023 revenue and $95 million for the first nine months.
- The transfer agreement triggered a goodwill impairment assessment and a full $287 million write-down of Commercial reporting unit goodwill. The impairment used Level 3 fair-value inputs. Management concluded long-lived assets were not impaired.
- In Q3, Conduent recorded $25 million of software impairment after abandoning an internal-use project and a customer declined to implement a product-software solution.
- Management’s stated priorities include growth, quality, efficiency and portfolio rationalization. The company reported signing its largest-ever TCV deal in Transportation, in Australia, and cited progress positioning digital payments for FedNow. No formal financial guidance for the remainder of 2023 is provided in the supplied filing text.
- Signings were mixed: Q3 total signings were $770 million, down 23%; nine-month total signings were $3.433 billion, up 11%. Nine-month new-business TCV rose 59% to $1.921 billion, while new-business ACV declined 9% to $487 million. Trailing-twelve-month Net ARR Activity was $103 million, down from $137 million in the prior quarter. These measures are management-defined indicators, not guaranteed future revenue.
- The company identified an out-of-period Government contract revenue adjustment in Q1 2023: revenue and pre-tax income were reduced by $7 million. Management concluded it was not material to previously issued periods and was not expected to be material to full-year 2023.
- Key risks include contract renewals and performance, government appropriations and termination rights, client losses, cost and pricing pressures, labor and macroeconomic conditions, cybersecurity and data privacy, foreign exchange, debt and interest rates, and uncertain litigation outcomes. Conduent reported $637 million of surety bonds and $184 million of letters of credit securing performance and other obligations; these are contingent support arrangements, not reported debt.
- Litigation remains uncertain, including the Skyview dispute and a remaining state inquiry concerning former student-loan servicing activities. Management said it believes recorded provisions are adequate but cannot predict all outcomes; adverse developments could exceed reserves. The Cognizant matter settled in 2023, producing reserve reversals and a $22 million net litigation recovery for the nine-month period.
Important facts for investors to verify
- Whether the BenefitWallet transfer closes on schedule and whether the estimated $425 million pre-tax gain is realized.
- Commercial performance and the effect of losing BenefitWallet revenue after the transfer, alongside the segment’s eliminated goodwill and Q3 profit decline.
- Whether Transportation implementation timelines improve and whether signings convert into recognized revenue and cash flow.
- Cash generation, receivables-sale effects, debt servicing costs and continued access to the revolver and surety markets.
- Potential changes in litigation, regulatory matters and other contingencies that could require additional accruals or cash payments.