Conduent Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022. Conduent provides technology-led business process services across Commercial, Government and Transportation. Amounts are in U.S. dollars.
Financial performance and liquidity
- Revenue: $922 million, down 5% from $967 million. Revenue declined in Government and Transportation; Commercial was nearly flat.
- Profitability: GAAP net loss was $6 million, or $0.04 per diluted share, versus net income of $136 million, or $0.61 per diluted share. Segment profit was $30 million versus $54 million. Adjusted EBITDA was $90 million versus $109 million; its margin fell to 9.8% from 11.3%.
- Cash flow: Operating cash use was $12 million versus $11 million provided in Q1 2022. Investing cash use was $22 million versus $273 million provided, largely reflecting the prior-year Midas sale proceeds. Financing cash use was $19 million versus $110 million, which included prior-year revolver repayment. Cash, cash equivalents and restricted cash totaled $547 million at quarter-end; cash and cash equivalents were $526 million.
- Balance sheet and liquidity: Current assets were $1.556 billion and current liabilities $842 million. Balance-sheet debt comprised $38 million current and $1.277 billion long-term; the debt note reports a $1.337 billion principal balance before $22 million of issuance costs and discounts. No revolver borrowings were outstanding, and $548 million was available. The company reported compliance with debt covenants.
- Other metrics: Interest expense increased to $27 million from $19 million, primarily due to higher rates. Capital additions were $22 million for property and equipment and internal-use software combined.
Changes versus prior year and significant items
- Revenue was lower mainly due to non-repeating federal stimulus revenue, lost business, delayed Transit project timelines and a $7 million out-of-period Government contract revenue adjustment. Management said the adjustment related to prior periods, was not material to previously issued statements and was not expected to be material to 2023.
- Q1 2022 included a $165 million gain on the Midas divestiture, $38 million of insurance recoveries related to the Texas matter, and $7 million of Midas revenue. These items materially affect year-over-year earnings and cash-flow comparisons.
- Q1 2023 included benefits from the Cognizant settlement: a $17 million reversal in cost of services and a $26 million litigation reserve reversal. The settlement was executed March 30; reciprocal $6 million payments were made in April.
- Restructuring and related costs rose to $29 million from $9 million, including $20 million of severance costs. The company also incurred $4 million in professional support costs for bringing certain technology functions in-house.
- New business ACV signings were $125 million, down 25%; total signings were $634 million, down 55%. Trailing-twelve-month net ARR activity was $108 million, compared with $102 million a year earlier. The new-business pipeline was $23.2 billion versus $22.0 billion.
Outlook, management commentary and risks
Management described a renewed focus on growth, quality and efficiency, including portfolio rationalization and potential divestitures of solutions viewed as less aligned with growth opportunities or more capital intensive. Management said cash, operating cash flow and available credit should be sufficient for expected obligations for at least the next 12 months. The filing provides no specific financial guidance figures.
Risks highlighted include contract renewals and performance, client losses, government contract termination rights and appropriations, receivable collection, reliance on third parties, cybersecurity and privacy compliance, macroeconomic and geopolitical uncertainty, inflation and labor conditions, foreign exchange, and significant indebtedness. Litigation outcomes remain uncertain. The company reported $631 million of surety bonds and $91 million of letters of credit outstanding to support contractual and other obligations.
Important facts for investors to verify
- Whether revenue trends, particularly Government and Transportation performance and delayed Transit work, improve in subsequent quarters.
- Whether signings and net ARR activity translate into realized revenue, given the decline in Q1 signings and the timing caveats on ARR.
- Cash conversion, receivable factoring activity and progress toward maintaining liquidity and managing debt.
- Future restructuring costs and whether efficiency initiatives offset higher costs and lower revenue.
- Resolution and financial effects of outstanding litigation and contingencies, including the Cognizant settlement, the securities class action settlement approval process, Skyview claims and the remaining student-loan-related inquiry.