Conduent Incorporated — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Conduent provides technology-led business process services across Commercial, Government and Transportation markets. Unless noted, amounts are in millions.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $915 | $928 | $1,837 | $1,895 |
| Net income (loss) | $(7) | $0 | $(13) | $136 |
| Diluted EPS | $(0.04) | $(0.01) | $(0.08) | $0.60 |
| Adjusted EBITDA | $93 | $87 | $183 | $196 |
| Adjusted EBITDA margin | 10.2% | 9.4% | 10.0% | 10.3% |
| Interest expense | $27 | $18 | $54 | $37 |
Q2 revenue declined 1% year over year; first-half revenue declined 3%. For the six months, operating cash flow was negative $22, versus negative $5 in 2022. Investing cash flow was negative $42, compared with positive $242, which included prior-year Midas divestiture proceeds. Cash and cash equivalents were $500 at June 30, down from $582 at year-end 2022.
Total debt principal was $1,336, including $41 due within one year. The company had no revolving-credit borrowings, $548 of net revolver availability, and reported compliance with debt covenants. It said cash, projected operating cash flow and credit availability should be sufficient for expected obligations over at least the next 12 months.
Changes versus the prior comparable periods
- Q2 net loss was $7 versus break-even a year earlier; first-half net income fell to a $13 loss from $136 income. The prior-year period included a $166 Midas divestiture gain.
- First-half results also reflect $42 of restructuring costs versus $20, higher interest expense, and lower litigation recoveries. The 2023 period included Cognizant settlement-related benefits: $17 in cost of services and $26 in litigation recoveries.
- Q2 Commercial revenue was $471 versus $470; Government was $270 versus $279; Transportation was $174 versus $179. Commercial adjusted EBITDA improved to $72 from $46, while Transportation adjusted EBITDA fell to $13 from $24.
- Management cited lost prior-period business, non-repeating federal stimulus revenue and an out-of-period Government contract adjustment as revenue headwinds. New-business ramp, higher interest rates benefiting Benefit Wallet, and Government volume gains partly offset them.
Outlook, management commentary and risks
- The filing provides no formal earnings or revenue guidance. Management said client attrition was materially lower in Q2 and was progressing toward the 3%–5% range discussed at its investor briefing. Net ARR activity was $137, up from $108 in the prior quarter.
- Management reported signing its largest-ever total contract value deal in Transportation. Q2 total signings were $2,029; first-half signings were $2,663. First-half new-business ACV was $333, down 4% year over year. The new-business pipeline was $20.7 billion, versus $22.0 billion a year earlier.
- Remaining performance obligations were approximately $1.6 billion; about 61% is expected to be recognized over the next two years. Management is pursuing portfolio rationalization and operational efficiency initiatives.
- The Board authorized up to $75 of common-stock repurchases over three years. The company repurchased 266,765 shares for approximately $1 in Q2. Repurchases are discretionary and may reduce available cash or increase share-price volatility.
- Management noted uncertainty around macroeconomic and geopolitical conditions, contract performance and renewal, client losses, rising interest rates, receivable collection, cybersecurity and data privacy, and litigation. It warned that contract losses, asset dispositions or higher rates could contribute to Commercial goodwill impairment risk.
- Contingencies include ongoing Skyview litigation, a remaining state inquiry concerning student-loan servicing, and other claims. The company said it had recorded adequate provisions but outcomes may exceed accruals. It had $639 of surety bonds and $97 of letters of credit outstanding.
Important facts for investors to verify
- Whether revenue trends, client attrition and new-business conversion support management’s stated growth priorities and attrition range.
- Whether Transportation implementation delays and Government contract losses continue to weigh on revenue and segment profitability.
- Underlying cash generation, including working-capital movements, factoring of receivables and the effect of preferred-stock dividends.
- Debt service and interest-rate exposure, and whether the $548 of revolver availability remains sufficient for liquidity and contractual needs.
- Potential effects of litigation and regulatory matters, the out-of-period revenue adjustment, restructuring actions and goodwill impairment indicators.
- Execution of the repurchase program and portfolio rationalization, including their effects on liquidity and long-term value.