CONDUENT Inc Q4 FY2024 earnings call

• Portfolio rationalization: The company has been focusing on culling the portfolio, divesting assets to streamline strategy and game plan, paying down debt, and buying out the Icon Group.
• Financial performance: Q4 adjusted revenue improved sequentially, and both Q4 and year-end adjusted EBITDA margins finished on the high end of 2024. Net ARR was strong with improved retention, and new business ACV was up quarter over quarter though down full-year.
• AI leverage: Leveraging Gen AI across portfolios, especially in fraud, end-user validation, customer service portals, CX language smoothing/translation, and improving end-customer experience.
• Leadership and strategy: New leadership in commercial, government, and transportation segments; focus on growing wallet share with existing clients through client partner programs; bullish on government going forward with improved pipeline and margins.

Commercial segment: Full-year 2024 adjusted revenue was $1.606 billion, down 3.7% from 2023; adjusted EBITDA was up 2.4% year over year, with an adjusted EBITDA margin of 10.5% (up 60 basis points year over year). Government segment: Full-year 2024 adjusted revenue was down around 10% to $984 million; adjusted EBITDA was $210 million, down 35% year over year, with an adjusted EBITDA margin of 21.3% (down around eight points). Transportation segment: Full-year 2024 adjusted revenues grew 5% year over year to $586 million, while adjusted EBITDA was down $19 million, and the segment was breakeven in 2024.

• Adjusted revenues in 2025 expected to be in the range of $3.1 billion to $3.25 billion, flat compared to 2024 with first half down 3%-4%, second quarter close to flat, and growth in the second half.
• Adjusted EBITDA margin expected to be in the range of 4.5% to 5.5% with an exit rate of around 8%.
• Adjusted free cash flow expected to be in the range of $0 million to $40 million, driven by milestone timing on large projects.
• CapEx expected to be approximately $80 million or around 2.5% of revenue. Restructuring charges expected to be around $25 million, $20 million lower than 2024.

• Cybersecurity risks: Taking any attempts to access systems as of utmost importance, with reliance on partnerships with top security firms.
• Macroeconomic factors: Broadly stable macroeconomic conditions, but cost pressures in healthcare driving opportunities in outsourcing for commercial segment; government segment dependent on state and local government dynamics.
• Government contract uncertainties: Previous headwinds in government segment from contract terminations, SNAP volume changes, and pricing adjustments, though expecting lapping of these effects in 2025.

Q: Could you give examples of tangible progress in implementing AI for revenue generation?

A: Examples include AI-enabled account takeover fraud detection in payment business, document automation in healthcare, and end-user support in human capital solutions using Gen AI.

Q: How to grow wallet share with existing commercial clients?

A: Through a client partner program under the new group president for commercial, focusing on enterprise-level problem solving rather than product pushing to identify and address breadth of opportunities for clients.

Q: Is margin improvement primarily driven by cost reduction and operational efficiencies?

A: Yes, due to stranded cost work underway and usual attempts to be more efficient, with divestitures leading to stranded cost that needs to be addressed.

Q: Thoughts on debt reduction and capital allocation in 2025?

A: Increasingly comfortable with debt levels, with divestiture proceeds to come in April 2025, and capital allocation to be balanced, considering EBITDA recovery and exit rate notions.

Q: Expectations for new business signings and net ARR growth in 2025?

A: Expect 2025 to be a better ACV sales year than 2024 with strong pipelines across segments; net ARR activity metric positive due to improved retention and good sales finish, with add-on revenues important and churn rate expected to decrease.

Q: Reasons for government segment forecast pickup in second half of 2025?

A: Lapping of previous headwinds from health contract termination, SNAP volume changes, and pricing adjustment in the second quarter of 2025, with expectation of stability and growth beyond that.

Q: Thoughts on portfolio rationalization and capital allocation?

A: Continues to focus on portfolio rationalization with targeted divestitures, considering scarcity value of assets; capital allocation to be open-minded, with share repurchase and debt reduction front of mind.

Q: Pricing environment and growth assumptions?

A: Muting inflation in costs, success in driving price in commercial business, more work offshore being accretive to margin, with price often secondary to trust and relationship in client dealings.