Conduent’s Financial Performance: A Balanced Approach to Growth and Efficiency

Conduent, a leading provider of digital business solutions and services, has reported its financial results for the year ended December 31, 2024. The company’s intense focus on growth, quality, and efficiency has resulted in a strengthened foundation, allowing it to execute on its three-year strategy and deliver value for its stakeholders.

Revenue and Profit Trends

Conduent’s revenue for 2024 decreased by 10% compared to the prior year. This was primarily due to the impact of several divestitures, including the transfer of the BenefitWallet Portfolio and the sales of the Curbside Management and Public Safety Solutions and Casualty Claims Solutions businesses. Additionally, the company experienced some lost business across its three segments, which was partially offset by new business ramp.

Despite the revenue decline, Conduent’s profitability improved significantly. The company’s net income for 2024 was $426 million, compared to a net loss of $296 million in the prior year. This turnaround was driven by several factors:

1. Cost Optimization: Conduent was able to reduce its cost of services by 5% and its selling, general, and administrative expenses by 1% compared to the prior year. These cost savings were achieved through the impact of the divestitures, as well as ongoing cost optimization efforts.

2. Reduced Depreciation and Amortization: Depreciation and amortization expenses decreased by 23% due to the impact of the divestitures, the write-off of capitalized software costs in the prior year, and older assets becoming fully depreciated.

3. Gain on Divestitures: Conduent recorded a net gain of $696 million on its divestitures, which significantly boosted its profitability.

4. Reduced Interest Expense: The company’s interest expense decreased by 32% due to the prepayment of its Term Loan B and a portion of its Term Loan A, utilizing the proceeds from the divestitures.

5. Favorable Tax Impact: Conduent implemented an internal reorganization that resulted in a built-in capital loss for tax purposes, which offset capital gains from the divestitures and led to net tax savings of $59 million.

These factors, combined with the company’s focus on growth and efficiency, have resulted in a significant improvement in Conduent’s financial performance.

Segment Performance

Conduent’s financial performance is based on three reportable segments: Commercial, Government, and Transportation.

Commercial Segment The Commercial segment’s revenue decreased in 2024 due to lost business and lower volumes in certain industries within the client base, partially offset by new business ramp. However, the segment’s profit and Adjusted EBITDA (a non-GAAP measure) increased compared to the prior year, primarily due to new business ramp, cost efficiencies, and the absence of a prior-year write-off of capitalized software.

Government Segment The Government segment’s revenue decreased in 2024, primarily due to lost business, particularly in the Government Healthcare business, and lower volumes in the Government Services business. The segment’s profit and Adjusted EBITDA also decreased, mainly due to the impact of lost business, lower volumes, and the absence of a prior-year reversal of liabilities related to the settlement of the Cognizant matter.

Transportation Segment The Transportation segment’s revenue increased in 2024, driven by the ramp-up of new business and improved operational performance, partially offset by lost business, a contract price decrease, and lower volumes. However, the segment’s profit and Adjusted EBITDA decreased due to the impact of the contract price decrease and lower volumes.

Divestitures The revenue, segment profit, and Adjusted EBITDA for the Divestitures segment decreased in 2024 compared to the prior year, as the results of the BenefitWallet Portfolio, Curbside Management and Public Safety Solutions, and Casualty Claims Solutions businesses were only included until the date of their transfer or sale, respectively.

Unallocated Costs Unallocated Costs, which include shared IT infrastructure costs, enterprise application costs, and certain corporate overhead expenses, decreased in 2024 compared to the prior year, primarily due to cost savings from insourcing certain technology functions, lower networking and corporate IT costs, and lower depreciation costs.

Liquidity and Capital Resources

As of December 31, 2024, Conduent had $366 million in cash and cash equivalents, of which approximately $140 million was held in foreign locations. The company also has a $550 million Revolving Credit Facility, of which none has been utilized for borrowings and $11 million has been utilized for letters of credit.

Conduent’s cash flow from operating activities decreased by $139 million in 2024 compared to the prior year, primarily due to lower Adjusted EBITDA and higher cash taxes, partially offset by improved accounts receivable management and lower interest expense.

The company’s cash flow from investing activities increased by $888 million, mainly due to the proceeds from the 2024 divestitures and the settlement of the Skyview matter. Conduent used a portion of these proceeds to prepay $642 million of its Term Loan B and Term Loan A, as well as to purchase $132 million of common shares from the Icahn Parties.

Conduent believes that its current cash balance, projected cash flow from operations, and available Revolving Credit Facility will provide sufficient financial resources to meet its expected business obligations for at least the next twelve months.

Strengths and Weaknesses

Strengths:

1. Focused Growth Strategy: Conduent has outlined a clear three-year strategy focused on accelerating growth in key areas, continuing its portfolio rationalization, and taking a balanced approach to capital allocation.
2. Improved Profitability: The company has demonstrated its ability to optimize costs, reduce depreciation and amortization, and leverage gains from divestitures to significantly improve its profitability.
3. Strengthened Balance Sheet: Conduent has utilized the proceeds from its divestitures to prepay debt, reducing its leverage and strengthening its financial position.
4. Diversified Business Model: The company’s three reportable segments – Commercial, Government, and Transportation – provide diversification and exposure to different industries and growth opportunities.

Weaknesses:

1. Revenue Decline: Conduent’s revenue declined by 10% in 2024, primarily due to the impact of divestitures and lost business, which could be a concern if the trend continues.
2. Segment Performance Variability: The company’s segment performance was mixed, with the Commercial and Transportation segments experiencing profitability challenges, while the Government segment saw a decline in profitability.
3. Macroeconomic and Geopolitical Risks: As a global company, Conduent is exposed to the effects of macroeconomic and geopolitical uncertainty, which could have a material adverse impact on its business.

Outlook and Future Prospects

Conduent’s management remains focused on executing its three-year strategy, which includes:

• Doubling down on key growth areas within each of its business segments
• Continuing its portfolio rationalization strategy by divesting certain solutions with limited growth potential or high capital intensity
• Taking a balanced approach to capital allocation, including internal investments, debt prepayment, and share repurchases

The company’s pipeline of new business opportunities remains strong, particularly in its Government Healthcare and Immediate Payments offerings. Conduent is also the first organization to execute transactions over the newly implemented FedNow capability, which it expects will lead to an acceleration of new business signings in 2024.

However, the company acknowledges the potential impact of global macroeconomic and geopolitical uncertainty on its business, which could have a material adverse effect on its financial performance.

Overall, Conduent’s focus on growth, efficiency, and balance sheet optimization has positioned the company for continued success. By executing on its strategic initiatives and managing its risks effectively, Conduent aims to deliver sustainable value for its stakeholders in the years to come.