Conduent Incorporated (CNDT) Earnings Call Transcript & Summary

Greetings, and welcome to the Conduent Second Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Nick Goyal, Vice President, Investor Relations. Thank you. You may begin.

Good morning, everyone. Welcome to Conduent's Second Quarter 2026 Earnings Call. With me today are Harsha Agadi, our CEO; and Giles Goodburn, our CFO. Harsha will provide an overview of the business and Gales will cover our financial performance in greater detail. We hope you have had a chance to review our press release issued earlier this morning. A copy of the press release and slides used during this call were filed with the SEC on Form 8-K. This information is also available on the Investor Relations section of our website. During this call, we will make forward-looking statements. These statements reflect management's current beliefs, assumptions and expectations which may change over time. Actual results could differ materially from those statements due to a number of factors. Information concerning these factors is included in our 10-K and 10-Q filings with the SEC. Unless otherwise stated, the information presented today reflects our continuing operations. It does not include the divestitures announced during this quarter. It includes non-GAAP financial measures, which should be viewed in addition to and not as a substitute for our GAAP results. for more information regarding the definitions of our non-GAAP measures, how we use them and the limitations to their usefulness for competitive purposes, please see our press release. And now I would like to turn the call over to Harsha.

Good morning, everyone, and thank you for joining us. 6 months into my role as CEO, I have a clear view of where we stand as a company where we need to improve and most importantly, where I believe we have significant opportunity to create value. Over the past several months, I've spent a lot of time listening to clients, engaging with associates across our business and reviewing our operations firsthand. My perspective was reinforced this spring at Elevate 2026, our client event in Chicago, where we heard directly from nearly 100 clients and partners, representing a diverse range of Fortune 100 companies about what matters most to them, greater speed, simpler operations, continued innovation and consistent execution. Those conversations also reinforced that the 5 priorities we established at the beginning of the year remain the right ones, increasing speed and accountability, enforcing financial discipline, reducing our cost structure, optimizing our portfolio and converting pipeline into growth. Today, I'll provide an update on the progress we're making against each of these priorities. Before I do a brief comment on the quarter. Our second quarter results were in line with our expectations. As a result of the 2 divestitures we announced during the quarter, we are updating our full year guidance to reflect the impact of those transactions. Now let me start with our first priority, increasing speed and accountability. Over the past several months, we're continued simplifying our structure and how we operate strengthening accountability and aligning the organization around our highest priorities. We've also strengthened our leadership team to improve operational efficiency and support our transformation. Approximately 80% of our senior leadership team is either new to Conduent or has taken on expanded responsibilities bringing their deep experience and proven leadership across the industries we serve. We're also beginning a phased return to office approach starting with locations where we have significant workforce. We believe that greater in-person collaboration will enable faster decision-making, stronger collaboration and better outcomes for our clients. These actions are creating a simpler, more agile and more efficient conduit, 1 that is better positioned to deliver consistently for our clients and shareholders. Our second priority is enforcing financial discipline. We continue to strengthen financial discipline across the organization with tighter controls around hiring, discretionary spending and capital allocation while increasing oversight of cash and liquidity across the business. These actions contributed to a meaningful improvement in our cash performance with cash usage essentially flat compared with the prior quarter. While we have more work to do, this is an important step in improving our cash generation and strengthening our financial flexibility. Our third priority is reducing our cost structure. Throughout the quarter, we continued simplifying the organization, reducing structural costs and redirecting investments towards the capabilities that will create the greatest long-term value. We continue to make good progress against the approximately $100 million annualized cost savings program we announced in the first quarter and remain on track to implement the majority of this program this year. The program spans all businesses and corporate functions with a focus on optimizing technology spend, rightsizing certain roles, reducing duplication, eliminating bureaucracy and simplifying our operating model across the enterprise. The fourth priority is optimizing our portfolio. We are taking a disciplined approach guided by a simple framework, fix, sell and grow. We will fix businesses where we see a clear path to improving performance, sell businesses that are no longer aligned with our long-term strategy and grow the businesses where we have the strongest competitive advantages and the greatest opportunities to create long-term value. During the quarter, we announced the sale of our transit business to Midaxo and the sale of our tolling business to [indiscernible]. Together, these transactions complete our exit from the transportation business significantly reduce off-balance sheet financial obligations and further simplify our portfolio. We expect both transactions to close by the end of 2026. With these transactions, we now expect to generate approximately $234 million in gross proceeds. In addition to retaining a 7% equity interest in quarter whose current market capitalization is approximately CAD 300 million. This exceeds the commitment we made in the first quarter to generate at least $200 million through portfolio actions. We intend to use the majority of these proceeds to reduce debt further strengthening our balance sheet and financial profile and providing us with greater optionality to invest in high-return growth opportunities. These actions also sharpen our strategic focus, allowing us to concentrate our capital, resources and management attention and the remaining businesses where we believe we can create the greatest value for our clients and shareholders. Portfolio optimization is not a onetime event. It is an ongoing discipline that will help us build a simpler, more focused and high-performing Conduent while maximizing long-term shareholder value. Our final priority and the fifth priority is converting pipeline into growth. During the quarter, we continue to build the momentum through a more focused go-to-market approach. The progress is reflected in the strength of our pipeline. Across our commercial and government segments, we have approximately $3 billion in qualified new business opportunities which has grown sequentially over the past several quarters. While there is more work to do, the continued growth in our pipeline reinforces our confidence that the actions we've taken to improve execution, sharpen our market focus and strengthen our client relationships are beginning to deliver. At the same time, it's important to recognize that there is a natural timing difference between winning new business and seeing the full revenue impact. As we've discussed previously, some contracts continue to roll off, and we also continue to see volume declines in certain existing client programs. Our focus is not simply replacing revenue but improving the quality of our portfolio by winning business in areas where we have a stronger competitive differentiation and a better long-term growth potential. This is a natural part of our transformation as we shape the portfolio toward higher-value opportunities and differentiated solutions. Those trends are reflected in the client momentum we saw during the quarter. In commercial, I'm pleased to let you know we have sold approximately $100 million of new business in the first 2 quarters. We also continue expanding into adjacent markets with new capabilities that create additional avenues for growth. I'll share a few examples. We signed a new pension risk transfer administration, engagement with Securian, expanding our position in the growing retirement administration market with a differentiated end-to-end solution. Trillium Health Resources selected our Health Services Plus platform to support claims processing, provider, data management and member services validating the investments we've made in our health care platform and reinforcing our ability to deliver integrated solutions for health care organizations. We also expanded our relationship with Avis Budget Group through a new vehicle citation offering, leveraging multiple solutions from across our businesses. Importantly, this establishes a new scalable offering that can be applied across organizations, managing large vehicle fleets, opening an attractive adjacent market for Conduent. We're also seeing continued expansion with several leading U.S. health care payers reflecting the strength of our relationships and our ability to deliver additional value across our portfolio of solutions. Turning to our government business. we have sold approximately $89 million of new business in the first 2 quarters, and we continue to demonstrate the value of our expertise in modernizing mission-critical public programs. Let me share some examples. During the quarter, we implemented a modernized state-of-the-art Medicaid platform for the state of New Mexico replacing a 24-year old legacy system with a single integrated platform that enables faster more efficient claims processing and improved access to care and continuity of service for approximately 900,000 Medicaid members. We also secured a multiyear renewal in Virginia to continue operating and modernizing the Commonwealth's Medicaid systems, enabling the transition to a more integrated platform designed to improve access to information, strengthen fraud prevention and enhanced program performance for approximately 1.6 million enrolled Viginians. And we continue advancing electronic benefits transfer modernization by completing pilot or production deployments of chip-enabled EMV technology in 3 states with a fourth state scheduled to roll out by the end of the summer. Together with enhanced fraud profession capabilities, these technologies are helping states better protect benefits while improving security for program participants. Beyond the wins we've announced, our qualified pipeline remains extremely strong. While the timing of individual awards can vary, the breadth and the quality of our pipeline reinforces our confidence in our ability to continue converting pipeline into sustainable growth. The client momentum we're seeing is supported by attractive long-term market fundamentals. Our go-forward portfolio addresses a large and growing market of approximately $200 billion expanding at an estimated annual rate of about 4%. We believe Conduent is extremely well positioned to capture this opportunity because organizations increasingly need partners that can modernize complex operations through integrated end-to-end solutions, not isolated point products. That is where Conduent stands apart. We combine deep operational expertise with technology automation and AI to transform mission-critical business processes for our clients. That differentiation is becoming even more important as organizations look to adopt AI increasingly. Clients recognize that AI is not about deploying stand-alone tools or running disconnected pilots. The real opportunity lies in embedded AI into the workflows and business processes that power their operations because we manage those processes on behalf of our clients. We bring the domain expertise, operational knowledge and technology capabilities needed to implement AI in ways that deliver measurable business outcomes. We are methodically embedding AI across the full cycle of our solutions from customers and constituent interactions to core business operations and enterprise productivity, and we're already seeing tangible results. One sterling example is Conni, our AI-powered digital assistant now embedded within our life at work health and wellness platform. Today, Conni resolves approximately 86% of employee inquiries without human intervention, while reducing live agent interaction by more than 20%. We're now taking the next step up by infusing Conni into agentic AI capabilities and expanding those capabilities into new use cases. One example is our personalized agentic AI-powered navigator the next evolution of Conni, which helps simplify complex health care interactions by transforming confusing health care information into personalized guidance for members and providers. That innovation is already being recognized in the marketplace. Recently, Conduent was selected as a winner of United Healthcare's 2026 global innovation challenge for its personalized agentic AI-powered navigator. Collected from 40 participating companies, this recognition clearly validates our superior ability to apply AI to solve the real customer problems while improving business outcomes for our clients. Internally, we're also deploying Microsoft Copilot and AI-assisted software development tools to help our engineering teams accelerate development improve productivity and bring new capabilities to market more quickly. Together, these investments demonstrate how we're combining deep domain expertise with practical AI innovation to help clients modernize operations, improve outcomes and create sustainable long-term value. The bottom line is this. We are executing with greater discipline, and we're beginning to see the results. redefining what clients and investors should expect from Conduent, a simpler, more focused company with stronger execution, greater financial discipline and a clear path to sustainable, profitable growth. While there is always more work ahead. I am extremely optimistic about where we're headed and confident we're building a stronger, high-performing company with significant opportunities. With that, I'll turn the call over to our Chief Financial Officer, Giles Goodburn.

Thanks, Harsha. As we have done in the past, we're reporting both GAAP and non-GAAP numbers. The reconciliations are in our filings and in the appendix of the presentation. Firstly, let me start by stating the results we are reporting today reinforce our conviction around our transformation journey Harsha laid out at the beginning of the year. However, when interpreting our second quarter GAAP and non-GAAP financial statements, you will see they are influenced by a number of factors related to this transformation. Specifically, discontinued operations and anticipated stranded costs from divestiture activity and the early consulting costs incurred to achieve the cost efficiency targets the benefits of which will become resident in future quarters. All of these factors are important steps towards our transformation destination. During the quarter, as Harsha mentioned, we announced the sale of both our transit and tolling solutions, which will complete our exit from the transportation business. Transactions collectively represent a strategic shift that will have a major effect on the company's operations and financial results and hence meet the criteria for discontinued operations presentation. Unless otherwise indicated, the financial disclosures and related information and commentary provided herein relate to the company's continuing operations, which exclude the transportation segment. All prior periods have been restated to reflect discontinued operations. These transactions are a key milestone in our strategic journey, that once closed, will generate gross proceeds of $234 million, plus a 7% equity stake in Quarterhill, the acquirer of our tolling business. 2025 revenue and EBITDA for the Transportation segment was $609 million and $18 million, respectively, thus transacting at an adjusted EBITDA multiple in the mid-teens significantly higher than where Conduent currently trades. The transactions will also provide other strategic financial benefits. Our off-balance sheet financial instruments, surety bonds and letters of credit will be reduced by approximately 80%, leaving roughly $125 million, predominantly supporting the government segment. The working capital intensity of the company will also be reduced as well the capital expenditure requirements. And importantly, the proceeds will allow us flexibility to address the capital structure with an emphasis on delevering the organization. Turning to the quarter. Let's discuss our key sales metrics on Slides 5 and 6. We signed $99 million of new business ACV in the quarter compared to $111 million in Q2 2025, but a sequential improvement versus Q1 2026. This quarter, the ACV one will drive a larger proportion of recurring revenue than we have seen in recent quarters. And our commercial segment new capability ACV and expanding our relationships with existing clients is the highest it's been for several years. The trailing 4-quarter ACV metric is up versus this time last year. and we expect to resume a sequential increase next quarter. At the midpoint of the year, we have signed $188 million of new business ACV, equal to the first 6 months in 2025. However, this year, we have closed 12% more annual recurring revenue signings and 7% more nonrecurring revenue signings than we did in the prior year. With the changes to our go-to-market strategy taking shape and driving a stronger pipeline, our expectation is that we have a stronger finish to 2026 than in 2025. Our qualified ACV pipeline remains strong at $3 billion, which is up 11% year-over-year. Both commercial and government segments are up year-over-year with our Commercial segment pipeline growing 48% since the beginning of 2026. Q2 was a strong quarter for renewal activity with $617 million of TCV, including several large health care clients in both our government and commercial segments. Let's turn to Slide 7 and 8 and review our Q2 P&L metrics. Revenue for the quarter was $531 million compared to $603 million in Q2 2025, down 11.9%. Adjusted EBITDA for Q2 2026 was $16 million as compared to $23 million in Q2 2025, and our adjusted EBITDA margin of 3% is down 80 basis points year-over-year. Included in these adjusted EBITDA numbers is approximately $4 million in 2026 and $6 million in 2025 of stranded costs related to the former Transportation segment, which we will address once the transactions have closed. Turning the page. Q2 2026 Commercial segment revenue was $316 million, down 13% as compared to Q2 2025. The decline here is driven by contract losses and volume declines, predominantly in our customer experience management offering, including our largest commercial client whose contract with us will end in the third quarter and is already incorporated in our outlook. Commercial adjusted EBITDA was $24 million, a decrease of $3 million year-over-year, and the adjusted EBITDA margin of 7.6% was up 20 basis points year-over-year. While we incurred a couple of negative discrete items in the quarter, the results from our cost efficiency programs drove a stronger margin performance. Government segment revenue for the quarter was $215 million versus $238 million in Q2 2025. The drivers here were lost business and the timing of implementation activity of our state-of-the-art Medicaid platform in the government health care portfolio, creating a temporary dip in revenue. As Harsha mentioned, we finalized the New Mexico implementation early in the quarter, which completed the revenue recognition for this project, and we are now focused on ramping up the implementation of our new Virginia contract, which will drive new revenue in the second half of this year. Adjusted EBITDA was $51 million and adjusted EBITDA margin of 23.7%, down 150 basis points year-over-year. The revenue impacts as well as favorable reserve releases in the prior year were the drivers. Unallocated costs were $59 million for Q2 2026, a reduction of almost 10% versus Q2 2025, reflecting the continued progress with our cost efficiency programs in the corporate functions. Let's turn to Slide 7 and discuss the balance sheet and cash flow. We ended Q2 2026 with approximately $240 million in cash on the balance sheet and negative adjusted free cash flow of $8 million for the quarter. Although adjusted free cash flow remained negative for the first half of the year, it improved by $81 million compared to the same period last year, primarily due to achieving payment milestones in our Government and former Transportation segments. Our adjusted net leverage ratio of 2.1 turns this quarter excludes EBITDA from discontinued operations, but includes the proportion of cash proceeds we expect to receive from the divestitures at closing. And our capital expenditure for the quarter was 2.6% of revenue, in line with our expectations. Turning to Slide 11. You will see we have recalibrated our guide for 2026 to exclude our discontinued operations. Our revenue guide for 2026 is now a range of $2.15 billion to $2.25 billion, and our adjusted EBITDA guide is between $140 million and $170 million, which at the midpoint is a 7% adjusted EBITDA margin. That concludes the financial review of Q2 2026, and I'll now hand it back to Harsha. Harsha?

Thanks, Giles. Before we open the line for questions, I'd like to leave you with one final thought. Transforming a company of Conduent's scale takes time, but it's very predictable. While our financial performance this quarter does not yet fully reflect the full impact of the actions we have taken, we're making steady progress on the priorities that will create long-term value. This quarter marked an important milestone in that journey. The 2 portfolio transactions we announced further reshape Conduent, strengthen our strategic focus and demonstrate our commitment to disciplined execution and thoughtful capital allocation. At Investor Day later this year, we'll share the next phase of that journey, including a more comprehensive view of our long-term strategy, portfolio priorities, capital allocation framework and growth opportunities we see across our markets. We look forward to sharing more with you then. Operator, we're now ready to take questions.

[Operator Instructions] Our first question comes from the line of Michael Kupinski with NOBLE Capital Markets.

Congratulations on executing on your initiatives. A couple of quick questions here regarding margins. Government segment margins improved meaningfully. How much of that improvement is structural because of the health care platform scalability versus maybe some temporary efficiencies or onetime items? And then excluding transportation, what is the realistic medium-term adjusted EBITDA margins for the remaining business? And I was just wondering if your previous goal of achieving 10% margins is still the appropriate framework? Or has the portfolio simplification changed that outlook?

So my reaction to your questions are the following. in this space, commercial and government, we really need to be -- and I'm looking at the segments individually, and I'm keeping transportation aside just for discussion purposes. We need to be in the mid- to higher double-digit margins. Then we minus the SG&A, that's the central SG&A, bringing us to a greater than 10% margin. So that goal remains unchanged. When you look at our benchmarking, our peers, they're able to do this. We need to do this. We need to do even better, even quicker, in my opinion. On the government side, there are 2 things happening. Anna Server, our leader for the government business is rapidly implementing AI in multiple areas. We don't go around talking too much about it and maybe we should. So I'm just going to give you one small example. We have a new fraud tool designed and owned by us called Verisite, assisted by Microsoft in the food stamp eligibility program that incorporates significant AI capabilities to identify patterns of potential fraudulent activity. The issue we face in the U.S. today is a tremendous amount of fraud. So our focus and investment in AI is to help the governments of the United States, whether it's state local or federal, using AI to trap fraud and save money for the various stakeholders. So I'm actually now receiving calls from State Attorney General, Secretary of State, the governors of the state, thanking us for starting to implement some of this code. The other thing that Anna is doing for the margins to start changing quite rapidly in the government is a change in the headcount in how she's organized. And if you remember, 6 months ago when I came in, we had a different leader, and Anna Server has been now in this job about 4 months, and she's taking very rapid actions to change the business. So that would be my answer. So the outlook remains unchanged in terms of 10-plus percentage across the entire business.

Got you. And just a follow-up on your AI comments. Do you expect AI to become more of a measurable contributor to revenue growth? Obviously, you've concentrated on the cost efficiency initiatives, but I was just wondering if that is a prospect as well factored into your outlook?

Yes. I think it's going to be a very big difference in terms of how we are executing. So I'm going to just give you some examples, again, in the government side, and I can also go on the commercial side. Where AI is being used today is internally, porting, taking old code and porting it to new code. Second, -- we have a lot of requirements that governments ask us to fulfill. The validation of these requirements we're using AI tools. Third, testing scenarios. fourth, quality code checks. The biggest issue I saw as I walked into Conduent is the speed to implementation. Sometimes when you sign up new business, it was taking 9 months, 10 months, we're compressing the time to go live, which then -- and we're using AI to do that, which then means revenue accretion will be faster, accuracy in terms of our operations increases. And I'd say the clients' happiness space increases because they're having true added value. Now what this might result in is reduction of some of our cost structure because of this automation, which might ripple through the entire company. If you look at our number of employees that I began with, we have definitely dropped the number of employees in the company as each month has gone by more rapidly as time is going.

Our next question comes from the line of Gowshi Suri with Singular Research.

Can you all hear me?

We can hear you.

Okay. With the largest commercial client kind of rolling off, what does the client concentration on the remaining book look like? I know you mentioned this $100 million commercial wins. What does the client accounts look like? And is that improving with the next biggest clients?