Conduent Shelves spins off and prepares future plans (NASDAQ:CNDT)

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A quick shot of Conduent

driver (NASDAQ: CNDT) reported its financial results for the second quarter of 2022 on August 2, 2022, excluding expected revenue and EPS estimates.

The company provides business process outsourcing to transaction-intensive organizations around the world.

Given the now archived the spin-off of its Transportation segment and slowing macroeconomic conditions, my outlook on Conduent is Suspension for the short term while we wait to hear management’s plans for the future.

Drivers Overview

Conduent Incorporated, headquartered in Florham Park, New Jersey, was founded to provide a range of business process outsourcing services to corporations, governments and transportation companies.

The company is headed by President and CEO, Cliff Skelton, who was previously President of Fiserv Output Solutions.

The company’s main offerings include:

  • Commercial Industries

  • government services

  • Transportation

The company acquires customers through its direct sales and marketing efforts and through various channel partner referrals.

Conduent serves virtually every major industry group, the US government, and various transportation entities.

Conduent Market and Competition

Based on a 2021 market Investigation report According to Grand View Research, the global business process outsourcing market was estimated at $232 billion in 2020 and is expected to reach $446 billion in 2028.

This represents a forecast of 8.5% from 2021 to 2028.

The main drivers of this expected growth are the increasing use of digital tools and offshore talent to maximize business efficiency.

In addition, the versatility of outsourcing services is increasing as other types of service process automation and intelligence add to the return on investment for companies.

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Below is a graph showing the historical and expected future growth trajectory of process outsourcing services in the US:

US BPO Market

US BPO Market (Grand View Research)

The Asia Pacific market is forecast to see the highest CAGR from 2021 to 2028, and the chart below indicates the breakdown of that market by end-use industry in 2020:

Asia Pacific BPO Market

Asia Pacific BPO Market (Grand View Research)

Major competitors or other industry participants include:

  • Contact 24/7

  • appen

  • TDCX

  • Accent

  • task us

  • genpact

  • Tata Consulting

  • Competent

  • teleacting

  • Telus International

  • TTEC

  • VXI

  • Sutherland

Conduent’s Recent Financial Performance

  • Total revenue per quarter has decreased in recent quarters:

Total revenue for the 9th quarter

Quarter 9 Total Revenue (Alpha Search)

  • Gross profit per quarter has followed a similar path to total revenue:

9 Quarter Gross Profit

9 quarter gross profit (looking for alpha)

  • Selling expenses, G&A as a percentage of total revenues per quarter have produced the following results:

9 Quarter Sales, G&A % of Revenue

9 Quarter Sales, G&A % of Revenue (Search Alpha)

  • Operating income per quarter has fluctuated according to the following graph:

9 quarter operating income

9 quarter operating income (looking for alpha)

  • Earnings per share (Diluted) have varied a lot in recent quarters:

Earnings per share for 9 quarters

Earnings per share for 9 quarters (looking for alpha)

(All data in the charts above is GAAP)

Over the past 12 months, CNDT’s share price has fallen 41% versus the US S&P 500 Index’s decline of about 15.4%, as the chart below indicates:

52 week share price

52-week share price (seeking alpha)

Rating and other metrics for Conduent

Below is a table with the relevant figures of capitalization and valuation of the company:

Measurement (TMT)

Amount

Business Value/Sales

0.51

Revenue growth rate

-4.1%

Net profit margin

2.7%

EBITDA % GAAP

8.8%

Market capitalization

$884,760,000

company value

$2,050,000,000

Operating Cash Flow

$135,000,000

Earnings per share (fully diluted)

$0.42

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(Source – Looking for Alpha)

For reference, a relevant partial public comparable would be TTEC Holdings (TTEC), although TTEC is much larger and operates in different segments of the business process outsourcing/customer experience market; Below is a comparison of their main valuation metrics:

Metric

TTEC Holdings

driver

Difference

Business Value/Sales

1.30

0.51

-60.8%

Revenue growth rate

9.9%

-4.1%

–%

Net profit margin

4.3%

2.7%

-37.3%

Operating Cash Flow

$209,730,000

$135,000,000

-35.6%

(Source – Looking for Alpha)

A full comparison of the two companies’ performance metrics can be viewed here.

Comment on Conduent

In its latest earnings call (Source – Seeking Alpha), which covers Q2 2022 results, management highlighted a lack of high-margin government stimulus that resulted in a drop in revenue.

The company also decided not to spin off or sell its transportation systems operations and payment business, likely due to lower valuation expectations in the current market environment.

The leadership also plans to hold an Investor’s Day setting out its priorities and future plans without the previously contemplated spin-off or sale transaction.

Regarding its financial results, adjusted revenues fell 8% year-on-year and adjusted EBITDA decreased 26.9%, both in line with expectations.

Management did not disclose any retention rate information, either at the level of its clients or dollar-based retention rate results.

The company has experienced relatively minor foreign exchange difficulties.

For the balance sheet, the company ended the quarter with $519 million in cash and equivalents and $1.29 billion in debt.

For the last twelve months, free cash flow was $43 million, with $92 million in CapEx.

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Looking ahead, management expects adjusted revenue in 2022 to be $3.9 billion at the midpoint of the range, with its Government segment expected to perform better than previously forecast.

The main risk to the company’s outlook is its Commercial segment, which is more susceptible to a macroeconomic downturn than its Government and Transportation segments.

Given the now shelved spin-off of its Transportation segment and slowing macroeconomic conditions, my outlook for Conduent is Hold in the short term while we await management’s plans going forward.

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