Executive Summary / Key Takeaways

• Conduent is executing a multi-year strategic transformation, shifting from a broad, less focused portfolio to a more streamlined, technology-led business process solutions provider targeting sustained growth and margin expansion by its 2025 exit targets.
• A significant portfolio rationalization phase in 2024 generated nearly $800 million in net proceeds, substantially reducing debt ($639 million less debt) and repurchasing shares (61 million), strengthening the balance sheet and simplifying governance. Further rationalization is planned for 2025.
• The company is leveraging technology, particularly AI and GenAI, to drive operational efficiency and create new opportunities, notably increasing fraud detection volume by 150% in its payment solutions and enhancing capabilities in document management and human capital services.
• Despite a "trough" year in 2024 marked by specific Government segment headwinds and a Q1 2025 impact from cyber event response costs, management maintains its 2025 outlook, anticipating sequential revenue improvement and margin expansion driven by cost efficiencies, sales ramp, and lapping prior-year challenges.
• Key risks include potential impacts from the January 2025 cyber event (litigation, reputational harm, regulatory actions) and execution risk on strategic initiatives and sales pipeline conversion, though management highlights mitigation efforts and a strong forward pipeline.

Conduent's Transformation Journey: From Breadth to Focused Growth

Conduent Incorporated, organized in 2016, operates at the intersection of technology and business process services, serving commercial, government, and transportation clients globally. For years following its spin-off, the company focused on operational and technological stabilization. Beginning in Q1 2020, an intense emphasis on growth, quality, and efficiency aimed to build a strengthened foundation, described by management as foundational and precedent to growth.

Building on this, a three-year strategy outlined in March 2023 aimed to accelerate growth and enhance value by creating a more nimble, technology-led entity. A core tenet of this strategy was portfolio rationalization, addressing a portfolio deemed too wide, leading to high central costs and underperforming assets. The goal: unlock accelerated growth, reduce debt, increase profitability, and free up capital for reinvestment or shareholder returns.

This strategic pivot culminated in a significant phase of divestitures in 2024. Conduent successfully divested its BenefitWallet Portfolio, Curbside Management and Public Safety Solutions businesses, and Casualty Claims Solutions business. These transactions yielded nearly $800 million in net proceeds. This capital was strategically deployed, resulting in $639 million less debt and the repurchase of 61 million shares, including those formerly owned by activist investor Carl Icahn. This not only fortified the balance sheet but also simplified the board structure, streamlining future decision-making. Management indicates this rationalization journey is ongoing, with further opportunities targeted in 2025 to enhance the balance sheet and agility.

In the competitive landscape, Conduent operates alongside larger, more diversified players like Accenture (ACN), DXC Technology (DXC), Cognizant (CTSH), and Genpact (G). While these competitors often boast higher revenue growth rates (ACN 5-7%, CTSH 4-6%, G 3-5%, DXC 2-4% in FY 2024) and generally superior margins (ACN operating margins 15-18%, CTSH 15-18%, G 10-15%, DXC 5-8% vs. CNDT's TTM operating margin of -2.57% and EBITDA margin of 7.41%), Conduent carves out a niche, particularly in government-centric and transaction-intensive services. Its strategic focus on specific public sector markets and complex commercial processes differentiates it from the broader digital transformation or consulting ecosystems of some rivals. While CNDT's overall market share is smaller (estimated 2-5%), its depth in areas like government benefit administration and transportation tolling/transit provides a distinct positioning, albeit with lower overall profitability and capital efficiency (TTM ROIC estimated around 10-15% vs. ACN 20-25%, CTSH 15-20%). The strategic rationalization aims to improve these metrics by focusing on higher-margin, higher-growth potential assets.

The Technological Foundation and AI-Driven Future

Conduent's operations are underpinned by leveraging cloud computing, artificial intelligence (AI), machine learning, automation, and advanced analytics. These technologies are not merely buzzwords but are actively being deployed to enhance existing services and create new capabilities.

A key area of focus is the application of AI, particularly GenAI. In its Government Services business, an AI pilot in collaboration with Microsoft (MSFT), combining traditional rules-based AI with GenAI, has moved into production. This solution is used to prevent account take-over fraud in payment solutions and has demonstrably increased the volume of cases for fraud detection by 150%. This quantifiable improvement highlights the tangible benefits of AI in driving efficiency and security in mission-critical government programs.

Beyond fraud prevention, AI is being integrated into other areas. Pilot work in the documents management space, using GenAI paired with traditional OCR, shows promise for more granular document classification, improving processing speed and potentially opening new adjacencies like processing healthcare claims correspondence. In Human Capital Solutions, GenAI is enhancing end-user support portals.

The strategic "so what" for investors is clear: these technological advancements contribute directly to Conduent's competitive moat by enhancing the value proposition for clients through improved efficiency, accuracy, and security. They enable cost reductions, support margin expansion, and open doors to new revenue streams and market adjacencies, particularly in areas like government fraud reduction, which aligns with broader administration efforts. While competitors like Accenture and Cognizant are also heavily invested in AI, Conduent's application within its specific niche markets, like state-level government programs and complex transaction processing, provides a differentiated angle. The company is also proactively addressing cybersecurity risks by teaming up with a leading firm to develop innovative methods for quickly identifying sensitive data post-event, including on-demand notification capabilities, a direct response to the evolving threat landscape.

Recent Performance: Navigating the Trough

The first quarter of 2025 saw Conduent report revenue of $751 million, a decrease from $921 million in Q1 2024. Approximately 54% of this decrease was directly attributable to the impact of the Benefit Wallet Transfer and the sales of the Curbside Management and Public Safety Solutions and Casualty Claims Solutions businesses completed in 2024. Excluding the divestiture impact, the revenue decline was driven by lost business and lower Commercial volumes, partially offset by new business ramp in Commercial and Transportation.

Operating costs and expenses totaled $807 million in Q1 2025, compared to $794 million in Q1 2024. Cost of services decreased due to divestitures and cost optimizations. However, Selling, General and Administrative (SGA) expenses increased, primarily driven by $25 million in direct response costs related to the January 2025 cyber event. This was partially offset by a $9 million insurance recovery related to a prior legal matter and corporate cost efficiencies. Depreciation and amortization also decreased, reflecting fully amortized assets and the impact of divestitures. Interest expense saw a significant decrease, falling from $27 million in Q1 2024 to $12 million in Q1 2025, a direct benefit of the 2024 debt prepayments using divestiture proceeds.

Segment performance in Q1 2025 reflected these dynamics:

• Commercial: Revenue declined to $402 million from $419 million, driven by lower volumes despite new business ramp. Segment profit fell to $16 million from $19 million, and Adjusted EBITDA decreased to $40 million (10.0% margin) from $45 million (10.7% margin), impacted by lower volumes and higher fixed technology overhead, partially offset by cost efficiencies. Management noted strong sales pipeline and client satisfaction.
• Government: Revenue decreased significantly to $216 million from $258 million. This was primarily due to lost business in Government Healthcare and discrete impacts from service level dispute reserves. Segment profit dropped to $28 million from $42 million, and Adjusted EBITDA decreased to $38 million (17.6% margin) from $55 million (21.3% margin), driven by the revenue decline, partially offset by cost efficiencies and benefits from AI investments in fraud prevention. Management expressed confidence in the segment "turning the corner" with an improved pipeline and new talent.
• Transportation: Revenue declined to $133 million from $144 million, primarily due to a non-retained portion of a tolling contract, partially offset by incremental revenue from a congestion charging back office solution go-live. Segment profit decreased to $2 million from $6 million, but Adjusted EBITDA increased to $6 million (4.5% margin) from $1 million (0.7% margin), benefiting from the absence of prior-year transition costs. Progress was noted in transit market share and major project implementations.

Overall, Q1 2025 results reflect the anticipated impact of the 2024 divestitures and specific, non-recurring costs related to the cyber event. The performance aligns with management's characterization of 2024 as a "trough" year, with the first half of 2025 still absorbing some of these effects before a return to growth is expected.

Strengthening the Balance Sheet and Capital Allocation

Conduent has made significant strides in strengthening its financial position, largely funded by the strategic divestiture program. As of March 31, 2025, the company held $277 million in cash and cash equivalents and had $540 million available under its $550 million revolving credit facility (with $10 million used for letters of credit).

Total principal debt outstanding stood at $657 million, with only $26 million due within one year, reflecting the impact of substantial prepayments made in 2024. The company prepaid $639 million of debt using divestiture proceeds, including voluntarily prepaying the entire Term Loan B and a portion of Term Loan A. This aggressive debt reduction strategy has significantly lowered interest expense and improved the company's financial flexibility.

Cash flow from operations in Q1 2025 was $58 million provided, an improvement from $37 million provided in Q1 2024, although the prior year benefited from a $22 million tax refund. Investing activities used $17 million in Q1 2025, a significant shift from $143 million provided in Q1 2024, which included $164 million in proceeds from the BenefitWallet transfer. Financing activities provided $10 million in Q1 2025, a stark contrast to $199 million used in Q1 2024, reflecting the absence of large debt prepayments and treasury stock purchases seen in the prior year period. Adjusted free cash flow for Q1 2025 was negative $74 million.

The company's net leverage ratio increased sequentially to 2.7x in Q1 2025 from 1.6x at the end of 2024. Management anticipates this ratio will increase over the next couple of quarters as the adjusted EBITDA from divested businesses is annualized in the calculation. However, they expect it to return to around 1.5x in the second half of 2025 and move towards a target of 1x exiting 2025, driven by sequential adjusted EBITDA recovery from cost efficiencies and growth.

The capital allocation strategy remains balanced: prioritizing debt reduction to achieve the 1x net leverage target, investing internally in strategic growth areas (like AI and delivery capacity), and considering further portfolio rationalization. The completion of the $50 million deferred payment from the Curbside/Public Safety divestiture in April 2025 further bolstered liquidity post-Q1.

Outlook and the Path to 2025 Exit Rates

Conduent maintains its full-year 2025 outlook, which anticipates a significant shift in the company's trajectory. Management expects adjusted revenues for the full year 2025 to be in the range of $3.1 billion to $3.25 billion. This implies the business will be down year-over-year in the first half of 2025 (between 3% and 4%, with most impact in Q1), close to flat in Q2 (guidance of $815 million to $825 million adjusted revenue), and then returning to top-line growth in the second half of the year.

Segment-level expectations for 2025 at the midpoint include Commercial growing approximately 2%, Government declining approximately 4% (as it laps the 2024 headwinds), and Transportation growing approximately 1%.

Adjusted EBITDA margin for 2025 is expected to be in the range of 4.5% to 5.5%, with a targeted exit rate of around 8%. Management forecasts sequential improvement in margin throughout the year, driven by:

1. The increasing impact and annualization of cost efficiency programs initiated in 2024 (over 90% actioned by Q2 2024).
2. The removal of stranded costs associated with the 2024 divestitures ($50 million target).
3. Additional cost efficiency initiatives across the business ($50 million target).
4. Margin expansion from pricing levers and favorable mix shifts (e.g., onshore to offshore).
5. Natural flow-through from anticipated top-line revenue growth in the second half of 2025.

Adjusted free cash flow for 2025 is projected to be in the range of $0 million to $40 million, with variability depending on the timing of large implementation project milestones. Capital expenditures are expected to be approximately $80 million, or around 2.5% of revenue. Restructuring charges are anticipated to decrease to approximately $25 million.

The underlying assumptions for this outlook include broadly stable macroeconomic conditions. Management believes the company's focus on state and local government essential services and the increasing demand for efficiency and outsourcing in commercial sectors provide resilience. The strategic initiatives, including new leadership, investments in technology (AI), and continued portfolio optimization, are expected to drive performance towards the stated 2025 exit goals of sustained top-line growth, sequential margin improvement, less capital intensity, and improved cash flow conversion.

Key Risks and Challenges

Despite the strategic progress and clear path forward, Conduent faces notable risks. The January 2025 cyber event, while operationally contained, resulted in unauthorized access and exfiltration of personal information. While the company has incurred material non-recurring expenses ($25 million in Q1 2025) related to potential notifications and maintains cyber insurance, future risks related to impacted data, litigation, reputational harm, and regulatory actions could still adversely affect financial condition or results. The complexity of analyzing the exfiltrated data and the ongoing process of client notification add uncertainty.

Litigation risk is inherent in the business, particularly concerning government contracts and intellectual property. While the company accrues for estimated liabilities, the unpredictable nature of legal proceedings means ultimate outcomes could exceed reserves.

Execution risk on the strategic plan is also present. Achieving the targeted cost efficiencies, successfully integrating new leadership, converting the sales pipeline into revenue, and executing further portfolio rationalization initiatives on schedule and at desired valuations are critical to realizing the 2025 exit targets. The Government segment's performance in 2024 highlighted the impact that specific contract losses and timing issues can have, underscoring the importance of consistent sales execution and retention.

While management views the business as relatively insulated from broad macroeconomic and geopolitical shocks compared to some peers, shifts in government funding priorities or procurement cycles, although not currently seen as material headwinds for Conduent's core entitlement-focused state/local business, could still pose challenges. Competition remains intense across all segments, requiring continuous investment in technology and operational excellence to maintain market position and pricing power against rivals with potentially greater scale or financial resources.

Conclusion

Conduent is in the midst of a significant transformation, strategically shedding non-core assets to focus on its strengths in technology-led business process solutions for commercial, government, and transportation clients. The initial phase of portfolio rationalization has substantially de-leveraged the balance sheet and returned capital to shareholders, creating a more focused and financially stable foundation.

Despite absorbing the impacts of divestitures and a specific cyber event in early 2025, the company is executing against a clear plan aimed at achieving sustained top-line growth and sequential margin expansion by the end of 2025. Leveraging technology, particularly AI for efficiency and new capabilities, is central to enhancing its competitive position and unlocking trapped value within its core businesses. While execution risks and potential fallout from the cyber event warrant monitoring, the combination of a strengthened balance sheet, a more focused portfolio, new leadership, and a clear operational and technological roadmap positions Conduent to potentially deliver on its stated 2025 exit targets and create value for investors. The narrative is one of moving beyond a challenging transition period towards a more nimble, profitable, and growth-oriented future.