TTEC - Conduent Faces Further Client Spending Headwinds

2023-09-26 14:41:34 ET

Summary

• Conduent Incorporated provides business process outsourcing services to global organizations.
• The company is facing spending headwinds in its Commercial Industries segment.
• I remain Neutral [Hold] on Conduent Incorporated until management can reignite revenue growth.

­­A Quick Take On Conduent

Conduent Incorporated ( CNDT ) provides business process outsourcing for transaction-intensive organizations worldwide.

I previously wrote about Conduent with a Hold outlook.

Conduent continues to face spending headwinds in its Commercial Industries segment, so I reiterate my Neutral [Hold] outlook for the near term.

Conduent Overview And Market

Florham Park, New Jersey-based Conduent Incorporated was created in 2016 to provide outsourced business process services to companies, governments and transportation firms.

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

The company's main business segments are:

• Commercial Industries
• Government Services
• Transportation.

The firm acquires new customers via direct sales and marketing efforts and through various partner channel referrals.

Conduent serves major industry groupings, the U.S. government and various transportation organizations.

According to a 2021 market research report by Grand View Research, the worldwide market for business process outsourcing was an estimated $232 billion in 2020 and is forecasted to reach $446 billion by 2028.

This represents a forecast CAGR (Compound Annual Growth Rate) of 8.5% from 2021 to 2028.

The main drivers for this expected growth are the growing usage of digital tools and nonlocal talent to maximize business efficiencies.

The versatility of outsourcing services is growing as other types of service process automation and intelligence adds to the return on investment for enterprises.

Below is a chart showing the historical and forecasted future growth trajectory of process outsourcing services in the U.S.:

Major competitive or other industry participants include:

• 24/7 Intouch
• Appen
• TDCX
• Accenture
• TaskUs
• Genpact
• Tata Consultancy
• Cognizant
• Teleperformance
• Telus International
• TTEC
• VXI
• Sutherland.

Conduent's Recent Financial Trends

• Total revenue by quarter has continued to decline in recent quarters; Operating income by quarter has stabilized more recently:

• Gross profit margin by quarter has turned up in the most recent quarter; Selling and G&A expenses as a percentage of total revenue by quarter have varied within a narrow range:

• Earnings per share (Diluted) have remained negative in recent reporting periods:

(All data in the above charts is GAAP.)

In the past 12 months, CNDT's stock price has risen 1.62% vs. that of TTEC Holdings' (TTEC) fall of 42.89%:

For balance sheet results, the firm ended the quarter with $500.0 million in cash and equivalents and $1.28 billion in total debt, of which $41.0 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $66.0 million, during which capital expenditures were $61.0 million. The company paid $20.0 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Conduent

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

(Source - Seeking Alpha.)

As a reference, a relevant partial public comparable would be TTEC Holdings:

(Source - Seeking Alpha.)

Sentiment Analysis

The chart below is a visualization of the frequency of various keywords in management's most recent earnings conference call with analysts:

The results show significant questions surrounding the effects of the macroeconomic environment creating challenges and headwinds for the firm's clients and their spending plans and decision-making.

Management stated that although it is seeing increased spending pressures in its Commercial segment, it believes the firm is taking market share.

Commentary On Conduent

In its last earnings call (Source - Seeking Alpha ), covering Q2 2023's results, management's prepared remarks highlighted meeting or exceeding previous expectations despite a "challenging macroeconomic situation."

The company is focused on integrating generative AI in its portfolio and believes it can enhance productivity, driving "better answers faster" and creating "better outcomes for our clients."

Just as importantly, management is very intent on growing its payments segment and said the company is the first and only BPO firm processing transactions through the newly-live Federal Reserve's FedNow system.

Leadership didn't produce any specific retention rate metrics but said its "sales and client retention were strong."

Total revenue for Q2 2023 fell by 1.4% year-over-year, but gross profit margin increased by 1.4%.

Selling and G&A expenses as a percentage of revenue dropped by 0.8% YoY while operating income grew by a whopping 75.0%.

The company's financial position is reasonably strong, with ample liquidity, $1.3 billion in debt and moderate free cash flow.

Looking ahead, consensus full-year 2023 revenue is expected to decline by (3.3%) versus 2022.

If achieved, this would represent a lowered revenue decline rate versus 2022's decline rate of (6.81%) versus 2021.

In the past twelve months, the firm's EV/Sales valuation multiple has risen only 6.3%, net-net, as the chart from Seeking Alpha shows below:

I previously wrote about Conduent after it had dropped its plan to spin off its Transportation unit, with a Neutral stance on the stock.

Since then, the stock has risen and fallen again as the firm continues to face a challenging environment for its Commercial segment, market share gains notwithstanding.

While less revenue decline in 2023 than in 2022 may be an improvement of sorts for Conduent Incorporated, it isn't enough to change my outlook.

I remain Neutral [Hold] on Conduent in the near term.

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