August 29, 2021 - 5:07pm EST by
2021 2022
Price: 7.12 EPS .67 .66
Shares Out. (in M): 213 P/E 10.6 10.8
Market Cap (in $M): 1,514 P/FCF 15.4 13.9
Net Debt (in $M): 1,174 EBIT 269 271
TEV ($): 2,688 TEV/EBIT 10.0 9.9

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I am recommending Conduent (“CNDT” or the “Company”) as a long investment with 50% or
more upside in two years or less.
Conduent is one of the largest business process services companies in the world. The Company
works with a majority of the Fortune 100 and more than 500 government entities each day
managing their business processes including some essential interactions with their end users.
Across the Fortune 100, Conduent serves 17 of the top 20 health plans; 6 of the top 10
pharmaceutical companies; 6 of the top automakers; and 9 of the top 10 banks. As evidence of the
scope of the Company’s businesses, Conduent processes 8.7M tolling transactions daily in its
Transportation segment, representing over 40% of U.S. tolling; 75% of insured patients in the U.S.
interact with Conduent’s healthcare and other BPS services; Conduent processes 50M invoices
annually within its Finance, Accounting and Procurement business; Conduent processes 45% of
U.S. Supplemental Nutrition Assistance Program (“SNAP”) payments; Conduent conducts 200M
interactions per year from its contact centers; and Conduent handles 100M employee interactions
each year from its HR offerings.
CNDT was posted to VIC twice during 2017 but there have been numerous changes, including a
stock price at less than half the price when those ideas were posted. The Company was also
described favorably as an investment in Barron’s that same year. There is lots of good content to
consider for historical context in each of those submissions. That which follows is primarily
focused on my perspective discerned from the results and prospects being led by the current CEO
Cliff Skelton who replaced Ashok Vemuri on an interim basis during August 2019 and on a
permanent basis at the end of February 2020. CNDT’s stock price is roughly equivalent now to
when Skelton became interim CEO two years ago. There has been significant improvement at the
Company but the market has not yet adequately recognized it. Prior to Skelton’s appointment,
there was a deterioration of customer satisfaction and significant contracts were lost, the Company
was accused of bribery, and employee morale was low.
Skelton joined Conduent as President and COO at the end of May 2019 from Fiserv Output
Solutions where he served as President after serving as Chief Information Officer of the whole
company. Prior to his seven years with Fiserv, Skelton’s experiences included five years as Chief
Technology and Operations Officer of Ally, eight years at Bank of America as Chief Operations
Officer of Card Services and other leadership responsibilities including accountability for the
merger integration of BAC with Fleet Boston, MBNA Corporation and US Trust, and 21 years as
an aviator and Squadron Commanding Officer in the U.S. Navy.
When Skelton assumed his leadership role at Conduent, he noted that the Company lacked a
cohesive culture. Although it’s difficult to quantify the importance of “culture,” it should be noted
that my primary research conducted across numerous employees does highlight a much-improved
culture from one that was deemed a “demoralized work environment.” Before Skelton, many
employees did not view the Company as being team-oriented but that perspective has changed
during the past couple of years as Skelton applied some of what he learned from his time as a Blue
Angels aviator. Skelton has said of his time with the Blue Angels that character is the key. “You
don’t get picked because you’re the best at what you do; they’ll train you to be the best. You’re
chosen because you’ll be a good teammate. You have to be a team in the air or big accidents
Skelton’s experiences are applicable to driving the turnaround at Conduent and he recruited people
for his executive staff that he or his peer worked with previously. Fiserv is a well-regarded
company and Skelton recruited three of his four “named Executive Officers” (the CFO, Chief
Revenue Officer, Chief Information Officer) from Fiserv. The Company’s fifth Executive Officer
is the General Counsel who worked with Lou Keyes, the Chief Revenue Officer, at Onex portfolio
company York Risk after Keyes spent 8 years with Fiserv. As described further within the
descriptions of the business segments, Skelton changed most of the management team.
With regards to previous senior management, one primary research participant said the following,
“Historical motivation was by fear, there was lots of voluntary and involuntary attrition that led to
ongoing negative morale. Executive management was not in touch with personnel, there was little
communication but now we have multiple town meetings.” As another participant said of the
previous culture, “it was bleak and now we enjoy a culture of transparency.”
Primary research comments that highlight the CEO’s focus towards improving the Company’s
culture and employee engagement include the following: “a more cohesive culture…an emphasis
on transparency…more collaborative and accessible…ascribing more importance towards front-
line employees as being integral to the team than historically…pro-active
communication…nurturing a path for advancement with clarity and purpose and the training to
achieve one’s goal…making technology more of an enabler than an obstacle…working together
to find customer solutions than in silos…better client service delivery empowers the salesforce to
sell instead of fighting fires…a win is for the organization and notthe individual…we feel more
aligned with the Company’s goals…transformed morale…”
In recognition of Conduent’s culture, the Company was ranked 29th
on the Top 50 list published by Comparably’s Best Global Company Culture for companies with more than 500 employees and
an international footprint. Conduent was first relative to five competitors rated on Comparably.
Although there’s much room to improve, CNDT ranked ahead of Top 50 companies such as SAP,
Dell, Cornerstone OnDemand, Siemens, ADP, Uber, T-Mobile, HP, and Cisco. The Company’s
focus towards employee engagement is evidenced by the inclusion of employee attrition being
among management’s targets for compensation incentives. That was not the case under the
previous CEO when M&A was included among the targets for compensation incentives.
Primary research regarding Skelton depicts a results-oriented CEO who is methodical, thoughtful,
and seeks to under-promise and over-deliver. He is not promotional and although he acknowledges
the substantial progress pertaining to Conduent’s turnaround, he tries to manage expectations in
communicating that there’s more room for improvement and that it will take time. Skelton prefers
an approach for motivating the Company’s more than 60,000 employees across over twenty
countries with a collaborative approach of inclusiveness and being purpose-driven. One manager
at CNDT said regarding the CEO’s management approach, “He seeks to inspire and drive people
to aspire… he does not motivate in a command-direct or fear-driven way…his style is more
disciplined, focused and importantly predictable…Cliff has changed the culture of the Company
with his approach and the hiring of other leaders who embrace a similar style to institutionalize
what has become a new Conduent…this is intangible but relevant at driving us towards better
results with our employees, our customers, and this should ultimately drive more benefits to our
shareholders… There is much excitement about our future potential that wasn’t prevalent before
the CEO change two years ago…Under Cliff’s leadership, employees feel empowered but this
took time to engrain in the culture but is a huge improvement from the demoralized culture that
preceded these changes…Our relationship with customers has clearly improved and many have
acknowledged it…”
In addition to the CEO change, there has been substantial change to the Board of Directors. None
of the nine Board members from the 2018 proxy are currently serving and only two of the Board
members from the 2019 proxy are currently serving. During February 2020, the Board reduced
the size of its Board to eight members. It is notable that although the composition of Carl Icahn’s
Board representation has changed, his three seats have increased to 37.5% of the totalrelative to
his 18.2% ownership. Based on Darwin Deason’s one representative, the two shareholders in
aggregate have twice the Board representation relative to their less than 25% ownership.
Moreover, two of the independent Board members served at Herbalife (though both have recently
departed) and Herbalife has been a well-documented investment made by Carl Icahn. There might
be some who find the current governance influence to be disconcerting given the representation
relative to ownership but I am encouraged that the Company’s Board is highly-aligned as “owners”
unlike many Boards that are entrenched with egregiously over-paid Directors lacking much
ownership alignment at all.
The changes to the Board were prompted by a letter of resignation that communicated much
discontent with the Company’s governance and especially with the Chairman. Thatwas
communicated in a letter of resignation by Board member Michael Nevin (Carl Icahn’s son-in-
law) during April 2019. Conduent claimed the letter was written as an attempt by Icahn to take
over the Board and not surprisingly Nevin refuted that claim. In an 8K in response to Nevin’s
resignation letter, the members of the Company’s Board not affiliated with Carl Icahn or Darwin
Deason noted the following, “We believe Mr. Nevin’s noisy resignation and these related
discussions represent an attempt to take control of the Company’s Board.” In a follow up
resignation letter titled “setting the record straight”, Nevin wrote, “I was fed up with being misled
by the Chairman of the Board and tired of the lax governance practices that I observed during my
tenure on the board—pure and simple.” The April 2019 letter highlighting some of the governance
issues that compelled Nevin to resign from the Board is linked below:
As some additional historical context, it was on May 8th
of 2019 when the previous CEO Ashok Vemuri communicated his intent to resign and that announcement was made concurrently with the
results for Q1’19 which included a reduction to guidance for 2019. The stock declined by ~40%
on the day of those announcements from $12.50 to $7.65. That decline was in addition to the more
than 45% decline the stock had suffered from its peak during mid-September 2018 through the day
that preceded the Q1’19 results that drove the additional ~40% decline. From September 14, 2018
through May 9, 2019, Conduent’s stock declined by over 67%!
The initial outlook for 2019 communicated by Conduent’s management was for top-line growth
at 0.5-1.5% but modified to a decline of 3-4% (CNDT’s 2019 sales were ultimately down 4.5%
from 2018). The Company missed Q1’19 expectations and both the miss and degradation to the
outlook was ascribed by management to the unanticipated and sudden in-quarter volume decline
from one of the Company’s larger commercial clients coupled with lower new business and
revenue conversion. That noted challenge was in addition to the Company having been notified
that it was not the preferred bidder for the renewal of the legacy CA MMIS contract. That contract
was among the Company’s largest at ~$140M of sales but management asserted it being
marginally profitable. While management was applauding that its renewal rate was over 90% for
the seventh consecutive quarter during Q1’19, the notable challenges were evidenced by the
renewal rate that declined to 60% during Q2’19 from an average 94% achieved during the
preceding nine quarters since CNDT was spun out of Xerox. In fact, the lowest renewal rate prior
to Q2’19 since the beginning of 2016 was 85% during Q4’16.
The challenges communicated during the Q1’19 earnings call would serve among the legacy burn-
off losses that Skelton and his management team would have to anniversary with new business
signings. “The Achilles heel has been the burn-off of business that was primarily loss during 2018-
2019.” As described below, new business signings have yet to offset the legacy losses but the
strong pattern of new signings is some evidence that a successful turnaround is being executed.
Those legacy losses continue to linger but their impact is moderating; the strength of new business
coupled with ongoing renewals will shine through within the next couple of years.
As recently noted by CEO Cliff Skelton, “Over the course of the last two years, we’ve made
tremendous progress in improving top-line revenue, new business signings, quality and
efficiency…and we are clearly on a growth trajectory.”
New business signings have been very strong. Management attributes its improved new business
signings partially to the changes made to the sales organization leadership as well as the
centralization of business development and sales talent. Conduent’s Chief Revenue Officer, Lou
Keyes, assumed his role during September 2019. He worked with the CEO at Fiserv where he
served as SVP of Sales & Enterprise Accounts for the Global Fiserv Sales organization. In the
past, Conduent’s sales organization was dispersed across each business and operated within silos.
The historical approach was not effective at cross-selling multiple services. There was no global
sales organization. The Company’s CEO said, “There was confusion between who sold, who
account managed, who service managed, who operationally managed, and therefore we took our
eye off the ball in terms of new product, new logo sales.Although there is more work to be done,
including salespeople working more closely with account management in a “streamlined way,” the
evidence of new business growth validates that Conduent’s turnaround is inflecting positively.
This is also validated by the Company’s client net promoter score increasing for the second
consecutive year.
During 2020, new business TCV increased by 94% which was almost 20% higher than
management’s internal target. On an annual recurring revenue (“ARR”) basis, it grew by 26% and
this has recently accelerated towards 30% during the first half of 2021. Renewals and new business
signings drive top-line growth but the Company’s legacy losses that current management inherited
continue to mask the contribution from new business success.
In an effort to assist the investor community for how new business signings are growing towards
eclipsing legacy losses, management introduced Net ARR activity during the Q4 20 earnings call.
The measurement is inclusive of losses, price and volume changes contracted during the prior
twelve months to reflect the net annual recurring revenue impact from the previous twelve months
of sales and retention activities. The figure does not predict the timing of that revenue but is
indicative of selling and retaining more than losing. This metric is trending favorably from $60M
at Q4 20 to $106M at Q2 21. When asked about when legacy losses would no longer be a hurdle
to anniversary, the CFO noted being at the “thin end of the wedge” and that those losses in 2022
will be half of 2021 and in 2023 half of 2022. Among the legacy losses that continue to pressure
Conduent’s results is the California Medicaid Contract which is pressuring the Company by
~$35M this year.
The fact is new business growth is robust and that growth will be flowing through Conduent’s
results in the not too distant future. The new business growth is evidence, in spite of many
historical challenges that tarnished the Company’s reputation, that there is more confidence from
the marketplace for Conduent’s services. With more confidence and more new business comes
more reference-ability that reinforces a potential for additional new business growth.
Nevertheless, if one screens for strong top-line revenue growth, Conduent won’t be winning that
award in the near future. However, if one screens for new business growth and has an investment
time horizon that is able and willing to embrace a trajectory of some growth materializing for an
equity that doesn’t seem to discount any potential growth, then Conduent is a stock worthy of
deeper evaluation.
There is undoubtedly some frustration within the investment community with the absence of
growth. This question and response during the Q4 20 earnings call highlight this area of focus.
Needham’s Research Analyst asked “Is there a way to maybe now predict when you can
get to organic constant currency positive growth. Is there a timeline maybe you know
exiting 2021-2022 timeframe…I think that’s the question we often get from
investors…when the company can enter a positive organic growth territory?”
To this question, CEO Skelton responded as follows: “The new net ARR activity report
metric we gave is sort of something that you can use as an indicator…Another component
in the equation…is when is the burn-off from previous losses. We think that happens over
the course of the next two years…we’re confident that all the vectors are lined up for
growth in 2022, but there’s just no way I can predict it with certainty until a lot of these
unknowns become more clear.”
If one applies the requisite research of the Company, I think a similar conclusion to mine will be
drawn that “the vectors” are indeed in place for Conduent to grow in a more consistent pattern that
the market will eventually discount more effectively. One can argue that the appreciation to the
stock price YTD and over one year already discounts a better future and to some extent that might
be true but the valuation and lukewarm sell-side sentiment indicate to me that Conduent is a very
attractive investment today (especially for those with a two-year time horizon) and even more now
than a year ago given increasing evidence (therefore less risk) of the positive impacts from changes
made by current management. The improvements at the Conduent are being recognized by
industry research, by customer’s vendor awards, by customer new business signings, by lower
employee attrition, and by insiders asserting their confidence with open market purchases.
The Company recently reported Q2 results which evidenced the first quarter of revenue growth
since Conduent was spun out of Xerox during December 2016. Growth of just 1% is not overly
impressive in isolation but given the historical degradation of sales and profitability, the evidence
of some growth could be an inflection towards the “growth trajectory” that management has been
communicating. EBITDA during the first half grew by 18%. Some cynics might argue that the
recent quarter of revenue growth was primarily ascribed to the ongoing Federal stimulus payments
from which CNDT does benefit. I think that’s a reasonable argument to make but one can also
argue that those stimulus payments are being made because of the ongoing challenges driven by
the virus. If the virus were to subside and in-turn reduce the volume of government-related
payments, then Conduent is likely to experience a rebound across its commercial and
transportation businesses that suffered from the virus and this should more than offset the COVID-
related benefits in the government segment (although there’s also a case to be made that the
baseline of government-related payments has structurally increased). Management estimates that
during 2020, the COVID-19 negative impacts to revenue and EBITDA amounted to $85M and
$23M, respectively. Management anticipates the negative impact this year will amount to $50M
of revenue. These figures demonstrate that the benefits from the government segment are not
enough to compensate for the setbacks in the commercial and transportation segments.
The Company is organized across three reportable segments: Commercial Industries, Government
Services, and Transportation. Based on management’s analysis, the total addressable market for
its services across these segments exceeds $186B. These three segments and a financial summary
are framed below:
Commercial Industries
% of 2020 total mix (before unallocated costs): 52.0% of Revenue; 33.4% of EBITDA
Total addressable market (per management): $146B estimated to grow at 3.2%
Approximately 45,000 employees work within the Commercial Industries segment
Service offerings include Customer Experience Management (“CXM”), Business
Operations Solutions (“BOS”), Commercial Healthcare Solutions, and Human Resources
& Learning Services (“HRLS”). As a component of Commercial Industries mix, these four
business segments comprised 30%, 26%, 20%, and 24% of Commercial Industries revenue
in 2020.
Competition includes customer experience solution providers such as Teleperformance,
TTEC, Concentrix, and Sitel (which recently acquired peer Sykes for 10.3x 2021
EBITDA); traditional business process outsourcing companies such as Genpact, EXL
Services, WNS Global and Exela; and multinational service providers such as Accenture,
Cognizant, and Hewlett-Packard Enterprises; this peer group trades at an average 21x
2022E EPS, 14x EBITDA, and 19x EBIT
Since June, Andrew Whisler has served as Global Head of Commercial Clients; she joined
Conduent October 2020 after more than 13 years at Fiserv
o Customer Experience Management services include customer care, technical
support, loyalty management, and outbound and inbound sales. During 2020, CXM
handled 196M contact center interactions. Automation and digitization should
drive margins higher over time. The technology research and advisory firm
Information Services Group recently highlighted Conduent as a Leader across the
digital operations quadrant and a “chosen leader” in the AI and analytics quadrant
for its effective use of domain knowledge and technologies.
CXM is led by Randall King who joined Conduent during May 2020 after
overseeing large operations including contact and banking centers for
almost twenty years at Bank of America
o Business Operations Solutions encompasses Conduent’s document
management/automation, and finance, accounting and procurement offerings as
well as casualty claims solutions, and legal, compliance and analytics. BOS helps
clients by automating and streamlining mission-critical business processes.
BOS is led by Dharma Rajagopalan who joined Xerox in 2007 and has been
the Group President of Business Operations Solutions since November
2020. He ideated and led the launch of Conduent’s Dara AI conversation
platform in 2018. The platform assists with the completion of routine tasks
through voice, web-chat, SMS and other digital interaction methods.
o Commercial Healthcare Solutions
Within its Commercial Healthcare Solutions business, Conduent delivers
administration, clinical support, and medical management solutions to
reduce costs, increase compliance and enhance utilization. For example,
Conduent is a leading provider of medical bill review. During 2020, the
Company administered bill review through its bill review software
Strataware for 50% of theworkers compensation medical claims in the U.S.
During the Q1’21 earnings call, Conduent’s CEO said, “…we haven’t
tapped the breadth of Conduent in the healthcare space. And very shortly,
we’ll be announcing a new leader across the segment…who comes out of
an environment where she was leading a lot of the sales efforts for several
of our competitors…we think there’s a massive opportunity…”
Commercial Healthcare is now led by Sheila Curr who joined Conduent this
past May. She is responsible for client management and growth across the
Company’s payer, provider, and pharma/life sciences clients. Sheila joined
Conduent from competitor TTEC where she was the Global VP of
Healthcare and grew that business by 58% in one year. Her other
experiences include leadership positions focused on the healthcare industry
and business process outsourcing at Wipro, Concentrix, StarTek,
Convergys, IBM, Sitel, and Sykes.
o Human Resources & Learning Services helps Conduent’s clients support their
employees at all stages of employment from on-boarding through retirement. This
business segment includes the Company’s Health Savings Account Solutions called
Benefit Wallet which competes with other HSA administrators such as
HealthEquity (“HQY”), HSA Bank, and WexHealth (part of “WEX”). At year-end
2020, Conduent managed 1M active HSAs with $2.7B AUM (~3.3% of total
market). The number of active accounts has not changed much during the past four
years although AUM has increased from $2.3B in 2017. Benefit Wallet revenue
has declined with lower interest rates. The specific results at Benefit Wallet are not
disclosed but management estimates a $40M negative impact from lower interest
There has been much discussion about Benefit Wallet on VIC in the past
and I won’t posit with a high degree of certainty what it could be worth if it
were monetized. HealthEquity is the best proxy for imputing a potential
valuation and they have recently pursued custodial consolidation by
acquiring the HSA businesses of Further and Fifth Third Bank, both the 9th
and 14th largest, at 2% and 1% market share, respectively per industry
research from Devenir. HQY trades at ~24x 2021E EBITDA and 38x
2022E EPS. On an HSA account basis (5.8M accounts), HQY is trading at
~$985 per account; on a multiple of AUM ($15B), HQY is trading at ~.4x.
HQY’s acquisition of Further was transacted at ~$910/member, .3x AUM,
and over 20x EBITDA. HQY communicated Further generating a 20%
EBITDA margin at the time of the definitive agreement but HQY’s
expectation is that Further will be generating a 45% margin inclusive of
synergies within three years. HQY’s EBITDA margin outlook for this year
(before its acquisitions) exceeds 32% margin.
If Conduent’s 1M HSAs were valued at a 15% discount to Further on an
account basis, that would be equivalent to $775M of value which imputes
to .3x AUM. A couple of weeks after the Further acquisition, HQY’s
transaction with Fifth Third Bank was to transition custodianship of that
HSA portfolio to HQY. That transaction was announced at ~$410 per HSA
account and ~.13x AUM.
Since Benefit Wallet suffered a decline of $40M from interest rate impacts,
it is mis-leading to value this business on the financial results of any one
year. The sensitivity of this business to interest rates was demonstrated by
peer Wex Health which executed a transaction with HSA Bank earlier this
year that included adjustments for more consideration if interest rates were
to rise. For the purpose of framing a SOTP valuation later, I use the $2.7B
AUM at Benefit Wallet and apply .2x AUM to frame a valuation at $540M
(or $540 per account). Based on my dialogue with “industry insiders,” they
deem my valuation “at the lower spectrum of a reasonable valuation range.”
These valuation metrics are more than a 45% discount to where HQY is
trading publicly but there are reasons that Benefit Wallet should be valued
lower including that BNY Mellon serves as the custodian of the Benefit
Wallet assets.
Government Services
% of 2020 total mix (before unallocated costs): 30.8% of Revenue; 51.4% of EBITDA
Total addressable market (per management): $29B estimated to grow at 5.6%
Approximately 6,000 employees work within the Government Services segment
Government Services is reported across two sub-segments: Government Healthcare
Solutions and Government Services Solutions. During 2020, the Services mix was 53% of
the total Government Services category with 15% growth that was largely driven by
COVID-19 volume. During 2019, Healthcare Solutions comprised 53%. During 2018 and
2019, the Government business generated a 22% EBIT margin; that grew towards 30%
during 2020 from the operating leverage driven by increased COVID-related volume.
Competition includes Maximus, CACI International and DXC. This peer group trades at
an average 14x 2022E EPS, 9x EBITDA, and 13x EBIT. DXC sold its U.S. State and
Local Health and Human Services Business for ~3.5x revenue to Veritas Capital (creating
Gainwell Technologies which competes with Conduent).
o Government Healthcare Solutions provides medical management and fiscal agent
care management services, eligibility and enrollment services and support to
Medicaid programs and federally-funded U.S. government healthcare programs in
29 states and Washington, D.C. The CA Medicaid business transition is almost
completed; much of the decline to revenue in Government Healthcare Solutions
from 2018-2020 is ascribed to that significant business not being renewed.
Government Healthcare Solutions has been led by Pat Costa since October
2020; she previously spent 28 years at HP (EDS) where the business tripled
in size during her five years of leadership.
o Government Service Solutions is a leader in government payment disbursements
(with over $110B disbursed annually) for federally-sponsored programs like
Supplemental Nutrition Assistance Program (SNAP) and Women, Infant and
Children (WIC) as well as government assistance such as child support and
Unemployment Insurance. Electronic payments are delivered by Conduent in 33
states. The Company processes approximately one-third of all U.S. child support
payments each year.
o As a result of increased unemployment rates in 2020 as well as federal stimulus
supplemental benefits, the Government Solutions business benefitted from
increased activity. As described, the provision of additional benefits could be a
headwind as virus-related issues subside, thereby leading to less government-
related stimulus payments. However, there is possibly a “new normal” with the
Biden administration’s expansion of government programs that will continue to
benefit Conduent relative to its pre-COVID government baseline in the Solutions
segment. The magnitude of this expansion across different programs towards
increased volume of participants (by which CNDT benefits through distribution per
participant) versus an expansion through higher distributed payments per
participant (e.g., the recently increase in food stamps) remains uncertain.
Government Service Solutions has been led by Mark King since November
2020; he is another member of senior management who worked directly
with the CEO at Fiserv within Output Solutions for ~8 years; he was
previously a SVP at Bank of America for ~12 years.
% of 2020 total mix (before unallocated costs): 17.2% of Revenue; 15.2% of EBITDA
Total addressable market (per management): $11B estimated to grow at 5.5%
Approximately 3,000 employees work within the Transportation segment
Service offerings include Roadway Charging, Transit Solutions, Curbside Management,
Public Safety Solutions, and Commercial Vehicles. As a component of Transportation
mix, these five business segments comprised 44%, 35%, 10%, 10%, and 1% of
Transportation revenue in 2020.
Conduent Transportation is a leading provider of automated and analytics-based
transportation solutions for government agencies and has been helping transportation
clients for more than fifty years. This includes over 25 years of experience as an industry
leader in traffic enforcement. Conduent provides one of every four U.S. public safety
enforcement systems, including those implemented to monitor speed and red-light
regulations. The Company operates six of the ten largest toll systems in the U.S., including
in CA/FL/NY/NJ, and processes 8.7M daily tolling transactions, representing over 40% of
the U.S. market. The Company’s curbside management solutions processed over 6.3M
payments and collected over $525M for citations and delinquencies during 2020.
The transportation segment suffered an estimated $76M decline in revenue from COVID-
19 impacts during 2020 primarily from volume pressure in services related to curbside
management and roadway charging, as well as volume pressure and project delays within
transit solutions. However, profitability increased in Transportation which was largely
driven by management’s cost savings program.
Transportation is a segment that benefits from a post-virus recovery. Management recently
highlighted that traffic on major U.S. toll road systems in four states soared in March-May
versus 2020 and that traffic in April and May of 2021 increased by more than 15% versus
2019 levels. With some significant new business won during Q2, including international
signings where management envisions substantial growth potential, the Transportation
segment comprised the largest mix, at 37%, of new business contract value. Q2 revenue
was up ~12% in 2021 versus 2020 but remains ~5% below the 2019 level.
In addition to the volume-driven growth that will accrue to Conduent from increased
driving under a “recovery” scenario, the Company should benefit from more global
installation of electronic toll collections. More installations are envisioned industry-wide
based on the rising demand for effective traffic management at toll collection centers,
increasing government initiatives to adopt electronic toll collection systems, increasing
cashless travelers, increased demand for minimizing traffic congestion and fuel
consumption at toll stations.
Conduent’s Transportation segment primarily competes against Roper’s TransCore, Cubic
(recently acquired by Veritas), Kapsch, and Verra Mobility. The Transportation business
is generally perceived as being attractive as demonstrated by peer group trading multiples
that are more than double the multiple of CNDT. If the Board were to monetize this
segment separately, it would likely be ascribed at least a 10x EBITDA multiple. The JPM
fairness opinion issued this past March pertaining to the take-private of Cubic (by Veritas
and Elliott) highlighted ~13-14x NTM EBITDA multiple as the peer group for its
transportation systems. Conduent’s margin in transportation has consistently exceeded that
of Cubic. TransCore is Conduent’s closest peer but TransCore’s parent company Roper is
comprised of numerous software-driven businesses so there isn’t much clarity for
TransCore’s valuation but Roper trades at ~30x EBITDA and over 40x EBIT. Verra
Mobility which is levered almost twice that of Conduent trades at ~14x EBITDA and over
25x EBIT forecasted by VRRM’s management for 2021. Given the strength of Conduent’s
transportation business, 10x EBITDA seems conservative” (said one of the investment
banker advisors who was involved in the Cubic transaction) but it’s what I apply in my
SOTP framework.
During a CITI conference last September, in response to a question asked by the CITI
analyst regarding potential divestitures, Conduent’s CEO noted that it could be “a business
is not perfectly interlocked and synergistic, such that creating more shared services and
operational scale may not help us with that business because it’s so different, like our
transportation business.”
o Mark Brewer joined Conduent during June 2019 and has led the Company’s
Transportation Solutions since September 2019; he previously held senior
leadership positions at Diebold Nixdorf, DXC Technology, CSC, and IBM
o Scott Doering has led Conduent Transportation’s tolling operation since April 2019
pursuant to his experiences with Cubic Transportation, Roper’s TransCore, and
Kapsch TrafficCom. Other than working for Verra Mobility, Scott knows the
competitive landscape from the inside.
Financial Summary by Business Segment
2018 (a) 2019 (a) 2020 LTM
Commercial Industries
Customerexperience mgmt710669648630
Business operations solutions716632566559
Commercial healthcaresolutions445482431435
HR and learning solutions679602518476
Commercial Industries Total Segment 2550 2385 2163 2100
Government Services
Government healthcaresolutions727675603586
Government services solutions624588678730
Government Services Total Segment 1351 1263 1281 1316
Roadway charging and mgmt services300327318327
Transit solutions226254248254
Curbsidemgmt solutions1091077274
Public safety solutions79837371
Commercial vehicles151088
Transportation Total Segment 729 781 719 734
Other Revenue 11 2 0 0
Total Company Revenue 4641 4431 4163 4150
Segment Adjusted EBITDA
Commercial Industries 454 376 258 252
Commercial EBITDA % 18% 16% 12% 12%
Government Services 328 311 397 434
Government EBITDA % 24% 25% 31% 33%
Transportation 99 108 117 124
Transportation EBITDA % 14% 14% 16% 17%
Corporate (b) -346 -302 -292 -293
Corp % of Total Rev -7% -7% -7% -7%
Total Company EBITDA 535 493 480 517
Total Company EBITDA % 11.5% 11.1% 11.5% 12.5%
Segment Adjusted EBIT
Commercial Industries 357 270 150 147
Commercial EBIT % 14% 11% 7% 7%
Government Services 298 280 372 409
Government EBIT % 22% 22% 29% 31%
Transportation 63 73 82 90
Transportation EBIT % 9% 9% 11% 12%
Corporate (b) -404 -346 -346 -347
Corp % of Total Rev -9% -8% -8% -8%
Total Company EBIT 314 277 258 299
Total Company EBIT % 6.8% 6.3% 6.2% 7.2%
(a) Adjusted to reflect divestitures
(b) Corporate adjusted for "Other"in2018by -2, in2019by -1 and in 2020 by 2
When Cliff Skelton assumed his CEO role, he noted that the Company lacked requisite technology
and a cohesive culture. I’ve already highlighted the improvements to culture; it’s relevant to
describe the improvements being made to Conduent’s technology. It’s worth noting again that the
CEO’s background includes leadership with regards to the deployment of technology. Prior to
Skelton’s roleat Fiserv as President of Output Solutions, he served as Group President and CIO at
Fiserv where he drove a large-scale transformation of Fiserv’s technology services, including the
integration of multiple disparate systems and data centers. His experience also included Global
Head of Technology at Bank of America. The CEO knows that technology must be a cornerstone
of Conduent’s strategy to compete more effectively and he established numerous goals (including
better uptime, less incidents, improved response times) for the Company to improve its technology.
The Company has over 1000 patents (note peers TTEC and Verra Mobility cite 84 and 61,
respectively) and so there’s a meaningful amount of IP deployed across CNDT’s many solutions
and services. The Company relies on software provided to an approximately equal extent, by both
internal development and external sourcing. Conduent’s technology organization has been led by
Mark Prout, Global Head of Technology and Operations, since September 2009; he is among the
executive officers to join Skelton from Fiserv where Prout served as Chief Technology Officer.
The Company has been focused on consolidating its data center operations as some legacy business
losses (some of which are still masking the new business signing growth) were ascribed to
technology disruptions. As of Q1, this process was about 65% complete; there’s currently one
more data center being consolidated. Management noted that historically it was not uncommon
for more than 100 technology disruptions to occur per month. Those disruptions led to the loss of
one of CNDT’s largest customers—CA Medicaid—and “a debacle with the state of Texas.” As
said by one Conduent executive, “Although one outage is still too much, our technology
disruptions are down to 1-4 per month. It’s critical that technology be among our core
competencies. Our new CIO has stabilized the technology platform to alter technology being a
deficit for Conduent.
As some additional evidence of the Company’s technology organization having improved,
Conduent was recently recognized by the American Business Awards with a Gold Stevie Award
in the “Leading Through Digital Disruption” category for having enabled digital work-from-home
capability for ~75% of the Company’s more than 60,000 global workforce. For those not familiar
with the Stevie Awards, it has become one of the world’s most coveted business awards; Verizon
and Johnson & Johnson were awarded Silver in the same category which reinforces the relevance
of the accolade received by Conduent’s Mark Prout against best-in-class organizations.
As validation of its turnaround efforts, the Company’s progress is being demonstrated by
improving metrics across client relationships, utilization, shared services, employee retention, new
business signings, technology uptime and operational effectiveness. The improvements at
Conduent are also being recognized by a variety of industry research and benchmarking services
that clients review as part of their procurement decision-making. The Company’s recent
acknowledgements include being named a “Top 15 Sourcing Index Standout” by Information
Services Group (“ISG”), being named among the Top 10 Customer Experience Management
Services by the Everest Group, as well as additional industry accolades which include identified
improvements communicated by research from industry experts NelsonHall, HfS Research,
Brandon Hall Group, and Gartner. Paul Reynolds, the Chief Research Officer of ISG, noted that
Conduent’s inclusion in the ISG Index Standouts list reflects the deals it has won over the past
year in addition to the demonstrated outcomes in case studies, and positive client feedback.
Moreover, Conduent has recently received direct recognition from its clients including General
Motors and Toyota. Conduent was named a 2020 Supplier of the Year Winner by General Motors
during GM’s 29th annual Supplier of the Year awards that recognized 122 of GM’s best suppliers
from over 20,000 across 16 countries. Conduent was recognized by GM for its work conducted
by the Company’s Payroll, Legal Compliance, and Finance, Accounting and Procurement teams.
This was the first time Conduent received such recognition from General Motors during its more
than twenty-year relationship.
The management team has focused much of its efforts towards standardization of its governance
processes and protocols for client implementations, risk and incident management and sales and
account management. By simplifying and standardizing its operating model, including the
removal of unnecessary management layers, management has repositioned its platform with
increased efficiency to expand its margin over time. It was only last year that Conduent created a
command center for oversight, coordination, and proactive capabilities to be more equipped to
respond quickly for ensuring “seamless delivery of service.” Adam Appleby who has served as
Conduent’s Global Head of Operations and Transformation since August 2020 has led part of this
effort. He also joined Conduent from Fiserv. Pursuant to graduating from West Point and serving
as a Captain in the Army, Appleby worked for GE, Bank of America, Ally Financial, Altisource,
and then six years at Fiserv. The implementation of the turnaround at Conduent has confronted
numerous challenges. The previous management team did have some success with changes that
were deemed necessary post-spin from Xerox but there were lingering issues that worsened that
led to a complete overhaul of leadership. As has been described, Cliff Skelton and many members
of his management team joined from Fiserv. It should not be underestimated the importance of
the “chemistry” that existed across the former Fiserv colleagues to leave Fiserv and choose to work
for a smaller company like Conduent that required substantial improvements.
Another key member of the management team to leave Fiserv after almost 16 years and join
Conduent during August 2020 is CFO Steve Wood who assumed the CFO role this past June after
initially serving as Conduent’s Corporate Controller. Steve worked closely with the CEO within
Fiserv Output Solutions where Steve served as CFO. The CFO transition has been seamless and
the market did not view the CFO change as a surprise given the CEO’s overhaul of leadership
positions with many former Fiserv colleagues. However, the fact that the planned refinancing was
not executed during May might have something to do with the CFO transition since that is a
relevant change that needed to be communicated to the debt market.
Among the near-term catalysts is a refinancing of the Company’s debt this year. Conduent is not
highly levered at ~2.3x (within management’s 2.0-2.5 target) but over 40% of its total debt matures
in December 2022 and another 57% in December 2023. The weighted average interest rates for
the 2022 and 2023 term loans were 2.34% and 3.82%, respectively, at year-end 2020. On May
21st, the Company announced its intent to refinance its 2022 and 2023 term loans with a new term
loan due in 2028 and Senior Secured Notes due in 2029. However, on May 26th, the Company
“determined, based on the combination of deal structure and market conditions, to postpone
refinancing efforts in order to pursue a more optimal outcome at a later point in time.” On the
most recent earnings call, the CEO noted in regards to the refinancing, “I want to reiterate that our
 debt refinancing remains a top priority for us in 2021. The markets remain attractive…we would
expect to refinance the debt in the next few months, we will get it done.” Management is quite
aware of the discounted multiple at which its equity trades and that there are components of their
business that might warrant a much higher valuation than ascribed currently but I think any such
catalyst to unlock that value will be deferred until the refinancing is completed.
Conduent’s stock peaked during September 2018, at which time the implied valuation for 2018E
EBITDA was ~9x. Based on 2021E EBITDA, the Company’s stock is currently trading at 5.5x
2021E EBITDA. Given the severe setbacks the Company incurred in the past, it is not surprising
that it has taken time for the Company’s credibility to be restored with the equity market but more
relevant is that management has been effectively restoring the Company’s credibility in the
marketplace with customers and although those fundamental improvements have yet to adequately
anniversary some of the legacy losses, I believe the evidence of positive inflection points will
improve financial results accordingly which will ultimately restore the equity market’s confidence
as well. The momentum of fundamental improvements is being evidenced and such should drive
a trajectory of better results that demonstrates some growth that has been absent from CNDT’s
post-spin track record.
Conduent’s FCF conversion (FCF/EBITDA as defined by management) has room for
improvement. Management is confident that the conversion trends will improve over time
concurrently with some improvement to the Company’s EBITDA margin which is targeted
towards 13-15% longer-term. During the past few years, restructuring charges that are added back
to frame EBITDA but not to FCF dilute the FCF conversion metric. During the past two years,
Conduent has incurred $138M of restructuring charges of which $116M was cash restructuring
charges. As restructuring moderates, FCF conversion will increase. As for restructuring, ~32% is
ascribed to the data center consolidation that is almost complete. In regards to a higher margin
profile, there are a variety of drivers including the inherent operating leverage from sales growth
that is expected to finally materialize in a more consistent pattern. Additional margin opportunities
exist from improved efficiencies being delivered, including from shared services which only began
being implemented during 2020. Management noted that better efficiency is expected through
shared service centers and lower costs of delivering services driven by improved platform uptime.
Part of these improvements stem from management migrating the Company’s data centers that
drove some one-time capital expenditures to enhance the Company’s technology while reducing
the inefficiencies of relying on legacy platforms and infrastructure. A 15% margin is not likely in
the next three years since that threshold is likely to require top-line growth of mid-single digits.
However, the Company should be able to trend towards 13% during 2024.For my valuation
framework, I’ve assumed the EBITDA margin increases to 12.35% in 2024.
My valuation framework, for 2021 through 2024, assumes that CNDT’s top-line grows (on a
CAGR basis) by ~2.2%, EBITDA grows by ~3.5%, and FCF grows by 16%. As a pattern of more
consistent results ensues, the equity market should ascribe a higher multiple to CNDT accordingly
and especially given the magnitude of the multiple discount to its peers. If one were to value
CNDT in two years at 7x 2024E EBITDA multiple, the equity would appreciate to almost $13,
significantly more than 50% relative to CNDT’s recent closing price. If the multiple were to
expand slightly to 6x, the stock price would appreciate to almost $10.50, thereby getting near my
50% upside or more in two years or less. If the multiple were not to expand at all from the current
5.5x, the stock price should still appreciate by ~30% based on the growth in EBITDA and FCF.
On a SOTP basis, I think one can frame a path to a higher price than the outcome (~$12.75) derived
from 7x 2024E EBITDA. However, there are numerous variables and assumptions of course and
I don’t think it’s worthy of framing a specific number as that would entail spurious accuracy. In
the absence of the equity price improving, I am confident this is a highly-aligned Board that will
pursue selected divestitures and/or combinations to capitalize upon the multiple arbitrage relative
to the less than 5.5x EBITDA valuation currently ascribed to the stock. The Company previously
explored strategic alternatives but decided to intensify its focus towards a turnaround given the
Board’s perception that more value would be ascribed to the Company and its different businesses
as management rectified historical challenges to improve the Company’s positioning with its
employees and customers and this would ultimately restore credibility with the investor
community. That said though, as described regarding the Transportation segment, this is a set of
businesses that are “not perfectly interlocked and synergistic” and at 9-10x EBITDA, that would
comprise ~42-46% of the Company’s current enterprise value, thereby implying 3.7-4.0x for the
remaining 76% of Company EBITDA. If one were to assume that all of the Commercial HR and
Learning Solutions (where Benefit Wallet sits) is monetized at $540M as described earlier and that
this business segment was generating a similar 12% EBITDA margin as the whole Commercial
Industries, then the pro forma Conduent (adjusted for the Transportation at 9x EBITDA and all of
HRLS at $540M) would imply 3.1x LTM EBITDA for the remaining businesses. There’s no
argument that Conduent has yet to exhibit a growth or margin profile congruent with its much
more valuable peer group but the magnitude of the multiple disparity fails to adequately discount
the multitude of positive changes that have been evidenced and the high likelihood of greater
visibility of those fundamental improvements driving better financial performance metrics within
the next couple of years. Although we’ve witnessed a much lower price during 2020 during the
COVID-induced crash, I think the improving fundamentals coupled with the current valuation
provides an investor with adequate downside protection from longer-term impairment from a
CNDT investment.
Although insiders sell for numerous reasons, they primarily buy to assert their confidence that the
equity is an attractive investment. Pursuant to the most recently announced better-than-expected
Q2 results, three insiders bought stock at $6.68-7.07 for $190K. In total, since the beginning of
2020 and excluding Carl Icahn whose organization holds three Board seats, insiders have
purchased over $750K of CNDT stocksince the beginning of 2020. This includes $300K by CEO
Skelton. His willingness to invest $100K cash recently is notable because the stock has met the
price conditions for him to earn portions of a large restricted performance award granted in April
2020. Another insider, who recently made his fifth purchase of CNDT for $395K in total, is
Chairman Scott Letier who serves as the Managing Director of Deason Capital Services, the family
office of Darwin Deason who founded CNDT’s predecessor firm Affiliated Computer Services.
Separately, Carl Icahn’s investment vehicle has almost doubled its investment from 19.8M shares
at the time of the spin-off to 38.1M shares for $163M at an average purchase price of ~$9, at prices
ranging from ~$6.50-13.36. It’s interesting to highlight that ~35% of Icahn’s incremental purchase
was made about a week after Skelton was appointed as interim CEO on August 7, 2019. The other
purchases were executed during November and December 2018 and during May 2019. With
regards to the purchases made during August 2019, such occurred after another capitulation of the
stock which declined at its intraday low by ~40% on August 9, 2019 from the preceding day close.
That flush on over 10.5M shares was pursuant to Q2 earnings being announced that evidenced
continued top-line pressure and a further reduction to the Company’s outlook from the reduction
made during Q1 of 2019 as previously described. Given the turmoil to governance, resignation of
the CEO, and substantial evidence of degradation of the outlook as described during Q1 of 2019,
I don’t think it should have been too surprising that the interim CEO would lower the expectations
bar on the Q2 ’19 earnings call but apparently the price action proved I was wrong.CNDT’s stock
price is not currently above $8.34 at which it closed on the day of Skelton’s interim CEO
appointment but I think the business performance is demonstrative of much improvement that is
not yet adequately being discounted and I am encouraged that numerous insiders agree with their
own capital at risk.
There are five sell-side firms that cover CNDT but the intensity of their focus to researching CNDT
seems sparse which to some extent is why the attractive investment opportunity to be long CNDT
now exists. One measurement of the lack of focused coverage is the fact that pursuant to the spin-
off through the time Ashok Vemuri resigned, the number of sell-side analysts asking questions
during the majority of earnings calls ranged from 7-8 (average of 6.7) versus 3-4 sell-side analysts
(average less than 4) asking questions during the majority of earnings calls since Skelton became
the CEO. I am not particularly influenced by the sell-side but it would be naïve to think that other
market participants are not. Five analysts currently cover CNDT and only one (Needham) rates
CNDT as a Buy. Given the magnitude of other market participants who are influenced by the sell-
side, I think the low level of current sell-side enthusiasm is a good set-up as I envision upgrades
will likely follow the pattern of improving fundamentals coupled with recent improvements to
price action (i.e., some analysts are just price-driven lemmings). More relevant though is that
recent improvements to price action has been driven by the improvements to new business signings
and the net ARR that is demonstrative of a better trajectory of growth potential. The sell-side was
burned when they were bullish at much higher levels and so they might have remained reluctant
to upgrade until more visibility of improvements transpired but given improved clarity from a
pattern of better results coupled with the higher price action, I would not be surprised to see some
improved sell-side sentiment sooner than later. Sell-side upgrades would be among additional
catalysts for the stock given incremental buyers who follow such changes.
Selected Risk Considerations
There are numerous risks at Conduent that need to be considered. I highlight some of the more
significant risks below.
Approximately two-thirds of Conduent’s EBITDA (before unallocated overhead) is from
both the Company’s Government Services and Transportation segments. Both of these
segments rely on government entities as customers. There are several well-documented
past situations (e,g., Texas Medicaid) when Conduent poorly executed with different
government entities. In addition to some loss business, there have been highly-public
litigation losses and both the losses and litigation linger as PR challenges during the
business development process. Moreover, there will always be risks serving government
entities which includes funding constraints and political developments.
o A key mitigating factor is the ongoing evidence of strong business wins across both
Government Services and Transportation segments. New business is being won
 based on the numerous favorable changes made at the Company. Legacy
challenges will linger and need to be reconciled but the evidence of improving new
business is demonstrative of management overcoming some of this risk factor.
Technology innovation is evolving at a rapid pace and Conduent must adapt to changes in
technology to stay competitively positioned. The Company spent $175M during the past
three years on internal software development; this is roughly equivalent to what was spent
for licensed software. One should assume that technology software spend will continue to
escalate but it’s likely to be offset by less capital spending for PP&E. The risk of not being
adequately equipped with technology to compete will remain a risk.
o A key mitigating factor is the technology backgrounds of both the CEO and CIO
who are knowledgeable to navigate these ongoing risks. Management has
acknowledged some outdated IT infrastructure and has moved aggressively to
reconcile this deficit. There is also a move towards shared services and
consolidation of the Company’s data centers. Management has highlighted that
almost all of its new business signings have a big cloud component and they are
focused on AI and machine learning in all call centers as well as their transaction
processing platform.
Labor wage pressures linger among the risk factors for most companies and Conduent is
no exception.
o A key mitigating factor is that approximately half of Conduent’s business is
conducted from lower-cost markets which are less prone to the pressures currently
being witnessed domestically but this risk will linger across Conduent but also for
its peers as well. Management’s intent to improve efficiency is necessary to
mitigate this ongoing near-term risk.
The refinancing of the term debt maturing in 2022 and 2023 remains an ongoing risk since
the absence of such would necessitate the 2022 term being characterized as short-term debt
if this is not completed by year-end.
o A key mitigating factor is that this is a critical priority of management’s focus and
the debt markets remain favorable for resolving this risk in the near-term.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


Selected Catalysts
 Refinancing of 2022 and 2023 term debt that removes any perception of near-term balance 
sheet overhang
 Ongoing new business growth coupled with improved renewals that flows through to 
eclipse legacy losses and result in a company generating a consistent pattern of top-line
growth combined with operating leverage that restores equity market confidence
 Improvements to both margin and FCF conversion 
 Higher interest rates which improve revenue and profitability on Benefit Wallet float 
 Potential for accretive monetization of one or more businesses that elevates visibility to 
peer group discounts
 Beneficiary of “reopening” towards “normalcy” that empowers growth to resume again in 
commercial industries and transportation segments that more than compensates for any
non-recurring COVID benefits that accrued to government business
 Potential tailwinds from expanded government social programs 
 Upgrades among sell-side driven by pattern of better results and higher price action
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