Turnaround Letter Buy-rated Conduent (CNDT) shares are down sharply today on weak 1Q19 results, crisp declines in new contract signings and lower guidance for the rest of 2019 . The CEO is leaving but not until a successor is named, likely in the third quarter. Given the company’s unclear situation, we are moving CNDT shares to a HOLD until we can complete a full review.
While reported revenues fell nearly 19%, most of the decline was due to divestitures. Excluding this, revenues fell 4%. This is surprising and disappointing as the company should be posting revenue growth net of divestitures. In the quarter, a large customer reduced their business with Conduent, new contract wins were weak and the company incurred penalties and higher costs to complete its work. Signaling problems for future revenues: new contract signings fell 26%, with sharp declines in both new business and renewals.
Adjusted EBITDA was up modestly from a year ago, with the margin increasing to 10.9% from 10.2% a year ago. Operationally, the company is making progress with its transformation, as corporate and infrastructure costs are lower, and other operational efficiencies appear to be taking hold.
The company guided for fiscal year 2019 revenues to decline 3-4% net of divestitures, compared to prior guidance of +0.5% to +1.5%, driven by the lower new contract signing rate.
The Adjusted EBITDA guidance of 12-13% is encouraging, as reaching these levels would put it within our 12% target. However, the implied $560 million in EBITDA is well-below our $792 million target due to the sharply lower revenue outlook.
Company is in disarray
Given the information so far, the precise cause of Conduent’s problems are not entirely clear. However, the disruption at the CEO level (activist and shareholder Carl Icahn, among others, are in sharp disagreement on many issues), the weak contract signings, sales force departures and on-going disputes with key customers indicate a company in disarray. In an industry with many capable competitors, Conduent appears to be losing credibility. While clearly the departing CEO turned out to be the wrong person for the job, any CEO turnover for a services company will add further hesitation to potential new customers.
Fortunately, Conduent’s balance sheet remains sturdy, with $520 million in cash against $1.55 billion in debt. The company has the wherewithal to sustain itself in what likely will be periods of weak/negative cash flow ahead.
The valuation at today’s mid-day price is about 5.7x updated 2019 estimated Adjusted EBITDA. Given the company’s current situation, this is understandable.
We are moving CNDT shares to a HOLD pending a complete review of their condition and outlook.
We are moving Conduent (CNDT) shares to a HOLD.
Disclosure Note: An employee of the Publisher owns CNDT shares.