Conduent Closes 80 Sites, Looks To Exit Non-Core Businesses In Push To Cut Costs By $700M

Conduent has slashed 9 percent of its sales, general and administrative costs and is considering leaving from $250 million to $500 million worth of non-core business behind.

The Florham Park, N.J.-based company said it is committed to becoming a leaner and more focused company following its separation from Xerox at the start of the year, and remains on track to achieve $700 million of cost savings by the end of 2018, according to CEO Ashok Vemuri.

"Conduent inherited a sprawling, fragmented and costly operational structure that restrained our execution and competitiveness," Vemuri told Wall Street analysts Wednesday. "Aligning our cost structure and operational model with industry benchmarks is foundational to our turnaround plan."

[Related: Conduent To Grow Sales Force By 20 Percent, Focus More Narrowly On Core Offerings, Verticals]

The newly-formed business process services company has spent the past several months assessing the desirability, feasibility, and viability of all of its assets, Vemuri said.

From there, Conduent plans to evaluate which assets make up the core of the company's portfolio – which includes areas such as transportation, human resource, IT outsourcing, workers' compensation, compliance, and financial services – and which are non-core areas, according to Brian Webb-Walsh, Conduent's CFO.

Conduent will divest some of the items that are non-core, which today account for between $250 million and $500 million of the company's revenue, according to Vemuri and Webb-Walsh. The profitability of the businesses Conduent may exit varies, Vemuri said, with some areas delivering profitability in line with the company as a whole and others being entirely unprofitable.

The company expects to have more clarity around what's core and what's non-core coming into next quarter, Webb-Walsh said, and will provide more commentary on the process as the company gets ready to carry out transactions.

"When we separated from Xerox six months ago, Conduent was an assortment of entities with an unfocused portfolio, redundant systems, inconsistent processes, and unreliable management information," Vemuri said. "Evolving to become a singular, highly-focused company is fundamental to our improvement."

Conduent anticipates that nearly half of the $700 million in savings sought will come from cutting infrastructure in areas such as real estate and IT, Vemuri said. The company has already exited nearly 100 leases and closed more than 80 office locations around the world, Vemuri said, and plans to exit many more facilities throughout the rest of the year.

Specifically, Conduent sold the former Affiliated Computer Services (ACS) headquarters in Dallas, which Webb-Walsh said resulted in $24 million of income for Conduent during its most recent quarter. Xerox bought ACS for $6.4 billion in February 2010, and the company largely makes up what is Conduent today.

Facility closures and the reduction of Conduent's workforce resulted in a $13 million increase in restructuring costs in the most recent quarter. Conduent indicated at the end of June that it would be laying off 178 workers in Rochester, N.Y. and Webster, N.Y. by the end of September, according to Worker Adjustment and Retraining Notification (WARN) Act notices filed in New York.

All told, Vemuri said Conduent reduced its total sales, general and administrative (SG&A) expenses by 9 percent in the first half of 2017, or by roughly 2 percent per employee.

"Conduent is becoming a leaner, more focused organization, enabling greater agility and sharper market execution," Vemuri said.

Sales for the quarter ended June 30 dipped to $1.5 billion, down 7.3 percent from $1.61 billion the year prior. That was in line with Seeking Alpha's expectations.

The company net loss improved to $4 million, or 3 cents per diluted share, from $10 million, or 5 cents per diluted share, the year prior. On a non-GAAP basis, net income plunged to $36 million, or 16 cents per share, down 42.9 percent from $63 million, or 30 cents per share, a year earlier. That was also in line with Seeking Alpha's expectations.

Conduent shares are up $0.75 (4.79%) to $16.50 in trading Wednesday afternoon. Earnings were released before the market opened.

Conduent's second-quarter commercial industry revenue tumbled to $876 million, down 6.7 percent from $939 million a year earlier due to lost business, volume headwinds, and the strategic exit from some areas of business. Customer experience performance, revenue decline, and focused investments also impaired the sector's profitability, Conduent said.

Public sector sales sunk to $540 million, down 6.7 percent from $579 million a year ago due to contract losses in government health care, state and local government, and payment services. Conduent's transportation revenue was flat as the ramping up of new business was offset by volume and pricing declines.

Revenue from other business plummeted to $80 million, down 15.8 percent from $95 million the year prior as the company reduced its exposure in the education and health enterprise spaces.

For all of 2017, Conduent expects revenue to decline by between 4.5 percent and 6.5 percent after factoring out changes in foreign currency exchange rates, while adjusted earnings before interest, taxation, depreciation, and amortization (EBITDA) are expected to climb between 5 percent and 6 percent.