Conduent, Inc. Aktie

Hello, and welcome to the Annual Meeting of Shareholders of Conduent Incorporated. Please note that today's meeting is being recorded. Please note that this presentation may contain forward-looking statements as such term is defined in the Private Securities Litigation Reform Act of 1995.

Please see important disclosures related to forward-looking statements on the meeting website by clicking on the Forward-Looking Statements icon in the Documents tab.

During the meeting, we'll have a question-and-answer session, you can submit questions or comments and at anytime by Message icon. It is now my pleasure to turn today's meeting over to Ms. Paláu-Hernández, Chair of the Board. Ms. Paláu-Hernández, the floor is yours.

Thank you, Amanda. Welcome to Conduent's Annual Meeting of Shareholders. I am Margarita Paláu-Hernández, the Chair of the Board, and I will chair today's meeting. I want to thank everyone for joining our annual meeting. And on behalf of the Board, we hope that you're all doing well. Conduent has come a long way, and we, as a Board, are proud of the progress and look forward to the path ahead as 48,000 Conduent associates work hard every day on behalf of our clients. Thank you again for joining us today.

I'd now like to introduce the other members of the Board of Directors and nominees. Harsha V. Agadi, Conduent's President and Chief Executive Officer; Michael Fucci, Chair of our Corporate Governance Committee and a member of our Audit and Compensation Committee; Kathy Higgins Victor, Chair of our Compensation Committee and a member of our Risk Oversight Committee; Scott Letier, Chair of our Audit Committee and a member of our Corporate Governance and Risk Oversight Committee; and Greta Van, Chair of our Risk Oversight Committee and a member of our Audit Committee.

I'd also like to take a moment to thank Kathy Higgins Victor for her years of dedicated service to our Board and to Conduent as a whole. Ms. Higgins Victor is not standing for election at this year's annual meeting, and we wish her the best of luck in her future endeavors. Also participating from PricewaterhouseCoopers, the company's independent auditor; Mary Davis, the lead PwC engagement partner. In addition, several members of the company's management team are with us today, including our President, Chief Executive Officer and Board member, Harsha Agadi, who I just introduced; Giles Goodburn, our Chief Financial Officer; and Michael Krawitz, our General Counsel and Secretary.

Finally, please note that we are recording today's meeting so that shareholders who cannot attend the meeting can listen to a replay and also to make sure we have an accurate record of the meeting. Before we turn to the business of the meeting, I'd like to ask Harsha to say a few words. Harsha?

Thank you, Ms. Paláu-Hernández, and thank you, everyone, for joining today. Our company is off to a great start in 2026. And while we are less than 120 days into my tenure as CEO, we are progressing towards our goal of positive free cash flow in 2027 and accelerating revenue. In the first quarter, under my leadership, we generated EBITDA margins of 6.8%, exceeding Street expectations and had a year-over-year improvement in operating cash flow of over $50 million. During the quarter, we also restructured my senior leadership team. The goal of these changes are to increase the pace of decision-making and improve accountability. In addition to the leadership changes in the quarter, we embarked on a cost initiative that we believe will take at least $100 million out of our cost structure, not only driven by headcount reductions, but also structural changes in how we deploy technology and how we run the business.

These will be sustainable changes that we will improve our cost structure and also should improve our competitive positioning over the coming years. We continue to invest in technology, in AI and other productivity-enhancing solutions. But one shift you may hear from me is that we don't always need to build our own technology that we deploy. We look for partners where it is prudent to drive improvements and deploy solutions as quickly as we can. We are seeing positive sales momentum and pipeline strength with new and existing clients in both the commercial and public sector space, driven by our focus on our client success, operational excellence and new go-to-market.

We are confident that we have the right strategy and are executing to achieve top line growth, EBITDA north of 8% and positive free cash flow. We know that our clients, associates and you, our shareholders, are counting on us, and we're right on track. Thanks for being part of this journey with us.

Finally, I'd like to also extend my sincere thanks to departing Director, Kathy Higgins Victor, for her contributions, insights and dedication to the company. We wish her well in the future.

And now I'll turn it back over to Ms. Paláu-Hernández.

Thank you, Harsha. Let's turn to the items being considered by shareholders. Michael Krawitz will help us with this section of the meeting. Michael?

Good morning, Maggie, and welcome, everyone. Greg Veliotis of Computershare has been appointed to act as Inspector of Election at this meeting. Greg has subscribed the oath of office and has submitted the following report. There were outstanding on March 23, 2026, the record date for the meeting, 155,096,814 shares of common stock. The holders of approximately 127.8 million shares are present at the meeting or by proxy or approximately 82.4% of the outstanding shares of common stock. Accordingly, a quorum is present.

Since we have a quorum present, I now declare that the meeting is legally convened. We will now conduct the formal business of the meeting. Michael, please discuss the procedures for transacting the business of the meeting.

The agenda and guidelines have been posted on the website for the meeting, and the meeting will take place as described in that agenda. Shareholders will have the opportunity to ask questions about any resolution that is before the meeting for consideration. If you wish to do so, please click on the message icon on your screen to submit your question or comment. Please keep your questions or statements brief and limited to the specific item up for discussion. At the relevant time, I will read the questions submitted that pertain to the specific proposal being presented as we go through the formal business noted on the agenda. We will take as many questions for each item as we reasonably can.

We'll also have a general Q&A period after our formal business has been conducted so we can address any questions not related to a matter on which you are voting. Please note, our annual meeting guidelines set forth requirements related to the meeting. For those shareholders who wish to vote online during the meeting, there is a vote icon available on the screen that is available to shareholders who properly registered and provided a control number. Shareholders may vote until the polls close, which will occur shortly after the final agenda item, which is the advisory vote on 2025 compensation. If you have voted your shares prior to the start of the meeting, your vote has been received by the company's inspector of elections, and there is no need to vote those shares during the meeting, unless you wish to revoke or change your vote.

Thank you, Michael. I will now ask you to present the matters to be voted on during this meeting.

First, to the election of directors and on behalf of the Board of Directors, I nominate the following persons named in the proxy statement for election as directors, to hold office for a term of 1 year until their successors have been elected and qualified. Harsha V. Agadi, Michael Fucci, Scott Letier, Margarita Paláu-Hernández and Greta Van.

Are there any comments or questions on this proposal?

There are no questions.

Since there are no questions, we will proceed.

Second item for voting is the ratification of independent auditors, and I move for the adoption of the following resolution; resolved, that the selection of PricewaterhouseCoopers to act as the company's independent registered public accounting firm for the year 2026 be and hereby is ratified.

Are there any comments or questions?

There are no questions.

Since there are no questions, we will proceed.

The third item for voting is the proposal regarding approval on an advisory basis of the 2025 compensation of our named executive officers. I move for the adoption of the following nonbinding advisory resolution; resolved, that the compensation paid to the company's executive officers as disclosed in the company's proxy statement for the 2026 Annual Meeting of Shareholders pursuant to Item 402 of Regulation S-K, including the compensation discussion and analysis, compensation tables and narrative discussion is hereby approved.

Are there any questions or comments?

There are no questions.

Since there are no questions, the discussion of the proposals and resolutions is now concluded. Ladies and gentlemen, the polls will close shortly. If there is any shareholder who would like to vote before the polls close, please do so now by clicking on the Vote button on the screen so that we can make sure your vote is counted. As was said earlier, if you voted your shares prior to the start of the meeting, there is no need to vote those shares again during the meeting unless you wish to revoke or change your vote. Does it appear that all the votes are in, Michael?

[Voting]

It does. Yes.

I now declare the vote -- the polls closed. Michael, will you please present the report of the Inspector of Election?

The Inspector of Election has presented a preliminary report to me and has determined that, first, for the election of directors, each of the director nominees received at least 94.8% of the votes cast at this meeting for such directors' election. This satisfies the majority vote requirement for the election of each of these directors.

Second, for ratification of PricewaterhouseCoopers LLP as independent registered public accounting firm for the year 2026, 99.4% of the votes have been cast for this proposal.

And third, for approval on an advisory basis of the 2025 compensation of our named executive officers, 91.5% of the votes have been cast for this proposal.

Thank you, Michael. Having received the report of the Inspector of Election, I declare that all of the directors nominated by the Board have been elected. The selection of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for 2026 has been ratified and that the 2025 compensation of our named executive officers has been approved. This concludes the business of our meeting today. There being no further business to come before the meeting, the formal portion of the meeting is adjourned.

Harsha and team would be happy to answer any questions of a more general nature. As a reminder, our annual meeting guidelines list certain topics that we will not address at this Q&A. Michael, are there any more questions that have not been addressed?

No. Thank you. There are no questions.

Thank you, Michael. And again, thank you all for joining today. We hope you stay well. Back to you, Amanda.

This concludes the meeting. You may now disconnect.

Greetings, and welcome to the Conduent First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Joshua Overholt, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us today to discuss Conduent's first quarter 2026 earnings. I am joined today by Harsha Agadi, our CEO; and Giles Goodburn, our CFO. We hope you've had a chance to review our press release issued earlier today.

This call is being webcast and a copy of the slides used during this call as well as the press release were filed with the SEC this afternoon on Form 8-K. This information as well as the detailed financial metrics package are available on the Investor Relations section of the Conduent website. During this call, we may make statements that are forward-looking. These forward-looking statements reflect management's current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially from those statements.

Information concerning these factors is included in Conduent's annual report on Form 10-K filed with the SEC. We do not intend to update these forward-looking statements as a result of new information or future events or developments, except as required by law. This information presented today includes non-GAAP financial results -- financial measures. Because these measures are not calculated in accordance with U.S. GAAP, they should be viewed in addition to and not as a substitute for the company's reported results.

For more information regarding definitions of our non-GAAP measures and how we use them as well as the limitations to their usefulness for comparative purposes, please see our press release.

And now I'd like to turn the call over to Harsha.

Thank you, Josh. I want to welcome all our investors, analysts and colleagues around the world to the call. I am confident you will be encouraged by what you will hear as we discuss Conduent's first quarter results and the steps we've taken to improve the pace and discipline of our execution. I want to say good morning, good afternoon and good evening to our 48,000 Conduent colleagues across the globe. I have now been CEO for 115 days and continue to hear from our clients about all your efforts on their behalf.

Thank you, and we will keep working to enhance our client operations. As I speak, with our clients, they value a combination of our technological capabilities and the human connection our employees demonstrate to make services seamless and predictable, each and every time. Again, thank you and keep driving innovation for our clients.

My commentary today will focus on 3 areas: First, I will give you an update on the priorities I laid out on the Q4 call. To be clear, the priorities remain unchanged. The 5 priorities are: reduce our cost structure, convert pipeline to growth, optimize the portfolio, increase speed and accountability, and enforce financial discipline.

Second, I will provide an update on our AI initiatives in both public sector and commercial. Finally, I will share some details on deals won in the quarter that, in aggregate, exceed $100 million.

In the Q4 earnings call, I had highlighted 5 priorities for Conduent. In Q1, we executed well on reducing our cost structure. We reported adjusted EBITDA margins of 6.8%, a marked improvement to last year. In addition, we have initiated a detailed review of our cost structure, engaging 2 external advisers, and through this work, identified significant potential opportunities.

Our initial assessment is that we can reduce $100 million of cost in the next 18 months. This, ladies and gentlemen, is just the beginning. As I highlighted in the Q4 earnings call, I believe that Conduent should have EBITDA margins north of 10%. Our pipeline continues to grow at a robust pace, and with the changes we have made in commercial leadership and improvements we have made in our go-to-market strategy, we should see an improvement in pipeline conversion in the back half of the year.

Our go-to-market strategy now across the company is focused on five approaches. The first is cross-selling to our existing clients. Second is the restructuring of our sales incentives. Third is larger defense. Fourth is winning new logos and fifth is the establishment of a deal desk. As it relates to commercial, the go-to-market changes include a much narrower focus on the health care and financial services sectors.

Meaningful relationships with CEOs across the commercial landscape and an increased focus on innovative solutions, solving client pain points. In public sector, we have reengaged in the federal space to focus on health and human services as well as other target agencies. This aligns with the current administration's focus on greater efficiencies as they deliver cost-effective services for the citizens of the United States.

We believe we are well positioned to compete for these opportunities. For portfolio optimization, I continue to be confident that we can achieve improvements in margins and efficiency of our business as we focus our business and prioritize investment in growth segments. As you will see in a later slide, we believe proceeds from identified divestitures in 2026 should be north of $200 million.

Regarding speed and accountability. First, we simplified our leadership team. Second, we have developed new processes to make quicker decisions, resulting in speed of implementation post contract timing. This should allow us to reduce working capital and generate revenues and ultimately, cash flow from more quickly. And my final priority is to enforce financial discipline, which is evidenced by not only the 6.8% adjusted EBITDA margins in Q1 and but also increased rigor on capital expenditures and cash management, which helped deliver a $50 million improvement in operating cash flows year-over-year. I want to give a little more color today on our AI initiatives, past, present and future.

At Conduent, we deliver end-to-end business process solutions using technology with our deep domain expertise, which positions us to use AI as a differentiator. On this slide, we have laid out 3 use cases we have developed AI against -- as we look at the examples here across the top, it shows problems we've sold with AI. First is fraud and risk management. Initially, we deployed machine learning models for payment fraud detection. We currently have deployed GenAI plus rules-based AI to improve account takeover detection, and we're also expanding into other fraud vectors to manage risk.

In the future, we believe we can take these AI solutions and scale them into other forms of fraud prevention. In customer and citizen interaction we initially implemented IVR for routing and cell service as well as chat bots and analytics to drive improvements in cost and service. We have now added Gen AI assistant agent assist to reduce handle time.

We have also expanded Kane, our very own branded Gen AI chatbot to power a personalized benefits experience in the human capital solutions space. In the future, we're working to deploy other Agentic AI solutions driving more autonomous conversational experiences. As we move to the third column, we see a combination of workforce and productivity-enhancing solutions, including AI, assisted coding and further scaling of these tools in the future.

I want to be clear, Conduent has not been standing still as it relates to AI. -- we are implementing AI as appropriate in solutions, and we are using AI to improve our own cost structure. In conclusion, I want to highlight our sales wins for Q1. As a company, we had $114 million in sales wins. These wins highlight our capabilities and our deep client relationships.

Commercial segment signed more than $48 million of new business in Q1, including significant contracts with 3 long-standing health care clients, demonstrating Conduent's continued strength in this sector. In the Public Sector segment, we signed more than $66 million in new business in Q1. This was driven by a large deal in the government Medicaid claims for $23 million in new business.

Now I will hand it over to Giles for the detailed financial review.

Thanks, Harsha. As we've done in the past, we're reporting both GAAP and non-GAAP numbers. The reconciliations are in our filings and in the appendix of the presentation.

Let's discuss our key sales metrics on Slide 6 and 7. We signed $114 million of new business ACV in the quarter, up 5% versus Q1 2025 and the sixth consecutive quarter of year-over-year growth, driven by our commercial and government segments, both of which increased year-over-year.

Our trailing 4-quarter ACV metric is up almost 5% versus this time last year, with the government segment up 60% in this metric versus Q1 2025 and and our commercial segment reversing a declining trend, which we anticipate will continue in Q2, where we continue to see strong demand from our existing client base.

Q1 ARR, annual recurring revenue, for the quarter was softer than we would have liked. However, commercial posted a strong year-over-year increase, while the government segment, which is influenced by mix and timing of deals, was heavily weighted towards nonrecurring revenue this quarter.

Importantly, in the quarter, we renewed a government health care client for up to 14 years, inclusive of additional NRR revenue to implement our market-leading SaaS and cloud-based Medicaid claims and financial management solutions.

While this is a multiyear implementation, we classify implementations as nonrecurring revenue. Notably in the quarter, we completed the implementation and went live with the same fully integrated market-leading solution with another of our large government state health care clients.

Other key notable wins in the quarter included new capability and add-on work for existing health care clients in our commercial segment and add-on work related to the HR1 working families tax credit legislation for existing clients in the government segment. Within the quarter, we signed 3 new logos and 14 new capabilities.

Our qualified ACV pipeline remains strong at $3.5 billion, which is up 10% year-over-year. The strength here is driven by our government segment, which is up 27% year-over-year and we are making progress with our commercial segment pipeline, which is 25% stronger than it was last quarter.

Let's turn to Slide 8 and review our Q1 2026 P&L metrics. Revenue for the quarter was $723 million compared to $751 million in Q1 2025, down 3.7%. Consistent with last quarter, revenue grew in 2 of our 3 segments. Our Government segment grew 4.6% and our Transportation segment grew 2.3%, both are sequentially higher than Q4 2025.

Adjusted EBITDA for Q1 2026 was $49 million as compared to $37 million in Q1 2025, and our adjusted EBITDA margin of 6.8%, is up 190 basis points year-over-year, and up 30 basis points sequentially.

The quarter benefited from a few discrete items, which contributed approximately 64 basis points for the quarter.

Let's turn to Slide 9 and review the segment results. Q1 2026 Commercial segment revenue was $361 million, down 10.2% as compared to Q1 2025. The continuation of volume declines in one of our largest commercial clients drove approximately 36% of this revenue decline. The remainder was attributed to lost business, partially offset with new business wins.

Commercial adjusted EBITDA was $43 million, an increase of $3 million year-over-year, and the adjusted EBITDA margin of 11.9% was up 190 basis points year-over-year. Our cost efficiency programs and stronger operational performance in our BPaaS and integrated digital solutions offerings drove the year-over-year increase. Government segment revenue for the quarter was up 4.6% at $226 million. The drivers here were new business and higher volumes in our Government Healthcare segment and price increases across several clients in the government portfolio.

Adjusted EBITDA was $59 million, with adjusted EBITDA margin of 26.1%, up 850 basis points year-over-year. The revenue drivers as well as our AI initiatives and efficiency programs drove the significant improvement here. This includes one of the discrete items I mentioned earlier which contributed 150 basis points to the government quarter. Transportation segment revenue was $136 million for the quarter, an increase of 2.3%, while adjusted EBITDA was negative $4 million for the quarter. New business, higher volumes and FX drove the stronger revenue versus Q1 2025. Year-over-year adjusted EBITDA decline was driven by additional post-implementation expense isolated to one of our transportation contracts. Unallocated costs of $49 million for Q1 2026, an increase of 4.3% versus Q1 2025. The continued progress with our cost efficiency programs in the corporate functions and a reduction in 2025 variable compensation, one of the discrete items I mentioned earlier, partially offset the recovery of legal costs benefiting the prior year period.

Let's turn to Slide 10 and discuss the balance sheet and cash flow. We ended Q1 2026 with approximately $251 million of cash on the balance sheet and negative adjusted free cash flow of $15 million, a significant improvement versus Q1 2025. our net leverage ratio remained at 2.8 turns this quarter and our capital expenditure for the quarter was 2.2% of revenue, with Q1 typically the low point of the year.

Turning to Slide 11. You will see our guide for 2026 and initial expectations for 2027. Our revenue guide for 2026 is a range of $2.8 billion to $2.9 billion. We anticipate both our government and transportation segments will post positive revenue growth in 2026 with the deterioration isolated to the commercial segment.

Our adjusted EBITDA guide is between $160 million and $190 million. The drivers here are the continuation of AI and our cost efficiency programs, price increases and stronger operational performance across the portfolio. The quarterly cadence of adjusted EBITDA for 2026 begins with a strong start to Q1, followed by a softer Q2 and then similar margins to Q1 in the second half of the year.

Looking out to 2027, we anticipate flat to positive revenue growth, adjusted EBITDA of between $190 million and $220 million with positive cash generation. That concludes the financial review of Q1 2026, and I'll now hand it back to Harsha. Harsha?

Ashia

Thank you, Giles. As you have heard today, Conduent is well on its way to improving margins, rightsizing the portfolio and increasing the growth rate. we are repositioning the company to be a growth company with double-digit EBITDA margins and sustainable free cash flow. We will do this through disciplined management and prudent investment in AI and other tools to enhance productivity and customer experience.

I want to let you know that our Investor Day will be on September 23, 2026 in New York City. I look forward to seeing you there. I am looking forward to a strong finish to 2026 and a strong start in 2027 with all our initiatives in place.

Thank you Operator, please open the call for questions. .

[Operator Instructions] Our first question is from Michael Kupinski with Noble Capital Markets.

On the last call, you mentioned a competitive mode. On the last call, you mentioned a competitive moat and high growth as important elements for deciding fixed sell or grow businesses. And how are you weighing the impact of AI on the moat around software compared to the growth of the rate of the growth rate of the industry?

Sure. So the answer might vary between commercial versus government versus transportation. On the government side, just so you're aware, the contracts are generally longer and much more lasting and sticky. And so to me, as technology changes, as long as we are adept and using state-of-the-art technology, which, by the way, some of the state governments are appreciating it. Our recent implementation in some states have been -- we've gotten kudos. I think we will continue to see a lot of sticky business on the government side.

On the transportation side, the growth may not be at the same pace, but as urban development increases and urban density, I think there is ample opportunity there. On the commercial side, if you don't innovate, you will not survive. And therefore, we are focused on our internal AI experiments we are no longer building things. We are either borrowing or partnering with AI-driven companies to do experiments quickly where we increase reliability of the answer, consistency of the service and not to mention it lowers our own cost.

So to us, we've started to take a very innovative approach. Another way to look at this is small firms that have high great technology may not have a blue chip customer list. If we partner with them, they might help us to further our own implementation. At the same time, we can share in the customer, therefore, bringing a total solution for that customer. So to me, I think on the government side, there is a fair amount of a moat. On the commercial side, technology is what's going to kind of really protect us.

You highlighted a sizable qualified pipeline. What are you seeing in terms of conversion rates and sales cycle duration, particularly in the government and transportation side, and additionally, could you talk about the average lead time of getting services online? .

Yes. Mike, it's Charles here. So from a government and transportation standpoint, I wouldn't say there's any real change in our win rates. It does vary as far as RFPs coming on and when some of those RFPs actually get signed due to, I would say, some uncertainty at the federal administration level. which does cause some contracts that we're engaged on pushing out to the right, but not necessarily going away. We're still winning our fair share, which is important.

And similar goes for the Transportation segment. As far as cycles to actually sign in to or sales cycles to revenue, clearly, it's a lot quicker in a lot of the commercial spaces to ramp from sign to revenue. We see a little bit of that in the government space on some of the more traditional BPO type activities. But generally, I'd say there's a longer cycle from signed to revenue generation as we think about the process that the state and federal clients have to go through to get to sign -- from a signed contract to revenue on our books.

Yes. There is an additional piece. I think today's senior leadership team in the company is directly interfacing with a lot of CEOs as opposed to just the Chief Procurement Officer or the Head of HR. And what is happening with that is instead of us actually responding to an RFP, which we are, but now we're getting inbound calls. So recently, I got a request from a CEO of a $5 billion company wanting an urgent project done using our data analytics capabilities, and our digital capabilities.

So what is happening is that conversations are now going at a much higher decimal and at a much higher level. So the whole chemistry is changing. One other thing if implementation is taking 7 months, 6 months, 8 months, we have now KPIs coming in place. I as CEO, I'm actually going to track, how can we reduce implementation time by 30 days, 60 days and therefore, start having revenue traction even earlier than estimated. So this is an organization that needs to move fast. If you look at my priorities, I think pace of play is very, very important to us right now.

Our next question is from Gowshihan Sri with Singular Research.

Can you hear me?

Yes.

On your FY '26 revenue guidance, it implies $150 to $250 step down. Can you help us understand how much of that step down is driven by as of the underlying organic volume, particularly in commercial. So just give a revenue base that actually looks like.

I'm sorry, we lost you there for a second. Can you repeat that, please?

So the revenue for 26 is around -- a step down of around $150 million to 250. Can you understand -- help us understand much of that is due to portfolio disbursals versus softness in the organic volume? .

Yes. So I think, firstly, Gowshi, it's important to reiterate that we're going to see -- we anticipate to see revenue growth in both the Government segment and the Transportation segment. So this -- the deterioration in revenue, the reduced guide is really confined to the commercial space where it's a combination of softer volumes in some of our clients and then clients that we've lost over the last, I would say, 12 to 18 months. .

Okay. And then when are you -- with the portfolio optimization, would you be -- and you said you're actively marketing business in the cell bucket without getting into specifics, can you give us a sense of how many of the processes are still active right now? And whether the scale of those proceeds have changed from the original framework that we discussed in the prior years? SP27915630 Okay. James will answer it, and then I'll add a little -- go ahead. .

Yes. So we've got a couple that we're working on. I'd say proceeds for those 2 roughly what we thought we would get when we look back sort of 6 to 9 months. So no real change there, just some complexity around some of the things that we've got to get through with the buying entities. And then that's certainly as how we think about it for 2026. And then beyond that, there are other things that we're considering in the portfolio as well. .

Yes. So what I would say is where we stand today, we are reasonably confident with our numbers and where we are in the process. So I'm pleased to say that I can say today, our goal is to exceed $200 million in proceeds -- in addition to that, we have received some inbounds on some other businesses. The interesting dilemma I face as CEO is some of these businesses are changing performance as we speak.

It's getting better. So we're kind of rethinking carefully is business for sale or not. I have to give credit to our broad team. They're moving quickly on changing the numbers. We have strong internal discipline on managing margins and managing revenue of individual businesses, and it's starting to make a difference. But having said that, we clearly have 2 businesses identified, marketed as well as we are estimating the proceeds to be such as we have discussed earlier in the call.

Our next question is from Marc Riddick with Sidoti & Company.

I wanted to touch a little bit on the -- well, maybe we start with the potential of $200 million in divestitures. Can you talk a little bit as far as prioritization of proceeds from that? And then we can sort of branch off into a couple of other things there.

Yes. Here's what I would say. My focus at the moment is obtaining the $200 million plus -- so that is my singular focus. Now what that does, as you know, is gives us optionality and optionality could be the following. It could be buying some of our debt down. It could be buying some of our stock. It could be reinvesting some of it in our businesses. And I am very metric-oriented and numbers oriented. So we're examining that.

And frankly, we are discussing with some bondholders just to get their expert advice as to how to approach all of this once we get the money. So we are still thinking it through, but it's a nice problem to have once we get the money.

Okay. I appreciate the commentary there. So maybe we can shift gears on. As far as AI, I think you mentioned in the prior call sort of ballpark where you felt you were as far as percentage of revenue? And maybe you could talk sort of a little bit about what you're seeing there and what your goals may be as to what's directly connected to AI or AI related, I suppose?

Yes. I don't think I will look at it as a percent of revenue yet. But here, I will give you, first of all, when I look at AI, there are actually 5 layers that make up AI that most of us know. You start with the chip, the data center, the cloud, large language modules and eventually on top of that is app development.

Three examples I can give you right away that we're using AI for. The first one is fraud detection, particularly in the government space because we're making a lot of payments, and we need to ensure we're not making the wrong payments. Now interestingly, we have it working rather well. And now we're going to actually start shifting that use case to our financial institutions as well. The second on the call centers or what you would also say multichannel contact centers.

We have one real-time translation. You can speak any language, it translates back and forth. Second is auto quality assurance. Third is training simulation where somebody who's answered the call, they're given a training lesson how to do better. And then finally, we talked about Kani, our own Gen AI persona, our own brand that is actually involved in dealing with our human capital solutions. So look, AI is a solution to reducing cost, increasing accuracy. But one of the things I'm running into rightly so with a lot of the clients, and I'm talking to CEOs of large health care companies as well as large service companies, and they keep emphasizing for us, the human connection of what you offer is as important as AI.

So for us, balancing the 2, you're only as good to the client as the last call you received. So executing well consistently is very, very important. But I think as time goes by, we will start assigning specifically use case and examples and savings because for us to get to double-digit margins and sustain, it's not just rightsizing or right shoring the cost, but also implementing AI very carefully in certain areas of our business that's very meaningful to the client as well as to us.

Mark, just to give you some tangible impacts that AI has had over the last, I would say, 6 months for us in a couple of situations. One, I talked a little bit about this last quarter, is the fraud detection where some of that fraud in our P&L. We've seen significant cost savings with the deployment of that AI capability, which has really helped out in the government segment.

Secondly is the Gen AI agent assistant, KONE, which we've deployed in our Human Capital Solutions business, which essentially helps clients, employees make better health choices as you go through the benefit enrollment program. We saw a considerably higher interaction rate between employees and KONE than we've ever had without KONE in prior years as we've been through that enrollment process. So 2 examples there where our AI investments are having significant impacts not only on our P&L, but for our clients as well.

Great. And maybe last one for me. You touched on a couple of client verticals in prepared remarks and a couple of the questions already around federal as well as health care a little bit. Are there any other client verticals as far as in your -- I guess, was it 115 days in the chair that you've seen thus far that you either maybe have been surprised by or encouraged by? Are there any particular client verticals that you think that stand out a little bit to you in the time that you've been there?

Yes. Here's what I would say. I have dealt with some of the government clients and transportation. And actually, they've been very constructive and transparent of how we work together. So I'm very pleasantly surprised. What is also very interesting to me is the number of CEOs of our commercial clients who've made direct outreach to me looking for solutions.

So this is what gives me the confidence that our sales pipeline is growing and is turning. We have new leadership in commercial. We have George, who is running the operations. We have Kimberly, who is running the entire sales side for commercial, both reporting to me directly. we have an internal rigor of a revenue call every week with all hands on deck. So we're actually starting to see the needle move.

So to me, I expected maybe more roadblocks on the revenue side, and it's starting to look more and more positive. And I think we need to move at a very fast pace to embrace the opportunities in front of us. Here's the other thing. We're doing a lot of work in the United States. We should be looking at other English-speaking democracies, just to keep it simple, like a Canada, England or in Australia to start increasing the same levels of service we provide U.S. federal and U.S. state governments.

This concludes today's conference call. We thank you again for your participation. You may now disconnect your lines.

Thank you.

Greetings, and welcome to the Conduent Q4 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Joshua Overholt, Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and thank you, everyone, for joining us today to discuss Conduent's Fourth Quarter 2025 Earnings. I am joined today by Harsha Agadi, our CEO; and Giles Goodburn, our CFO.

We hope you've had a chance to review our press release issued earlier this morning. This call is being webcast, and a copy of the slides used during this call as well as the press release were filed with the SEC this morning on Form 8-K. This information as well as the detailed financial metrics package are available on the Investor Relations section of the Conduent website.

During this call, we may make forward-looking statements. These forward-looking statements reflect management's current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially from those statements. Information concerning these factors is included in Conduent's annual report on Form 10-K filed with the SEC. We do not intend to update these forward-looking statements as a result of new information or future events or developments, except as required by law.

The information presented today includes non-GAAP financial measures. Because these measures are not calculated in accordance with U.S. GAAP, they should be viewed in addition to and not as a substitute for the company's reported results. For more information regarding definitions of our non-GAAP measures and how we use them as well as the limitations to their usefulness for comparative purposes, please see our press release.

And now, I would like to turn the call over to Harsha.

Thank you, Josh. I want to welcome our investors, analysts and clients as well as colleagues around the world to this call. I am confident you will be encouraged by what you hear, as we discuss where Conduent is headed and how we intend to get there. I also want to say good morning, good afternoon and good evening to my 51,000 Conduent colleagues across the globe.

Over the past few weeks, I've been energized by the stories I have heard, stories of teams serving clients with commitment, resilience and professionalism every single day. Thank you for what you do and for the pride you take in representing Conduent.

Over the past 3 decades, I've had the opportunity to lead more than half a dozen companies across multiple sectors, both private and public. Most relevant to Conduent, I have founded in the past and led a BPO that scaled globally and eventually listed on the NYSE. Through those experiences, I have learned what it takes to build organizations that move with deliberate speed and purpose, deliver measurable outcomes for clients, generate sustainable growth and free cash flow for investors and create meaningful development opportunities for all our employees on a global scale. I'm here because I believe Conduent can deliver those same outcomes.

My expectations are simple and my objectives are clear. It is to lead Conduent to consistent year-over-year revenue and EBITDA growth, supported by very strong and durable free cash flow generation. In the BPO industry, these are not aspirational results. They are the natural results of a healthy business with clear strategy, disciplined execution and a relentless focus on serving clients on a daily basis.

As clients focus on their business, our focus is to provide seamless BPO and KPO services to enable their daily services smoothly to their clients. Having been in the role for less than 30 days at Conduent, it would be premature for me to present a fully detailed long-term plan for Conduent's return to sustained growth, improved earnings and free cash flow.

Ladies and gentlemen, this is a turnaround story. The work is underway, and we will share with you. What I can commit to today is full transparency and cadence. In addition to our normal earnings reports, we intend to host an Analyst Day in New York City, where you will have the opportunity to meet our Board and other members of the Conduent executive team and hear directly about our strategy, priorities and execution plan. While the full plan is still being finalized, this is not my first turnaround.

Having led multiple transformations in various sectors, I know there are decisive actions that must happen early, actions that set direction, change momentum and create the conditions for sustainable results. Those actions are already underway, and they inform the priorities I am here to outline. First and foremost, we will move faster. That means faster decision-making, faster execution and faster improvement. The senior leadership team has already felt this increased pace, and we will only continue to accelerate it. The tone has to be set from the top. Opportunities do not wait and neither will we. Our leaders are being empowered to act, and empowerment comes with clear accountability. We must move with speed to capitalize on the opportunities before us.

Second, we will apply maximum financial discipline across every major decision, especially capital allocation. We will evaluate decisions through multiple lenses, revenue growth, margin expansion and free cash flow generation. This framework will guide how we allocate capital, rationalize parts of the portfolio, manage working capital and prioritize investments.

Third, we will lower our cost structure. This includes reducing corporate overhead, particularly within SG&A and taking a hard look at our entire technology spend and stack. However, we will not compromise quality or client outcomes, but we must be more efficient in how we deliver our solutions. At current levels, corporate overhead and technology expense as a percentage of revenue must come down.

Fourth, we will continue to rationalize our portfolio. My goal for Conduent is clear. Organic revenue growth resulting in strong free cash flow. To get there, we are reviewing every business, categorizing each as either fix, sell or grow. Businesses that are categorized as fixed will operate under formal improvement plans with clear metrics, time lines, leadership accountability goes hand-in-hand with that. Businesses that are in the category of sale will be actively marketed with a focus on executing transactions efficiently and at fair value. Proceeds will be first used to reduce debt, followed by multiple other priorities.

The third is growing the businesses that are identified to grow will receive the required investments as well as be unconstrained so that they can grow. Fifth, our qualified ACV plant today stands at $3.2 billion. Our priority is better conversion rates. Going forward, our priority is not just building pipelines, but consistently converting it. Across each of our businesses, pipeline development and execution will improve in a way that supports sustainable revenue growth.

Finally, we will simplify and strengthen our organization. To deliver on these priorities, we will become a nimbler company with fewer layers, lower cost and clear accountability. We will reduce organizational complexity that slows decision-making and empowers our leaders with full P&L ownership.

I would now like to hand over to Giles to continue the update on the earnings calls, as he will be giving you a very clear update on Q4, which was not under my CEO leadership. Thank you, Giles.

Thanks, Harsha. As we've done in the past, we're reporting both GAAP and non-GAAP numbers. The reconciliations are in our filings and in the appendix of the presentation. Let's discuss our key sales metrics on Slides 5 and 6. We signed $152 million of new business ACV in the quarter, 1 of our highest quarters in recent years, up 11% versus Q4 2024. Our full year 2025 new business ACV was $517 million, up 6% versus 2024. Each quarter can be influenced by the timing of large deals, especially in the public sector segments. However, if you aggregate the ACV on a trailing 4-quarter basis, you can see we're trending in the right direction.

On a full year basis, our government segment new business ACV is up 50%, and our Transportation segment is up 14% versus 2024. While our commercial segment is down 15% versus prior year, the encouraging signs are that our new capability ACV, selling new products to our existing clients is up again this year by 60%. This is a cornerstone of our commercial go-to-market strategy, which we are optimistic will continue to reap rewards.

Within the quarter, we signed 14 new logos and 20 new capabilities. And on a full year basis, signed 41 new logos and 87 new capabilities. New business TCV for full year 2025 was up 16% versus 2024, driven by our government and transportation segments. As Harsha mentioned, our qualified ACV pipeline remains strong at $3.2 billion, which is up 4% year-over-year. The strength here is driven by our government segment, which is up 29% year-over-year, with an in-year 2026 qualified pipeline, almost double where it was at the beginning of 2025.

Let's turn to Slide 7 and review our Q4 and full year 2025 P&L metrics. Adjusted revenue for full year 2025 was $3.04 billion, compared to $3.18 billion in 2024, down 4.2%. We ended the year with Q4 adjusted revenue growth in 2 of our 3 segments. Our Government segment grew 1.8%, and our Transportation segment grew 1.9%. Both segments showed positive momentum and positioned well for growth in 2026. Adjusted EBITDA for the year was $164 million, as compared to $124 million in 2024. And our adjusted EBITDA margin of 5.4% is up 150 basis points year-over-year and towards the top end of our guided range. We finished the year with a Q4 adjusted EBITDA margin of 6.5%, up 250 basis points versus Q4 2024 and a sequential improvement of 130 basis points versus Q3.

Let's turn to Slide 8 and review the segment results. Full year 2025 Commercial segment adjusted revenue was $1.5 billion, down 5.9% as compared to 2024. The volume declines in our largest commercial clients drove approximately 40% of this revenue decline. The remaining top 10 commercial clients grew on an aggregate basis in 2025 versus 2024. Commercial adjusted EBITDA was $154 million, adjusted EBITDA margin of 10.2% was down 30 basis points year-over-year. While we made good progress with our cost efficiency program in this segment, it wasn't enough to offset the impact of lower revenue.

The 5 priorities Harsha outlined earlier will significantly accelerate the desired improvement in this segment. Government segment adjusted revenue for the year was down 6.3% at $922 million. Our new business revenue outpaced lost business revenue with the primary driver of decline being the completion or winding down of large implementation projects, which we expect to replace in 2026.

As I mentioned earlier, in the fourth quarter, our Government segment grew 1.8% year-over-year. We are confident this will continue, and the team is positioned to deliver full year 2026 revenue growth. Adjusted EBITDA was $221 million, with adjusted EBITDA margin of 24%, up 270 basis points versus 2024. The drivers here resulted from our AI initiatives and efficiency programs, resulting in lower fraud, labor and telecom expenses, offsetting the implementation runoffs.

Transportation segment adjusted revenue was $609 million for the year, an increase of 3.9% while adjusted EBITDA was $18 million and adjusted EBITDA margin was 3% for the year. up 300 basis points versus 2024. Both revenue and EBITDA improvements were driven by strong equipment sales and a contract amendment in our international transit business. Unallocated costs were $229 million for the year, a decrease of 10.2% versus 2024. The improvement here is driven by the cost efficiency programs and our corporate functions and a recovery of legal costs, which more than offset significantly higher U.S. employee healthcare claims activity we continue to experience.

Let's turn to Slide 9 and discuss the balance sheet and cash flow. We ended the year with approximately $243 million of total cash on balance sheet and adjusted free cash flow was negative $130 million. Adjusted free cash flow in the quarter was positive $28 million, a little less than we had anticipated due to the timing factors I mentioned last quarter. The updates on these timing factors are we signed the contract amendments that were delayed by the government shutdown in Q4 and build the client for the work already performed. However, we now expect to receive this cash later in Q1 or early in Q2, which accounts for the reduction in contract assets and the increase in accounts receivable on our year-end balance sheet.

Our net leverage ratio decreased to 2.8 turns this quarter, which was a result of the higher EBITDA, and our capital expenditure for the year was 3.4% of revenue, in line with our expectations. We continue to make progress with our portfolio rationalization plans and relating to our full year 2026 guidance, as Harsha mentioned earlier, given his short tenure in the CEO role and the 5 priorities he has outlined, you can expect a more wholesome update on both these items with our Q1 financial results in early May.

That concludes the financial review of 2025, and I'll now hand it back to Harsha. Harsha?

Thank you, Giles. I look forward to coming back on our Q1 call to revisit these priorities and give you a very detailed update. Just so you're clear, the initiatives would have already starting to take momentum well before our call -- next call. We will also be prepared to outline their expected impact on Conduent's financial performance.

As I continue forward, I would say Conduent has a strong foundation, meaningful client relationships and a global team that knows how to deliver to our thousands of clients across the globe. What we are focused on now is execution. Moving faster, simplifying the business, allocating capital with discipline and holding ourselves accountable for results. Our direction is clear, our execution plan is now in motion. The actions we're taking are designed to return Conduent to sustainable revenue growth, expanded margins and generate strong free cash flow that is sustainable.

As we execute, we will continue to communicate transparently, measure progress rigorously and earn your confidence quarter-by-quarter. I am truly energized by the opportunity given by the Board and the support to lead from the front confidently. We do have a good leadership team in place, deeply committed to building a stronger, more focused and more valuable Conduent for our clients, all our employees, and without any doubt, our shareholders.

Ladies and gentlemen, that is the message for the day. And I think if we can get the operator to open it up for questions. Thank you.

[Operator Instructions] The first question is from Pat McCann from NOBLE Capital.

Harsha, it's great to hear about your vision for the future of the company. I was curious when it comes to the framework that you outlined of looking at business units and deciding whether to fix, sell or grow them. I was just wondering about would you -- could you give any more color into what metrics you would be looking at the various business units with to kind of make that decision in terms of whether that's margin profile or the capital intensity of a business unit. Anything like that, that -- any more color you could give there in terms of how you will evaluate?

Thank you very much again for the question and actually a very thoughtful question. So there will be multi variables at play. And I'll just name a few, which you named a few, but I'll start with the CEO's very important job is capital allocation. We have a lot of capital going in. Are we getting the right rate to return? And where should we place our bets? So what we have today is an accumulation of somewhere between 15 and 20 small businesses, covering not just the commercial side, but also the government and the transportation segment. So what happens is, I'm looking for, does the sector have unbelievable growth metrics. As an example, healthcare will continue to grow. Second, can we have decent predictable EBITDA margins? Sometimes, when EBITDA margins are high, we can be taken thinking it's a great business. But anything that's not sustainable, you run out of steam. So we also need to think through how much capital needs to be allocated and what is the free cash flow that's coming in.

Finally, is there a moat around the business? Can somebody come in and replace us easily or not? And can the moat be breached with, the #1 question of the day, technology that is extremely dynamic at this time, and obviously driven by AI, GenAI and all of the other variations? So to me, these are some of the factors. So I intend to as quickly as our next Board meeting to actually surround with a matrix and say, here's how we're looking at the world. And by the way, a lot of the -- I've talked to the top 10 investors, and I have to tell you, all of you have given me wonderful ideas to make sure I'm covering all bases. So those will be the factors.

And I'll just ask 1 more question, and I'll hop in the queue because I know there are others. When it comes to -- the company obviously has a number of different business units, some of them are more closely related to each other, some, not as much. I was wondering what your general philosophy is on a go-forward basis, on which business you would keep if you look at it from the perspective of certain businesses are -- have overlap or had their efficiencies because of the similarities of where certain business units operate and that sort of thing versus the more disparate portfolio of businesses that are completely separate? I don't know if the question is clear, but I am trying to keep it all kind of going in 1 direction.

Yes. No, no. It's actually -- not only is the question clear. It's a good dilemma. And so I'll tell you what has been the case to some extent in the past, and I'll move away from the past quickly, and I've seen this in other businesses that are going through a term is let us be everything to everybody or let us be anything to anybody. We need to walk away from that. And 1 of the things we as a team are doing, is listing out things we will just not do. It is actually not just important to what you do. You have to make a list of what you really will not do and refrain from it. It may look good. And I am of the mindset when I go to a client, I will say this is what we can do and we're the best at it. If you need this additional service, maybe we can do this, but maybe we'll find you somebody that we might partner with. We have 1 big element within our company, and that is a very deep client relationships.

We have a long list that, to me, is worth a huge royalty. So if I'm going to bring a partner to execute with me on a third or fourth service with the client, I may be charging for that relationship because I bring to bear the relationship management. So to me, I hopefully have answered the question, but it will be case by case. But even in the case by case, we have to be very disciplined about it. We have 20, 30 different services, but we're offering maybe 1.5, 2 services here, completely different services elsewhere. That does not generate scale or efficiency.

I'll go back to my previous days in another BPO, we were doing tax returns only for partnerships, and we got a request to do it for corporations. I actually declined the business saying, we're experts at doing back-office work for the next 4 big firms just for partnerships and not corporations that are public. So you have to start having a little bit of silo mentality and actually viciously support your value proposition and how you deliver it.

The next question is from Gowshi Sri from Singular Research.

My question is on the commercial side. You laid out in the last call that top 24 to 25 accounts, we're growing and the new leadership would necessarily affect the 2026 performance. As you sit here in Q4, any evidence you're seeing that revamped go-to-market feeding into the top of the funnel help you out from that 1 client that was kind of lagging your behind?

Yes, Gowshi, good question. So the top 25 and the top 10 that I talked about specifically related to the Commercial segment. As you think about 2026, as I said in the remarks, we've got some really good momentum in both our public sector businesses. Government group for the first time in Q4, 1.8%. And it's got an extremely strong pipeline across all components of their product offerings and a lot of that pipeline relating to 2026 opportunities. So we feel really good about the government segment.

From a transportation is somewhat in the same boat, some good relationships there, a good, strong pipeline and work that we've got that we can achieve and continue to drive year-over-year revenue growth in that segment.

Commercial is where we've got a little bit of work to do. We've reshaped the go-to-market strategy and brought the teams closer to the clients so that we can better serve those client bases, especially those top 10, top 25 clients, where a lot of them we are growing revenue, and we are expanding our capabilities with that client base. So we know we've got work to do in there. I wouldn't anticipate growth necessarily in 2026, but I'll certainly make the right trajectory as we look forward out into 2027.

So here is, I'd call it, good news. We are right now examining the leadership for commercial. When you look at midsized companies, $3 billion to $5 billion range, many of the times, the CEO may not be as close to the client as they should be. I have this rare opportunity to have 3 of the leaders reporting into me directly right now. It's an easy answer to go find somebody to run commercial, and I have some candidates outside as well as some candidates inside the company.

It will end up having a single leader. But at this time, I am actually getting close to the processes. I'm getting close to the clients. I have now at least 1 phone call a day with a client, some not happy, some extremely thrilled, some wanting more services. I have been active for many years in the CEO ranks. I've been very careful in cultivating relationships across the board, across sectors. And I will bring it to bear for my commercial friends and colleagues so we can generate more.

The other good news is that the discipline around sales force, the discipline around how we're approaching sales. By the way, there is now -- and I will not comment on the past because we'll run out of time. But there is now a weekly regimen with me sitting in at the meeting where we only focus on revenue generation, as it relates to commercial, transportation and government has nobody from the administration side. They're welcome to come in if they have time, but this is purely the sales guys and gals and the line management of the company focus. And even within commercial, we may choose to focus on a few sectors. We may not just go here and there, but where we are strong, where we have name recognition, where we have strong references, we're definitely going to piggyback on that.

Okay. And like you said, the commercial segment, healthcare has been a particularly successful side of the business. Are you deliberately choosing to go deeper with a smaller set of payers and health plans, especially with your AI offering? Or do you still think you need more logos here? I'm trying to understand whether the and other platforms scale better via depth or breadth from here?

Yes. I would say it's not as much as more logos. We have a lot of logos. I think it's going to be getting deeper into certain sectors, where we already have a fair amount of market share. And so to me, if you look at healthcare today, and you just look at Medicare spending, I'll just give you round numbers, it's probably $1 trillion -- no, no, maybe even $4 billion or $5 trillion. It's a large number. In fact, healthcare spending in the U.S., this I know for a fact, is now the third largest economy in the world after United States and China. So to me, focusing on that heavily and participating in it, helping make a difference to our commercial clients and our government clients simultaneously.

If you look at even the big beautiful bill, it has brought in a lot of stringency on reclassifying, changing eligibility states are a little lost, and we are their solution to simplify how the big beautiful bill applies, whether it's Medicaid, whether it's Medicare, whether it's social security eligibility. So I think we're going to be more focused than less focused.

And on the government side, you talked about margin expansion from AI-driven fraud cost reduction, and as we said, direct expense in Medicaid early showcases. As you scale those solutions, are you leaning more towards a gain share economics with clients or fixed bid movements? What does that mean in terms of margin improvement and revenue in 2026?

Sure. So I think, first of all, 1 risk we do have is in the world of AI, some clients may want to take it in-house, but it may not be that simple. So I'm going to talk about a few things as it relates to let us say an AI company versus Conduent. And I'm going to say this is a small $25 million revenue AI disruptor. What we have is a strong distribution network, deep client relationships, operations know-how, proprietary data, and there are large switching costs. But the disruptor may bring a solution that might lower cost and increase accuracy. So one of the mantras we have in the company is let us not behave like a large company, let us not have a big ego. Let us partner with small disruptors who might bring the solution to increase accuracy, lower cost.

And yes, we might share some of the savings with the client, in this case, the government, or it could be commercial. But in addition, we may not use the same AI disruptor, let us say, on a healthcare client that we might use in transportation. The gentleman who runs transportation will have the leeway to partner with a different AI disruptor. What these AI companies are thirsting for is a bank of clients. They don't have that, but they have the technology. I'm not going to sit and innovate these things from scratch. We don't have that much time and leeway because they're going to be nimbler and faster, how do you partner with them commercially and share in the economics will be the way to go.

Excellent. And I'll just make this. I'll be a cheekier. As you walk us through the '25 ACV and you expect that to -- expect that you've alluded to convert that into revenue with speed, where are you most confident by segment? And your exit EBITDA margin was 6.5% for Q4, full year. As you look into 2026, what should we think of it as a realistic sustainable margin once all the cost actions and portfolio moves have been embedded?

Okay. So here's how I would say. Clearly, we haven't given you guidance, which we will in Q1. But having not given guidance, I'll give you a sense first on how the businesses are growing. Second, what I believe should be steady state margins. And when I say steady state, it could be in 3 years, it could be in 2 or we might be faster, it depends. So the government sector for us is growing smartly and doing well and has come out of the gates quite strong.

The Transportation sector has potential and actually is also strong and positive. Commercial needs a turnaround job, and the 3 individuals running it are on it like a rash. Let me a assure you. Now coming to margins, in a business, in our sector, which is BPO, KPO, I think at a minimum, we need to start really clipping at between an 8% and 10% margin in the medium term, maybe even higher and that potential exists.

Today, I can see, and I'll use a colloquial phrase, low-hanging fruit that I can see maybe 1 of the few people because I'm new. Whenever you're new, it looks clearer. As you get older into the company, the complexity in your mind increases. So when I don't have past memory, I'm actually at the edge of saying, "Oh, we can do A, B, C". So I think there is a fair amount of cost takeout that -- and by the way, it's not just me to the credit of the senior leadership team. They have come to me without me challenging. They have come to me and said, there's cost here, there's cost here, there's duplication of efforts. So I think the margin should increase. And it's not just the margins. We have to convert our EBITDA, and I'm not talking adjusted EBITDA, convert EBITDA to free cash flow, which means, how do you collect, how fast do you collect, are you tracking DSO, are you tracking DPO and are you converting that into eventually positive free cash flow. At $3 billion, you have scale, you should be able to.

The next question is from Matt Swope from Baird.

Harsha, you mentioned a couple of times the sort of moat around the business. Can that moat be breached by technology, AI, the impact that these AI disruptors are having. Obviously, that's been the talk of 2026 so far. Can you give us some comfort how much of your existing revenue stream do you think is exposed to AI disruptors or other sort of technology threats?

Having been here less than 30 days inside the company, I would humbly say I cannot answer that question right now. But here's what I can tell you that I would say safely, rough guess, 15% to 20% of our business may be exposed to it. But here is the problem. It is a moving target. Technology, particularly AI is dynamic. And therefore, I think we're going to need to get ahead or partner with people who keep us ahead in the arms race, if you will, of AI. So to me, is the risk today? No. Can the risk keep increasing? Yes. Therefore, we're going to need to move quickly is what I would say or else, our clients will move quickly.

Now, the positive is I would say the commercial segment will get disrupted maybe a little faster than transportation or government. So I'm just going to give you a tip of the iceberg. In transportation, we have a new product, it's called Fairgate. It's automated. It's precise, and it is safe and that is now being installed across the entire New York subway system that tests are on, and we're going to start rolling this out. And when we roll it out and we get this right, this will also move into other geographies. So this will make a big difference as an example.

I think as well, Matt, to add to that, clearly, Harsha is right is probably about 15% that's at risk in the commercial space. But I think we're securing that moat a lot tighter with some of our own AI capabilities as well right across the platforms that we have, whether it's in commercial, using AI to streamline our benefit enrollment environment for our clients and their employees. Harsha touched on some of the things that we're doing for tolling as well as some of the capabilities we've got license plate recognition and occupancy detection. And then we've talked about all the fraud components that we've got in our government space as well. So we're shoring up the moat of some of the areas that we've got around the company as well. .

I appreciate that, guys. That's helpful. Charles, maybe 1 for you. As you sort of bridge the gap and CEOs, we've heard a lot about these 2025 exit rates. We've heard a lot about the portfolio divestiture plan. Can you help us with where that stands now? The -- for example, the 2025 exit rate free cash flow was going to be $60 million to $80 million. Obviously, we're well, well into the negatives on free cash flow. How should we think about modeling going forward? I know you're not giving full guidance given that Harsha has just started, but vis-a-vis the 2025 exit rates that we've heard about for a while, how do we think about 2026?

Yes. So I think clearly, we set those targets about 3 years ago, and they were aspirational targets. We are making progress towards some of those targets. You look at government and transportation. And we've done well and got there from a revenue growth standpoint. We've still got work to do in some of the areas. We would -- I'd say we still target a sub onetime levered business, as we look out into the future. And that's going to come from some of the divestiture activity that Harsha has alluded to.

I think you'll see us accelerate with speed that some of the cost initiatives that we've got going on right across the organization, whether it's in the corporate functions, technology or improving margins in the business. And just better discipline around our working capital. We did have a couple of large implementations out there that we didn't quite get to the place where we wanted to get to by the end of 2025 that had a fairly significant impact on our cash generation. And given where we landed at the negative numbers that we posted for the year. Now, that cash hasn't gone away. We're going to receive it in Q1 or early Q2. But we've got to have better discipline on how we're executing on some of these larger projects.

So I guess my answer is the destination hasn't changed. We're still striving towards improving EBITDA margins on a sequential basis. We're still striving to get to profitability and free cash flow generation. I think Harsha coming in is really going to push us to accelerate that as quickly as possible. And that's the journey that we continue to be on.

Do you think free cash flow can be positive for 2026?

That's a...

I can answer it. Here's how I would answer it. We are obviously -- we ended '25, as Giles said, negative 130. There's a fair amount of work, but I'm going to give it a shot, but again, I'm not giving guidance. And I will have guidance. I will have very precise free cash flow goals. And if you noticed in my script, in my messaging, in my dialogue, I have mentioned the word free cash flow at least 10 times. I am fixated on it. So we're going to try really hard, but definitely, the turn is coming.

Okay. And how about -- you guys have always historically had this portfolio rationalization slide in the deck. That's obviously out for the moment. The Phase II proceeds that were targeted before were up to $350 million. Is -- I know you -- I think you had that as prior #4, Harsha. Where does portfolio rationalization timing set and maybe magnitude versus what you -- what we've heard in the past?

Okay. So first of all, I have to thank you very much for a statement you made. You called it priority 4. I should have said those 6 priorities do not have a sequence. You have to run and chew gum at the same time, and we have a very good leadership team that's capable of doing it. So having said that, portfolio rationalization is a very high priority. There are some things in motion that were put in motion before I took over as CEO. I was the Chairman for a very short while. So I was familiar with it. If anything, as Giles alluded to, he has hit the acceleration on the rationalization. But what I'm also seeing is a thorough review of the entire portfolio and looks like we may have some other opportunities that we're going to work on simultaneously.

We have bankers in place. We may have maybe more bankers so that we can kind of swiftly go through this so that I'm not waiting a year from now saying, "Oh, by the way, we're still on portfolio rationalization". The faster we get it done, the more we focus on our base business. So the folks who are in line management, they're not in the middle of portfolio rationalization exercise. They're focused. Every day, I have said to them, assume you own the business until that last day of transfer. We don't know if we will 100% for sure sell.

Meanwhile, the group that's focused inside M&A and finance are fixated on portfolio rationalization. So we need to do this simultaneously. And to me, it's not #4 priority. That's why I was appreciating you to pointing that out.

That is helpful. And just 1 last quick one, if I could squeeze it in. With your bonds trading down into the low 70s, would bond buybacks in the open market fit within your capital allocation?

Well, that's another good question. So to me, I think making sure we delever first a little bit and get our debt lined correctly. And I think the trading of the bond has opened up, in my opinion, an opportunity that may be more lucrative than buying our shares back. So to me, it's a touch and go, but again, bankers are reasonably smart. So I'm going to have them run across mathematics to give me an option each time as to each dollar of allocation. Right now, where it's trading, the yield is rather attractive and saying that we will go into open window fairly soon here as a typical public company, so I, as an investor, I'm also in my head saying, do I buy more shares, do I buy more bonds. So that excitement is actually percolating in my little brain right now.

Next question is from David Nierenberg from Nierenberg Investment Management Company.

Harsha, it's wonderful to be working with you again.

Nice to hear your voice, David. You're definitely surprised me sitting in the West Coast.

It's our third time together in 10 years. I imagine that most people on the call don't have the depth of experience that I've had with you, but I've already bought 1 million shares in confidence because you are a great leader, a great businessman, a great salesman, a diplomat, a tough guy and you have a global network across multiple industries to access for the benefit of this company. I am very excited to be back with you here and looking forward to you're making shareholders a great deal of wealth just as you have done since you succeeded me as Chairman of the Board of Flotek Industries. Looking forward to working with you. Grateful that you were here. Wishing you all the best.

Thank you very much David. And I appreciate 1 of your support, not just verbally, but through your pocket of backing our shares and buying. I'm actually taking it in as you're saying 1 million shares. So I need to have more shares than you. That's pretty clear. The good news is that the Board has structured my compensation heavily on share price that dictates vesting, but doesn't stop me from buying the shares as soon as open window opens up. But I appreciate your support immensely. Thank you.

This concludes the question-and-answer session as well as today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Greetings, and welcome to the Conduent Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, [indiscernible], Vice President of Investor Relations. Thank you. You may begin.

Thank you, operator, and thank you for everyone joining us today to discuss Conduent's Third quarter 2025 earnings. I'm joined today by Cliff Skelton, our President and CEO; and Giles Goodburn, our CFO. We hope you had a chance to review our press release issued earlier this morning. This call is being webcast and a copy of the slides used during this call as well as the press release were filed with the SEC this morning on Form 8-K. This information as well as the detailed financial metric package are available on the Investor Relations section of the Conduent website.

During this call, we may make statements that are forward-looking. These forward-looking statements reflect management's current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to vary materially from these statements. Information concerning these factors is included in Conduent's annual report on Form 10-K filed with the SEC. We do not intend to update these forward-looking statements as a result of new information or future events or developments, except as required by law. The information presented today includes non-GAAP financial measures. Because these measures are not calculated in accordance with U.S. GAAP, they should be viewed in addition to and not as a substitute for the company's reported results. For more information regarding definitions of our non-GAAP measures and how we use them as well as the limitations to their usefulness for comparative purposes, please see our press release.

And now I would like to turn the call over to Cliff.

Thank you, Josh, and thank you, everyone, for joining Conduent's Q3 2025 earnings presentation. As you can tell, [ Josh Overholt ] is now our new Head of Investor Relations. We've been waiting for Josh to arrive from the other side, if you will, where Josh was part of an investment team we periodically communicated. It's great to know have Josh's advice as our new Head of FP&A and Investor Relations.

Let me start by saying, wow, it's been kind of an uncertain ride in our federal government lately, as you all know, with the shutdown. I've often said that the bulk of our business in the public sector is at the state and local level, even though some of the funds, the states distribute come from the federal government, obviously. We're lucky enough that most of these funds are entitlements unaffected by shutdowns, although snap, for example, can come with some concern. We told us recently as yesterday that the emergency fund allotment is now at 65% and includes our administrative fees. So that's good.

So far, we haven't seen an impact due to unfunded programs, but we have seen an occasional wait-and-see perspective from time to time on new deals and milestones. Regarding the quarter from a financial perspective, it was a good quarter as it relates to adjusted revenue, EBITDA and margin. We're proud of our performance given the current environment, and we're equally proud to see consistent sales performance and an expanding sales pipeline. Revenue was in line with guidance, slightly up sequentially to $767 million and directly in line with our pursuit of positive year-over-year growth objectives. Giles will talk about the puts and takes in revenue in a few minutes.

EBITDA also came in as per guidance with both year-over-year and sequential improvement at $40 million and a margin of 5.2% and up from 4.9% last quarter and 4.1% in Q3 of 2024 and exactly where we said it would land in our Q2 narrative. Regarding sales, performance was consistent and steady year-over-year amidst some reticent buyers who were a bit preoccupied with the government shutdown in the public space specifically. Meanwhile, commercial sales is a bit behind performance expectations as we focus on changes to our go-to-market approach and look to upgrade business development leadership. Still, there is pent-up demand in the commercial space, and the pipeline has expanded and will expand further.

As mentioned previously, the opportunities and momentum in our transportation business specifically, remains strong, and the government pipeline indicates some very strong buying signals and go-forward opportunities. Once the shutdown concerns are behind us, cash and milestone achievement hurdles will also open up an manifest. In previous earnings, I stated that our portfolio rationalization efforts were underway and those efforts continue in a manner that we hope to discuss no later than Q4 earnings as we continue our strategy work. Meanwhile, as you know, we've refinanced our revolving credit facility, allowing us to pay off our Term Loan A balance, further simplifying the balance sheet, again, the timing of milestone payments and the shutdown influenced environment should soon free up cash payments and improve the free cash flow metrics and cash on the balance sheet.

As we look to rightsize our Board and further populate it with folks that have been in our industry, we added a new board member the last week of October who is a former Chair of Deloitte U.S., Mike Fuji. We're confident that Mike will add a new perspective and new support across both the commercial and government businesses based on his background and leadership experience.

Now I'll talk in my closing remarks about our AI initiatives and some of our recent wins. This will be important because one of the topics we need to focus on is our technology strength versus our operational peers. We need to showcase our significant capabilities in the resident AI initiatives more forcefully. A recent proof point is that we're now beginning to actually license some of our software with built-in AI to our clients. proving that we aren't strictly a services company, but a service technology integrated business that has proprietary intellectual property far and away more impressive than our BPaaS competition.

One example of how we're showcasing our capabilities is our recently developed AI experience center in New Jersey, which we're beginning to socialize with some of our biggest clients in the health care and auto manufacturing businesses. Meanwhile, Giles will take you through the detailed financials. We are still directly on course despite some of that lumpiness that happens especially in the government space. Finally, with patients, you'll soon see that our portfolio rationalization plan is clearly underway and working.

With that, let me turn it over to Giles. Giles?

Thanks, Cliff. As we've done in the past, we are reporting both GAAP and non-GAAP numbers. The reconciliations are in our filings and in the appendix of the presentation. Let me discuss the key sales metrics on Slides 5 and 6. We signed $111 million of new business ACV in the quarter, consistent with prior year. Year-to-date 2025, new business ACV is up 5% versus the same period in 2024. While we have line of sight to achieve stronger sales this year than in 2024 the uncertainty surrounding the speed to execute agreements within the government agencies could push some deals into 2026. Within the quarter, we signed 10 new logos and 25 new capabilities. Both sequentially up versus Q2. And on a combined basis, up 7% year-to-date versus the prior year, with the strength coming from supporting our existing client base with new capabilities. New business TCV was up 5% versus the prior year at $246 million. This was another strong quarter of sales execution in our transportation business which includes the Richmond Metropolitan Authority, new logo win and puts that segment up 320% year-to-date versus 2024.

Our qualified ACV pipeline remains strong at $3.4 billion, which is up 9% year-over-year. The strength here is driven by our government segment as we pursue opportunities in the federal space.

Let's turn to Slide 7 and review the Q3 2025 P&L metrics. Adjusted revenue for Q3 2025 was $767 million compared to $781 million in Q3 2024, down 1.8% year-over-year, but within the range that I guided last quarter. Transportation generated another quarter of strong growth. However, the decline was driven by our commercial and government segments, which I'll discuss in more detail in a moment. While still down year-over-year, we continue to narrow the gap towards positive revenue growth. Adjusted EBITDA for the quarter was $40 million as compared to $32 million in Q3 2024 and our adjusted EBITDA margin of 5.2% and is up 110 basis points year-over-year, again, right in line with where we guided and a sequential step up versus last quarter.

Let's turn to Slide 8 and review the segment results. For Q3 2025, Commercial segment adjusted revenue was $367 million, down 4.7% as compared to Q3 2024. We continue to experience volume declines in our largest commercial clients, which is a significant contributor to the lower revenues. Excluding this largest client, our top 25 commercial accounts grew year-over-year, most notably from within our health care vertical. We also signed another software license agreement in the quarter to a large public health plan but these positives only partially offset the lost business. Commercial adjusted EBITDA was $37 million, and the adjusted EBITDA margin of 10.1% was up 100 basis points year-over-year. The drivers here with the software license agreement I just mentioned and cost efficiency programs more than offsetting margin from lost business.

Government segment adjusted revenue for the quarter was down 6.7% at $238 million. This decline is attributed to the impacts associated with completing several implementations in the prior periods and extending several implementations in the current period as well as a client canceling and implementation to perform the work in-house. Adjusted EBITDA was $61 million, slightly higher than prior year, with adjusted EBITDA margin of 25.6%, up 210 basis points versus Q3 2024.

The drivers here resulted from our AI initiatives and efficiency programs. resulting in lower fraud, labor and telecom expenses, offsetting the negative implementation impacts. Transportation segment adjusted revenue was $162 million for the quarter, an increase of 14.9% year-over-year, while adjusted EBITDA was $4 million, and adjusted EBITDA margin was 2.5% for the quarter, up 250 basis points versus Q3 2024. Both revenue and EBITDA improvements were driven by strong equipment sales in our international transit business. Unallocated costs were $62 million for the quarter versus $63 million in Q3 2024. The improvement here is driven by our cost efficiency programs in the corporate functions, which more than offset significantly higher employee health care claims activity we experienced in the quarter.

Let's turn to Slide 9 and discuss the balance sheet and cash flow. During the quarter, we completed the refinancing of our revolving credit facilities by amending the credit agreement allowing us to prepay in full the Term Loan A, reduce the revolving credit facility to $357 million, of which $197 million extends to 2028 and $170 million continues to mature in 2026. We also added a $93 million performance line of credit facility maturing in 2028. We utilize the revolving credit facility to prepay the term loan A and at the end of the quarter, had $198 million unused.

We ended the quarter with approximately $264 million of total cash on balance sheet and adjusted free cash flow for the quarter was negative $54 million. Free cash flow in the quarter was impacted by a number of timing items. Firstly, we are still awaiting a number of contract amendments being approved by federal government agencies which given the current environment is taking longer than usual and is a prerequisite for us billing clients for work already performed. Secondly, we are in the post-implementation phase for a couple of contracts in the government and transportation segments, which once stabilized will allow us to routinely bill and collect for steady-state operations and maintenance activity as well as build the final milestones.

The combination of these two factors are the reason for the increase in both our contract assets and accounts receivable balances compared to last quarter. Of the $168 million contract asset balance at the end of Q3, we expect to build over $100 million by the end of Q1 2026, assuming the federal government resumes a more normal level of operations. Our net leverage ratio increased to 3.2 turns this quarter, which was a result of the cash flow items I just referenced. Capital expenditure for the quarter was 3.8% of revenue and we repurchased approximately 4.7 million shares in the quarter at an average price of $2.70.

Let's turn to Slide 10 and look at the 2025 outlook. At the beginning of 2025, we guided the year under the assumption of broad, stable macroeconomic conditions. During the third quarter and entering into Q4, we are starting to feel the impact of the reduced federal government workforce in certain agencies, delaying the progression of RFPs and contract approvals compounded by the current extensive government shutdown, which in combination creates greater ranges of variability and predictability in where we will finish the year financially. The good news is we still believe we will achieve the adjusted EBITDA margin range of between 5% and 5.5%. However, we now believe adjusted revenue for the year will be between $3.05 billion and $3.1 billion, and adjusted free cash flow will be dependent on the timing items I referenced earlier. As we enter the final stages of 2025 and the 3-year exit rate targets established back in 2023, we feel we are making good progress with the business, and we'll lay out 2026 expectations when we deliver Q4 earnings in February next year.

Turning to Slide 11. We continue to make progress with Phase 2 of our portfolio rationalization strategy. And as Cliff stated, we will provide further updates no later than our Q4 earnings. We incrementally increased the number of shares repurchased to approximately $70 million and are confident in achieving the $1 billion of capital deployment we committed to in early 2023.

That concludes the financial review of third quarter 2025. And if you now turn to Slide 12, I'll hand it back to Cliff for his broader view on the business. Cliff?

Thank you, Giles. As always, a couple of closing comments prior to taking questions. Our revenue continues to reflect the puts and takes of our transformational journey while as you can see, adjusted EBITDA and margin are meeting expectations on the high end and continue to be predictable. You can now tell that we remain on track for the 2024 to 2025 EBITDA expansion we've been talking about, where we said you should expect a significant increase and then continued year-over-year increases in adjusted EBITDA and margin. Meanwhile, we're focused on revenue and conversion of working capital to cash for the remainder of 2025 is areas somewhat inhibited by a weaker start in commercial sales. And as mentioned, some deal pushes in the government space associated with the timing of milestone recognition in what was in anticipated government shutdown in late Q3.

But again, much demand remains pent up and on the horizon. Some tactics we have underway are as follows: we revised our commercial go-to-market and leadership model to take out layers and produce increased opportunities to penetrate our current client base. We're enhancing sales and revenue generation talent to open new doors with proven leaders in the BPO and BPaaS technology industry. Not only have we embedded our solutions with more Gen AI, but we've begun to do a better job telling our digitization and AI story. Including the as-mentioned launch of our AI experience center in New Jersey and the deployment of new Merci initiatives, not pilots, but real production solutions in areas like agent assist, language smoothing, language translation tools, automated indexing in our digital platforms and automated detection of pharmaceutical reportable events, all of which will drive margin expansion and open new revenue generation opportunities. We've seen significant fraud reduction in our electronic payment card platforms as well due to AI deployment.

The bottom line is we will tell these stories more often as our clients continue to ask for innovation an example of where we can help them do their jobs better.

[Audio Gap]

We deploy our CapEx to continue to evolve these solutions with new innovation to solve client challenges. We've also seen some new software license wins with our HSP claims adjudication platform which now opens up new pathways for not only more software licenses of that product, but potentially simplifying the claims process for even larger health care insurance payers. A couple of other proof points for our quarterly progress. We refinanced our revolving credit facility, as mentioned. The sales pipeline is growing and there definitely deals in the weighting. Our transportation business has seen an expected uptick in sales with some recent wins in Richmond Pay-by-Plate processing, as Giles mentioned, additional work in the Bay Area tolling space, additional transit work in Abu Dhabi in Israel as well as a recent transit win in Greece, among others.

As mentioned in the past, the journey clearly has twists and turns, evidenced by a phenomenal like government shutdowns and natural disasters, which we certainly have contingency plans for we're continuing that progressive path toward year-over-year growth, and I've already seen the pitch up, if you will, from EBITDA -- from the EBITDA trough we described in 2024 to growth. The plan is working. As mentioned, more rationalization is on the horizon, as is continued margin expansion from the cost coming out of the center and less capital intensity associated with future expected transactions.

Thanks for listening today, and thanks to our 55,000 strong team for their hard work. Finally, I'd be remiss if I didn't send best wishes to our folks in Jamaica. But also in Cebu, Philippines, where hurricane activities have done serious damage to those environments and the necessary ingredients of everyday life. So far, our business continuity efforts have held our operations in good stead. But many have real personal hardship to deal with. As I stated, we're optimistic about our future and see sunny skies ahead.

Thanks, and I'll open up to the operator for questions. Operator?

[Operator Instructions] Our first question comes from the line of Gowshi Sri with Singular Research.

Can you hear me? Just -- you flagged that you had near closes in Q2 that was expected to close in Q3. How much of that pipeline actually closed this quarter given that the closings were kind of flattish year-on-year -- and would that be -- we'll be seeing some acceleration if the government shutdown eases up and would that be...

It's sort of like the small animal through a snake is coming through -- I think it's exacerbated, in Q3 because of the government shutdown due to timing in the federal government releasing some deals in places like the CMS where approval is needed in order to get states to be able to improve health care deals, Medicaid deals. I don't see any massive change from Q3 to 2 to 3 to 4 other than in that government space that we just talked about.

Okay. Got you. I know you highlighted Gen AI deployment in both government and commercial space. How are you measuring productivity or quality gains that that will concretely boost the client stickiness or cross-sell opportunity. Any solutions that might be in the public sector wins, what is your expectation on the contract side and the margin uplift from the Gen AI pilot?

Yes, it's a great question. The primary pilot in the government space is in our fraud category, specifically in our Direct Express program, where address validation is really important. We've used Gen AI to expedite that and create a faster determination from our our associates. And we see that spreading throughout the Medicaid and the SNAP environments as well, where we can reduce fraud quickly, and that's been a big mission of the federal government as well.

In the commercial space, it's more around customer experience where everybody is deploying fraud, things like language, the translation, smoothing, agent assist those kinds of things as well as where we see a real opportunity in scanning and indexing, where we can use Gen AI to automate the indexing to create a claims adjudication ready platform for our clients. So that's a big space. That's going to create both revenue and expense opportunities. The fraud space is more about expense reduction opportunities. What's still outline is we process those capabilities onto the client. In other words, where do we share in both those expense reductions and those revenue increases those are contract by contract, to be honest with you, and it's going to depend on exactly what the endeavor is.

And just to add to that, Gowshi, we're seeing the expense positive expense impact from the fraud initiatives in the government space turn up in the P&L now and in the last quarter as well. So we're seeing the free...

And we're seeing in commercial as well. Yes.

Got you. Given that there is a negative operating cash flow, I know you said at 87% of that the divestiture has done. Are there any specific cost out of stranded cost areas left to tackle what's the internal time line for fully realizing those benefits.

Yes. So I think we're through the initial phase of stranded costs related to the divestitures we did last year. Clearly, we're in the process of Phase 2 of the portfolio rationalization. And there'll be a little bit that we act on in 2026. One thing I will say is we do have a very strong cost discipline in the organization, and we're continually looking to optimize areas, whether it's in spans and layers in the organization or our real estate portfolio. So it's a continual effort, and we'll keep on that journey.

Okay. And just my last question. As you -- given the environment as it is, are you changing the contract classes or structural changes, especially given the recent government or commercial deals to reduce churn risk or exposure to budget delays?

No, we're not, I guess. I mean the thing to remember here, given the government shutdown, is it hasn't affected our revenue stream. It's affecting the timing of milestones and the release of sales opportunities that all are going to get through the end of the snake, as I mentioned earlier. But the revenue stream and the revenue deployment is not affected and we're primary state and local government business in the public sector. So, we see no reason to change the model as we speak today.

Our next question comes from the line of Marc Riddick with Sidoti & Company, LLC.

So wondering if you could talk a little bit about the client mix that you're seeing, particularly on AI endeavors. You made mention of the fraud focus. I was wondering maybe you could talk a little bit about maybe what the industry verticals look like and maybe the sort of first movers, if you will, that are engaging and maybe what you're learning from them?

Yes. It's two different questions really depending on whether it's commercial or in the government space. In the commercial space, we're in the neighborhood of 30% to 40% in health care and a lot of the opportunity from an AI perspective and efficiency perspective and potentially even fraud reduction perspective, although not yet is in that health care space. In the government space, it's a different kind of health care. It's Medicaid processing, primarily in Medicaid eligibility, where there's a lot more fraud and a lot more opportunities to reduce expense and drive fraud reduction.

So, I mean, it's two different opportunities, but most of those opportunities from an early mover perspective or centered around health care.

Great. And then as we sort of think about the opportunities on the commercial side. I was wondering if you could talk a little bit about as we sort of look into next year, I can understand some delays with activity and the like. But do you get the sense that there's any particular areas that you would like to shore up bandwidth or sort of maybe the level of comfort that you have as far as being able to meet opportunities on growth opportunities on the commercial side.

In the commercial side, I mean if you think about our product sort of penetration, we're less than 2 products per client, which for a company that has as many products and opportunities as we have is too low. We're very focused on that client penetration, especially in our top 60 top 80 clients. And we're putting some new processes in place to deploy against that. Again, health care is a big play there. But the continuum -- for example, the continue of service and claims adjudication from all the way from the beginning of a claim through the servicing of a claim as opportunities end and we're intently focused on that. And we're also focused on some software deployment and software licensing opportunities that we've never really deployed in the commercial space. We just had our first 1 with our HSP license to a midsized client in California.

We've always done it to a lesser degree in public health medicine in the public sector with our Maven platform, but we're now starting to do the same thing in commercial. So we see real upside here in technology deployment. We see real upside and further penetration of our current client base. We're putting a new business development team together to feed the top end of that pipeline better, which we think is the [indiscernible] for us in commercial. It's really not sales execution is feeding the top of the pipeline. So we're all over that and then we're all over the penetration of our current client base.

I think, Marc, we're seeing some of the results in that, right? As I said in my remarks, on a year-to-date basis, we're up year-over-year as far as new capability sales are in the commercial and overall in the Conduent organization and that's selling new product into the existing client base. And specifically, as it relates to commercial, put aside the largest client that we've got, the other '24 or '25 clients are growing year-over-year as well. So we're seeing some of that actually flow through into the financials.

I mean that's a great point. While we're not satisfied with our commercial sales in 2025 just yet, I mean, absent that 1 client, it's already growing. So there's real opportunity. We're seeing growth already. we just need to outrun that 1 client.

Got you. And then so do you potentially see -- I think those mentioned made as far as adding talent, sales talent, is there sort of a general time frame or sort of runway that you see there? I guess that's kind of a '26 question. I know we're not doing '26 guidance, but I guess maybe I was sort of thinking about the time frame of how some of that might roll out.

Well, it necessarily will affect '26 performance, but it necessarily needs to happen in Q4 2025.

And we have reached the end of the question-and-answer session, and this also goes conclude today's conference, and you may disconnect your lines at this time. We thank you for your participation. Have a great day.

Greetings. Welcome to Conduent's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to David Chen, VP of Investor Relations. Thank you. You may begin.

Thank you, operator, and thanks, everyone, for joining us today to discuss Conduent's second quarter 2025 earnings. I am joined today by Cliff Skelton, our President and CEO; and Giles Goodburn, our CFO. This call is being webcast, and a copy of the slides used during this call as well as the press release were filed with the SEC this morning on Form 8-K. This information as well as the detailed financial metrics package are available on the Investor Relations section of the Conduent website.

During this call, we may make statements that are forward-looking. These forward-looking statements reflect management's current beliefs, assumptions and expectations and are subject to a number of factors that may cause actual results to differ materially from these statements. Information concerning these factors is included in Conduent's annual report on Form 10-K filed with the SEC. We do not intend to update these forward-looking statements as a result of new information or future events or developments, except as required by law.

The information presented today includes non-GAAP financial measures, because these measures are not calculated in accordance with U.S. GAAP and they should be viewed in addition to and not as a substitute for the company's reported results. For more information regarding definitions of our non-GAAP measures and how we use them, as well as the limitations to their usefulness for comparative purposes, please see our press release. And now I would like to turn the call over to Cliff.

Thank you, David, and thank you, everyone, for joining Conduent's Q2 2025 earnings call. As always, I'll preamble the quarter, I'll turn it over to Giles for the detailed numbers, and I'll close with some comments about the market, changing landscape in public and commercial sectors and some strategic thinking regarding our optimistic view of the rest of the year and into 2026. .

Q2 was, by and large, right down the middle of the fairway for us. Revenue for the quarter was slightly up sequentially at $754 million, in line with our expectations with another solid quarter of adjusted EBITDA at $37 million and 4.9% of adjusted EBITDA margin, exceeding expectations up year-on-year and flat sequentially in a quarter usually representing the low point of the year.

Before Giles gets into the detailed financials, let me just confirm that our portfolio rationalization efforts remain on track. Without getting too explicit, I can say that work is definitely underway. We feel good about our sales performance, especially in the public sector with an overall ACV of $150 million, up year-over-year and quarter-over-quarter. Q3 will be an important quarter for us in sales, and we're expecting improved performance from our Commercial segment as some deals move to the right from Q2.

In the quarter, we signed 8 new logos, expanded relationships with 22 existing clients, and renewed several contracts, including the Direct Express contract supporting the federal government as a sub to a leading financial institution. The other good news here is that we're seeing increased activity and sales opportunity in our transportation businesses, both tolling and transit. And our pipeline is strong in government as well.

We continue to roll out AI initiatives, encompassing the gamut ranging from the obvious such as telecom enhancements and language smoothing to fraud reduction enhancements, to item processing workflow improvements, to end-user simplification process improvements and efficiency improvements. We remain convinced that while AI and GenAI are obviously here to stay and will continue to morph. In the BPO space, its primary focus is on using AI as an enhancement, not a replacement. As was said by a prominent AI CEO recently, AI isn't seen as a replacement for people, but more as a competitive advantage for those individuals who utilize AI.

You went on to say more people are going to be able to do more things. That's effectively what we're seeing. AI is opening doors to enable us to do more things at higher quality with fewer mistakes, potentially driving margin enhancements with a better end user experience. Technology is definitely moving faster than risk tolerance in some areas, but we will continue this journey with open minds for sure. Finally, as part of our orderly sequencing, we elected the new Chairman of the Board, Harsha Agadi. Harsha joins the Board and the Chairman role at a strategic point in time where his experience will be put to good use. We're certainly thankful for Scott Letier's leadership over the past 4 years as he transitions from Chairman to leading the Audit Committee among other roles on our Board.

Regarding the rest of the year, Giles will be a little more explicit, but we're intently focused on meeting previously mentioned expectations. As you know, in this business, revenue can be a bit lumpy. However, margin is more controllable. We expect to hit the high end of EBITDA and margin and expect to meet revenue expectations.

Let me turn over the dialer to Giles to take you through the detailed financials. Giles?

Thanks, Cliff. As we've done in the past, we're reporting both GAAP and non-GAAP numbers. The reconciliations are in our filings and in the appendix of the presentation. Let's discuss the key sales metrics on Slides 5 and 6. We signed $150 million of new business ACV in the quarter, up 6% versus the prior year and 38% sequentially. First half 2025 new business ACV is up 9% versus the first half of 2024, and we're positioned for strong year-over-year ACV growth in the second half of 2025. All three business segments demonstrated sequential new business ACV growth this quarter, with each business segment closing a deal of at least $10 million ACV in the quarter. New business TCV was up 21% versus the prior year at $331 million, and distributed relatively equally across the segments.

Renewals in the quarter were solid and included the Direct Express program Cliff mentioned earlier. The net ARR activity metric our combined measure of wins, losses, pricing effects and other contractual changes was positive at $63 million. Our qualified ACV pipeline remains strong at $3.3 billion, which is up 5% year-over-year and 6% since the beginning of 2025, which positions us well to achieve the second half year-over-year ACV growth and will drive revenue growth across all segments in 2026.

Let's turn to Slide 7 and review our Q2 2025 P&L metrics. Adjusted revenue for Q2 2025 was $754 million compared to $774 million in Q2 2024, down 2.6% year-over-year. While Transportation achieved revenue growth this quarter, the decline was driven by our Commercial and Government segments, which I'll discuss in more detail in a moment. Adjusted EBITDA for the quarter was $37 million as compared to $24 million in Q2 2024. And our adjusted EBITDA margin of 4.9% is up 180 basis points year-over-year. This is higher than we guided the quarter, which was driven by excellent progress we have been making in one of our large transit contracts.

The first half of the year has delivered stronger margins than we had originally planned and sets us up well for the second half of the year, where we will benefit from the continued progress in our cost efficiency programs, price increases in a couple of our larger contracts as well as the traditional seasonality we experienced in the second half of the year, all of which will contribute to our progression towards the previously communicated exit rates.

Let's turn to Slide 8 and review the segment results. For Q2 2025, Commercial segment adjusted revenue was $365 million, down 5.9% as compared to Q2 2024. New business continues to outpace lost business in this segment. However, similar to Q1, we continue to experience volume degradation in our largest commercial client, which is a significant contributor to the lower revenues. Adjusted EBITDA was $27 million, and the adjusted EBITDA margin of 7.4% was down 190 basis points year-over-year. The drivers here were lower revenue, higher talent acquisition costs supporting new business signings as we grow into the expanded delivery footprints in the Philippines and India and high usage of centralized technology costs.

Government segment adjusted revenue for the quarter was down 2.9% at $238 million. This decline is attributed to the impacts associated with completing or extending several implementations. However, new business has now started to outpace lost business in this segment. Adjusted EBITDA was $60 million, an increase of 22% year-over-year, with adjusted EBITDA margin of 25.2%, up 520 basis points versus Q2 2024. The drivers here resulted from our AI initiatives and efficiency programs, resulting in lower fraud, labor and telecom expenses.

Transportation segment adjusted revenue was $151 million, an increase of 7.1% year-over-year, while adjusted EBITDA was $8 million in the quarter, and adjusted EBITDA margin was 5.3% for the quarter, up 320 basis points versus Q2 2024. This was driven by the outcome of a couple of significant events achieved in a large transit contract. These significant events achieved in the first half of the year related to our large transit contract in Australia. Firstly, we signed an amendment to the contract, which included additional scope. And secondly, we repurchased the noncontrolling interest in the joint venture that delivers the client contractual obligations. This allows us to execute more efficiently and resulted in a positive catch-up adjustment in the quarter. Unallocated costs were $58 million for the quarter versus $64 million in Q2 2024. The improvement here is driven by our cost efficiency programs in our corporate functions.

Let's turn to Slide 9 and discuss the balance sheet and cash flow. We ended the quarter with approximately $294 million of total cash on balance sheet and our $550 million revolving credit facility was largely undrawn. We are currently in the process of refinancing our revolving credit facilities, which we expect to have finalized in the very near future. On April 30, we received the final payment of $50 million relating to the Curbside Management and Public Safety divestiture, which completes the receipt of proceeds from Phase 1 of our divestiture program.

Our net leverage ratio remained at 2.7x this quarter. We see this as the high point in our journey and forecast this ratio to begin to reduce in Q3 and sequentially again in Q4, in line with our forecasted improvements in adjusted EBITDA. Capital expenditure for the quarter was 3.1% of revenue, in line with expectations.

In the quarter, we launched a new 3-year share buyback program for an aggregate of $50 million. During Q2, we repurchased approximately 2.7 million shares at an average price of $2.70.

Let's turn to Slide 10 and look at our 2025 outlook. Given the stronger than planned adjusted EBITDA margin in the first half of the year and the confidence we have in our outlook, we have increased the midpoint of our guided full year adjusted EBITDA margin range to between 5% and 5.5%. As for revenue, while we are confident we will demonstrate year-over-year revenue growth in the second half of this year, we will fall slightly short of revenue growth on a full year basis and have adjusted our full year adjusted revenue guide accordingly to between $3.1 billion and $3.2 billion. Our 2025 exit rates remain intact and at this point, can be used as a proxy for 2026.

Expectations for Q3 2025 are as follows. We expect adjusted revenue to be sequentially higher than Q2 but slightly below Q3 2024, and expect adjusted EBITDA margin to be in the range of 5% to 5.5%, a sequential improvement versus Q2. We continue to expect to post top line growth in the second half of the year and margin to expand as we work through our cost programs. These outlooks have not been adjusted for any Phase 2 divestiture activity and therefore, are representative of the company as it exists today.

Turning to Slide 11. We continue to make progress with Phase 2 of our portfolio rationalization strategy with a couple of transactions working through the marketing phase. We incrementally increased the total number of shares repurchased to 64 million and are confident in achieving the $1 billion of capital deployment we committed to in early 2023.

That concludes the financial review of second quarter 2025. And if you now turn to Slide 12, I'll hand it back to Cliff for his broader view on the business. Cliff?

Thank you, Giles. Before we open it up for analyst questions, I'd like to share some thoughts on our business strategy and our optimistic view for the future. Look in our simplest sense, we said and continue to say that we'll tell you what we're going to do and then we'll do it. Q2 financials are yet another example of upholding our execution promise. We'll continue to do just that. We previously said we pursue an optimized portfolio we have and are. We'd improve culture, operations and technology. We've done so, evidenced by awards by Newsweek as well as other culture and industry analyst awards, and dramatically improved retention as well as technology uptime.

We'd pay down debt. We have and will continue to do so. We'd use available capital in a balanced way. We have and continue to also buy back shares. We'd improved margins and cash flow as we move out of the 2024 trough. We have done so and we'll continue to do more in 2026 as we hit those 2025 exit rates we described. We'd upgrade our talent with folks that have been there, done that. We have, and we recently bolstered talent in commercial, administration and finance. We'd take cost out of the center. We have and will continue to do even more of that.

We said we'd leverage new government expectations. We've done that especially in our Transportation businesses, both tolling and transit and in the government fraud categories where we expect to see some more enhancement. Finally, we said we'd use AI to strengthen our capabilities. We have evidenced by what we're seeing across the quality, efficiency and end user experience outcomes. In fact, we'll soon have a customer client AI experience center to enable further ideation and innovation in the AI space.

Regarding AI, one of the underappreciated features of Conduent is that we manage end-to-end business processes for our clients and most of our solutions are delivered using Conduent's proprietary technologies and platforms. This uniqueness removes some risk of substitution from AI and in fact, allows us to leverage AI to create differentiation in our solutions and to create new adjacencies, such as our fraud solution for account takeover in the government space.

Finally, what we are seeing in the business process outsourcing and technology services market, is a just a position of uncertainty and optimism. There's continued uncertainty in tariffs and what it means for organizations or will mean, AI and exactly how organizations should capitalize on it. Government and legislative changes and what they mean or will mean. The economy and inflation and where things are headed. Interest rates and unemployment and how to react. Yet the market is blossoming for many, and companies see the green shoots of opportunity in all these factors. Innovation is still valued. Customers come first and most clients remain optimistic. The fundamentals still matter. So we're sticking to them. Transformations take some time, but here at Conduent, we are on track. At this stage, we have to stay consistent in saying what we'll do, doing it and continuing to tell our story.

I hope you all hang in there with us on this journey because it's working. There are always puts and takes along the way, but again, the plan is working. The expectation is clearly around growth, cash flow, margin, lower debt and shareholder sentiment we can be proud of. As always, our associates will continue to work hard on behalf of our clients and their end users. It's never perfect but we strive for excellence every day.

Thank you for listening. We'll now open it up for questions. Operator?

[Operator Instructions] Our first question come from the line of Pat McCann with NOBLE Capital.

My first question had to do with the Big Beautiful Bill. I was wondering if you could give any comments there as far as any potential impacts to the business, particularly around the SNAP program. It seems like maybe we can finally put some of that uncertainty around budget cuts and so forth behind us with regard to the business. I'm just curious if you could give a little bit of color there.

Thanks, Pat. Yes. Listen, the Big Beautiful Bill at this stage, is more ideation than execution. I mean it's coming. But we see more opportunities than we see impediments, but it's uncertain. So if you look at some of the work requirements, some of the residency requirements, et cetera, that work has to be done by somebody. So regardless of whether you believe that Medicaid spending is going down or not going down that's sort of irrelevant to our business one way or the other. What's relevant to our business is whether we can capitalize on these new requirements and how we assess the implementation of those requirements on behalf of our clients. So like I said, it's uncertain at this stage. We do believe that there is some fraud reduction opportunities, both in SNAP and in our open loop systems. Again, those are being rolled out regardless of the Big Beautiful Bill. So if anything, we -- as I said in my commentary, some of the green shoots of opportunity are resident within the bill, but the full implementation has not been enacted yet in a way that we can monetize.

And with regard to the Commercial segment, could you talk a little bit about what are maybe the largest drivers of the new business signing momentum?

It's been pretty consistent. Where we -- across our new logo or new capability and our add-on, I would say we're doing more in the new logo new capability arena in terms of performance on a relative basis. We've got to get our account managers hitting the stride in terms of that add-on because that's where the impact revenue comes from, meaning revenue that's produced within the year that you sell. So we're seeing pretty even consistency. I'd like to see better performance out of the account management team. We're seeing, as I said, good performance out of the new logo new capability on a year-over-year basis. But across the Board in Commercial we see an optimistic Q3 and we've got to hit our stride in all three of those categories.

Great. And then finally, I was just curious with regard to the rationalization efforts, you mentioned there are a couple of potential news items in process right now. And I was wondering, timing-wise, could you give any more information in terms of should we expect any news between now and the end of the year? Or if there's any additional framing you could give, that would be great.

Yes. Thanks for the question, Pat. I don't want to get too far out over my skis on this one. Let me just say that there is work underway. As we have said in the past, we're looking to find ways to improve the balance sheet, improve cash flow, improve margins and whatever we do kind of hits the mark in those areas. We think there are opportunities across the portfolio, some more closer to the boat than others. So let me just say that there's work underway without being more explicit. Do I think something is going to happen by the end of the year? I certainly hope so and believe so.

Our next question is come from the line of Gowshihan Sriharan with Singular Research.

Can you hear me?

Yes, we can.

As this AI-driven solutions become a meaningful part of your offering, are you seeing any pull effect where clients who initially buy a compliance or fraud solution then expand into other Conduent services?

Yes. I mean if you look at what we're doing in AI, in the past, I've said that AI was sort of in preparation mode. We're now in execution mode across 8 key initiatives where we're actually in production. And fraud is one of those in the government space, specifically in our open loop system, which we're now trying to migrate to our closed-loop SNAP solution. But we're seeing -- we're not talking to clients that are saying give me AI, give me AI, what we're seeing is clients saying, give me efficiency, give me quality improvement, give me process improvement and AI is a good way to do it. We've got it in our customer-facing environments like Life@Work. We've got them across our transportation business.

As I mentioned, government fraud, pharma. And certainly, like everyone else in our contact centers, we're seeing a lot of AI improvements around voice translation, around improved IVRs, et cetera. So the real answer is it's everywhere. Process improvements in our scanning and indexing. And it's -- as I mentioned in the commentary, it's here to stay. Now the question is, how do you -- we're not an AI company. We're an implementer of AI technology to try and prove that improvement in quality, efficiency and that end user experience. So it's across the board, Gowshi. No one area, including fraud is any more important than the others.

Okay. And on the regulatory industry development as Medicaid redetermination cycle, SNAP fraud crackdowns. Do you think the market is substantially underestimating this as a revenue catalyst in the next 6 to 12 months?

It's a good question. It's an unknown answer at this point. I believe, as I said earlier, there's real opportunity. The states can't do the work by themselves. They have to outsource that work to folks like us. They can't determine eligibility. They can't determine work requirements. They can't determine residency requirements without phone calls and e-mails and chats, et cetera, and that's what we do on behalf of the states for the Medicaid eligibility work. So the answer should -- to your question should be, yes. But it all is contingent upon how states roll out the implementation of -- and the speed at which they roll out the implementation of these regulatory requirements that have been put down by the federal government.

Okay. Okay. And for talent acquisition, you've highlighted Newsweek's Most Loved place. Have you seen materially lower attrition rate for critical roles? Or is the wage pressure still an offsetting factor, because I think you mentioned that as you scale new offerings?

Yes, it's a great question. I would say the wage pressure is more muted than I would have said a year ago. Our retention is improved. Our attrition is lower than it was on a consistent basis that what we grade, for lack of a better way to orient people, we have 12 grades in our upper grades with, let's say, 9 through 12, which are the most senior folks in our company. We've seen much lower attrition. But talent is always competitive. Money will always matter. The culture will always matter. And we're never going to stop trying to get the best talent we can in order to do the best job we can. And we've -- as I mentioned earlier, we've done a lot of work in our commercial space, especially, we're doing work in our public sector space. And so the talent is critical. But the direct answer to your question is, yes, we've seen some lower attrition and some muted salary expectations compared to the where it was a year ago.

I'll make this my last question. Given that you guys are in your inflection point with the ongoing portfolio actions and a stated goal of unlocking shareholder value, what should the investors watch for in terms of the strategic shift in the Board-driven initiatives under the Mr. Agadi's chairmanship?

Let me go first and then if Giles has any monetary implications. Look I wouldn't overreact to the Board changes. The timing was right to make the Chairman role. We're constantly examining the Board constituency. We're constantly examining the right experience base for potential Board members to make sure we've got the right team on the field. I will say that Scott Letier has done a fantastic job leading and mentoring in some very tough times, including when the Icahn folks were in the stock. So we're very appreciative of that hard work. But after 4 years, it was time to start changing things out. The new chairman comes with lots of experience, 4, 5, 6 times as a CEO, big investment profile, several Boards, including Chairman of several big companies to include a claims company, an oil servicing company, et cetera. So we're pleased with where we are. We're not done looking at opportunities in terms of Board constituencies, but I wouldn't expect any significant outcomes strategically otherwise from the move.

Yes. I think the near-term objectives remain the same. We've got to complete Phase 2 of the portfolio rationalization. We've continued to improve our margin sequentially. And then a balanced approach to the capital as it comes in from the divestitures and how we deploy it.

Our next questions come from the line of Marc Riddick with Sidoti & Company.

I wanted to start maybe -- I think you've talked in the past about your efforts to gain a greater share of wallet. Maybe if you could give a little bit of an update there as to what you're seeing with those efforts as well as maybe how that sort of plays out with the competitive landscape and maybe what you're seeing there?

Yes, Marc, I think Cliff alluded to this a little bit earlier, but some of the investments that we've made in the commercial space with new leaders and our client partner strategies. Over the last 2 quarters, we've written, I think it's over 40 new capabilities with existing clients, which is expanding share of wallet with some of the bigger clients that we have in the commercial space. So we see early shoots of that working, and we've certainly got aspirations and expectations of a continuation of driving new capabilities in our existing client base as we move into Q3 and Q4. So I think that piece is working. We just need to see more of it.

Yes. I mean this land and expand kind of methodology that Giles just alluded to is a secret sauce in the commercial space specifically with respect to new capabilities. But the share of wallet has two forms to it. Of course, the products and services, which we are increasing on a per client basis from the -- in the neighborhood of the 1.5, 1.6 up towards 2 products per client. Obviously, the bigger the client, the more products. The smaller the client, the fewer. But that's one component of the share of wallet is really important.

The other component is this is a volume-driven business in many cases. And so once we're resident with a client, we've got to retain as much of that volume as we can. And some of that is episodic based on the economy just on the environment. Some of it is based on performance. And so that's why operational stability is so important to us, and we work hard every day to make sure that, that technology uptime, that the operational stability is solid because clients have choices, and they can move volume around. We're not the only partner out there that they can give the volume to. So it's both. It's -- we got to get in and sell. We're going to drive more share of wallet from a product perspective but we've got to retain those clients in that volume, irrespective of what happens in the economy. So we're doing both as hard as we can anyway.

Great. And then I wanted to -- I think in your prepared remarks, Cliff you mentioned as far as some commercial activity that I think you're expecting the shift out of -- that you think shifted out of Q2 into maybe Q3 or the remainder of the year. Could you give us maybe a little color on maybe some of that? And do you get the sense that, that was just kind of more delays in client activity. Is that sort of headline driven? Or was there something else there we should be thinking about?

Yes. There's no magic one client deal out there that say, oh, when this one hits, it's going to be the big one. That's not what I was referring to. But there are lots of -- if Mike McDaniel, our Head of Commercial, were here, he'd tell you there are lots of deals that he and his team are working that are very close to signing where we have the spirit and intent and sort of verbal commitment to get these deals. And some of those are just pushing to Q3. And that's why we're expecting a better performance out of Commercial in Q3, I was speaking specific to Commercial. We also have to do a little better job in Government and Transportation has been going well. Government is also pushed to the right a little bit with a very solid pipeline. Those contracts take longer to execute. And so we're expecting more out of the Government team in the second half of the year as well. .

We have reached the end of our question-and-answer session. And with that, ladies and gentlemen, we appreciate your participation. This does conclude today's teleconference. Please disconnect your lines at this time, and enjoy the rest of your day.