Conduent, Inc. Stock

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

I would now like to turn the conference over to your host, Nick Goyal, Vice President, Investor Relations. Thank you. You may begin.

Good morning, everyone. Welcome to Conduent's Second Quarter 2026 Earnings Call. With me today are Harsha Agadi, our CEO; and Giles Goodburn, our CFO. Harsha will provide an overview of the business and Gales will cover our financial performance in greater detail. We hope you have had a chance to review our press release issued earlier this morning. A copy of the press release and slides used during this call were filed with the SEC on Form 8-K. This information is also available on the Investor Relations section of our website.

During this call, we will make forward-looking statements. These statements reflect management's current beliefs, assumptions and expectations which may change over time. Actual results could differ materially from those statements due to a number of factors. Information concerning these factors is included in our 10-K and 10-Q filings with the SEC. Unless otherwise stated, the information presented today reflects our continuing operations. It does not include the divestitures announced during this quarter. It includes non-GAAP financial measures, which should be viewed in addition to and not as a substitute for our GAAP results. for more information regarding the definitions of our non-GAAP measures, how we use them and the limitations to their usefulness for competitive purposes, please see our press release.

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

Good morning, everyone, and thank you for joining us. 6 months into my role as CEO, I have a clear view of where we stand as a company where we need to improve and most importantly, where I believe we have significant opportunity to create value. Over the past several months, I've spent a lot of time listening to clients, engaging with associates across our business and reviewing our operations firsthand. My perspective was reinforced this spring at Elevate 2026, our client event in Chicago, where we heard directly from nearly 100 clients and partners, representing a diverse range of Fortune 100 companies about what matters most to them, greater speed, simpler operations, continued innovation and consistent execution. Those conversations also reinforced that the 5 priorities we established at the beginning of the year remain the right ones, increasing speed and accountability, enforcing financial discipline, reducing our cost structure, optimizing our portfolio and converting pipeline into growth.

Today, I'll provide an update on the progress we're making against each of these priorities. Before I do a brief comment on the quarter. Our second quarter results were in line with our expectations. As a result of the 2 divestitures we announced during the quarter, we are updating our full year guidance to reflect the impact of those transactions.

Now let me start with our first priority, increasing speed and accountability. Over the past several months, we're continued simplifying our structure and how we operate strengthening accountability and aligning the organization around our highest priorities. We've also strengthened our leadership team to improve operational efficiency and support our transformation. Approximately 80% of our senior leadership team is either new to Conduent or has taken on expanded responsibilities bringing their deep experience and proven leadership across the industries we serve. We're also beginning a phased return to office approach starting with locations where we have significant workforce. We believe that greater in-person collaboration will enable faster decision-making, stronger collaboration and better outcomes for our clients.

These actions are creating a simpler, more agile and more efficient conduit, 1 that is better positioned to deliver consistently for our clients and shareholders. Our second priority is enforcing financial discipline. We continue to strengthen financial discipline across the organization with tighter controls around hiring, discretionary spending and capital allocation while increasing oversight of cash and liquidity across the business. These actions contributed to a meaningful improvement in our cash performance with cash usage essentially flat compared with the prior quarter. While we have more work to do, this is an important step in improving our cash generation and strengthening our financial flexibility.

Our third priority is reducing our cost structure. Throughout the quarter, we continued simplifying the organization, reducing structural costs and redirecting investments towards the capabilities that will create the greatest long-term value. We continue to make good progress against the approximately $100 million annualized cost savings program we announced in the first quarter and remain on track to implement the majority of this program this year. The program spans all businesses and corporate functions with a focus on optimizing technology spend, rightsizing certain roles, reducing duplication, eliminating bureaucracy and simplifying our operating model across the enterprise.

The fourth priority is optimizing our portfolio. We are taking a disciplined approach guided by a simple framework, fix, sell and grow. We will fix businesses where we see a clear path to improving performance, sell businesses that are no longer aligned with our long-term strategy and grow the businesses where we have the strongest competitive advantages and the greatest opportunities to create long-term value.

During the quarter, we announced the sale of our transit business to Midaxo and the sale of our tolling business to [indiscernible]. Together, these transactions complete our exit from the transportation business significantly reduce off-balance sheet financial obligations and further simplify our portfolio. We expect both transactions to close by the end of 2026. With these transactions, we now expect to generate approximately $234 million in gross proceeds. In addition to retaining a 7% equity interest in quarter whose current market capitalization is approximately CAD 300 million. This exceeds the commitment we made in the first quarter to generate at least $200 million through portfolio actions.

We intend to use the majority of these proceeds to reduce debt further strengthening our balance sheet and financial profile and providing us with greater optionality to invest in high-return growth opportunities. These actions also sharpen our strategic focus, allowing us to concentrate our capital, resources and management attention and the remaining businesses where we believe we can create the greatest value for our clients and shareholders. Portfolio optimization is not a onetime event. It is an ongoing discipline that will help us build a simpler, more focused and high-performing Conduent while maximizing long-term shareholder value.

Our final priority and the fifth priority is converting pipeline into growth. During the quarter, we continue to build the momentum through a more focused go-to-market approach. The progress is reflected in the strength of our pipeline. Across our commercial and government segments, we have approximately $3 billion in qualified new business opportunities which has grown sequentially over the past several quarters. While there is more work to do, the continued growth in our pipeline reinforces our confidence that the actions we've taken to improve execution, sharpen our market focus and strengthen our client relationships are beginning to deliver.

At the same time, it's important to recognize that there is a natural timing difference between winning new business and seeing the full revenue impact. As we've discussed previously, some contracts continue to roll off, and we also continue to see volume declines in certain existing client programs. Our focus is not simply replacing revenue but improving the quality of our portfolio by winning business in areas where we have a stronger competitive differentiation and a better long-term growth potential. This is a natural part of our transformation as we shape the portfolio toward higher-value opportunities and differentiated solutions. Those trends are reflected in the client momentum we saw during the quarter.

In commercial, I'm pleased to let you know we have sold approximately $100 million of new business in the first 2 quarters. We also continue expanding into adjacent markets with new capabilities that create additional avenues for growth. I'll share a few examples. We signed a new pension risk transfer administration, engagement with Securian, expanding our position in the growing retirement administration market with a differentiated end-to-end solution. Trillium Health Resources selected our Health Services Plus platform to support claims processing, provider, data management and member services validating the investments we've made in our health care platform and reinforcing our ability to deliver integrated solutions for health care organizations.

We also expanded our relationship with Avis Budget Group through a new vehicle citation offering, leveraging multiple solutions from across our businesses. Importantly, this establishes a new scalable offering that can be applied across organizations, managing large vehicle fleets, opening an attractive adjacent market for Conduent. We're also seeing continued expansion with several leading U.S. health care payers reflecting the strength of our relationships and our ability to deliver additional value across our portfolio of solutions.

Turning to our government business. we have sold approximately $89 million of new business in the first 2 quarters, and we continue to demonstrate the value of our expertise in modernizing mission-critical public programs. Let me share some examples. During the quarter, we implemented a modernized state-of-the-art Medicaid platform for the state of New Mexico replacing a 24-year old legacy system with a single integrated platform that enables faster more efficient claims processing and improved access to care and continuity of service for approximately 900,000 Medicaid members. We also secured a multiyear renewal in Virginia to continue operating and modernizing the Commonwealth's Medicaid systems, enabling the transition to a more integrated platform designed to improve access to information, strengthen fraud prevention and enhanced program performance for approximately 1.6 million enrolled Viginians.

And we continue advancing electronic benefits transfer modernization by completing pilot or production deployments of chip-enabled EMV technology in 3 states with a fourth state scheduled to roll out by the end of the summer. Together with enhanced fraud profession capabilities, these technologies are helping states better protect benefits while improving security for program participants. Beyond the wins we've announced, our qualified pipeline remains extremely strong. While the timing of individual awards can vary, the breadth and the quality of our pipeline reinforces our confidence in our ability to continue converting pipeline into sustainable growth.

The client momentum we're seeing is supported by attractive long-term market fundamentals. Our go-forward portfolio addresses a large and growing market of approximately $200 billion expanding at an estimated annual rate of about 4%. We believe Conduent is extremely well positioned to capture this opportunity because organizations increasingly need partners that can modernize complex operations through integrated end-to-end solutions, not isolated point products. That is where Conduent stands apart.

We combine deep operational expertise with technology automation and AI to transform mission-critical business processes for our clients. That differentiation is becoming even more important as organizations look to adopt AI increasingly. Clients recognize that AI is not about deploying stand-alone tools or running disconnected pilots. The real opportunity lies in embedded AI into the workflows and business processes that power their operations because we manage those processes on behalf of our clients. We bring the domain expertise, operational knowledge and technology capabilities needed to implement AI in ways that deliver measurable business outcomes.

We are methodically embedding AI across the full cycle of our solutions from customers and constituent interactions to core business operations and enterprise productivity, and we're already seeing tangible results. One sterling example is Conni, our AI-powered digital assistant now embedded within our life at work health and wellness platform. Today, Conni resolves approximately 86% of employee inquiries without human intervention, while reducing live agent interaction by more than 20%. We're now taking the next step up by infusing Conni into agentic AI capabilities and expanding those capabilities into new use cases. One example is our personalized agentic AI-powered navigator the next evolution of Conni, which helps simplify complex health care interactions by transforming confusing health care information into personalized guidance for members and providers. That innovation is already being recognized in the marketplace.

Recently, Conduent was selected as a winner of United Healthcare's 2026 global innovation challenge for its personalized agentic AI-powered navigator. Collected from 40 participating companies, this recognition clearly validates our superior ability to apply AI to solve the real customer problems while improving business outcomes for our clients. Internally, we're also deploying Microsoft Copilot and AI-assisted software development tools to help our engineering teams accelerate development improve productivity and bring new capabilities to market more quickly. Together, these investments demonstrate how we're combining deep domain expertise with practical AI innovation to help clients modernize operations, improve outcomes and create sustainable long-term value.

The bottom line is this. We are executing with greater discipline, and we're beginning to see the results. redefining what clients and investors should expect from Conduent, a simpler, more focused company with stronger execution, greater financial discipline and a clear path to sustainable, profitable growth. While there is always more work ahead. I am extremely optimistic about where we're headed and confident we're building a stronger, high-performing company with significant opportunities.

With that, I'll turn the call over to our Chief Financial Officer, Giles Goodburn.

Thanks, Harsha. As we have 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.

Firstly, let me start by stating the results we are reporting today reinforce our conviction around our transformation journey Harsha laid out at the beginning of the year. However, when interpreting our second quarter GAAP and non-GAAP financial statements, you will see they are influenced by a number of factors related to this transformation. Specifically, discontinued operations and anticipated stranded costs from divestiture activity and the early consulting costs incurred to achieve the cost efficiency targets the benefits of which will become resident in future quarters. All of these factors are important steps towards our transformation destination.

During the quarter, as Harsha mentioned, we announced the sale of both our transit and tolling solutions, which will complete our exit from the transportation business. Transactions collectively represent a strategic shift that will have a major effect on the company's operations and financial results and hence meet the criteria for discontinued operations presentation. Unless otherwise indicated, the financial disclosures and related information and commentary provided herein relate to the company's continuing operations, which exclude the transportation segment. All prior periods have been restated to reflect discontinued operations.

These transactions are a key milestone in our strategic journey, that once closed, will generate gross proceeds of $234 million, plus a 7% equity stake in Quarterhill, the acquirer of our tolling business. 2025 revenue and EBITDA for the Transportation segment was $609 million and $18 million, respectively, thus transacting at an adjusted EBITDA multiple in the mid-teens significantly higher than where Conduent currently trades. The transactions will also provide other strategic financial benefits. Our off-balance sheet financial instruments, surety bonds and letters of credit will be reduced by approximately 80%, leaving roughly $125 million, predominantly supporting the government segment. The working capital intensity of the company will also be reduced as well the capital expenditure requirements. And importantly, the proceeds will allow us flexibility to address the capital structure with an emphasis on delevering the organization.

Turning to the quarter. Let's discuss our key sales metrics on Slides 5 and 6. We signed $99 million of new business ACV in the quarter compared to $111 million in Q2 2025, but a sequential improvement versus Q1 2026. This quarter, the ACV one will drive a larger proportion of recurring revenue than we have seen in recent quarters. And our commercial segment new capability ACV and expanding our relationships with existing clients is the highest it's been for several years. The trailing 4-quarter ACV metric is up versus this time last year. and we expect to resume a sequential increase next quarter.

At the midpoint of the year, we have signed $188 million of new business ACV, equal to the first 6 months in 2025. However, this year, we have closed 12% more annual recurring revenue signings and 7% more nonrecurring revenue signings than we did in the prior year. With the changes to our go-to-market strategy taking shape and driving a stronger pipeline, our expectation is that we have a stronger finish to 2026 than in 2025. Our qualified ACV pipeline remains strong at $3 billion, which is up 11% year-over-year. Both commercial and government segments are up year-over-year with our Commercial segment pipeline growing 48% since the beginning of 2026. Q2 was a strong quarter for renewal activity with $617 million of TCV, including several large health care clients in both our government and commercial segments.

Let's turn to Slide 7 and 8 and review our Q2 P&L metrics. Revenue for the quarter was $531 million compared to $603 million in Q2 2025, down 11.9%. Adjusted EBITDA for Q2 2026 was $16 million as compared to $23 million in Q2 2025, and our adjusted EBITDA margin of 3% is down 80 basis points year-over-year. Included in these adjusted EBITDA numbers is approximately $4 million in 2026 and $6 million in 2025 of stranded costs related to the former Transportation segment, which we will address once the transactions have closed. Turning the page. Q2 2026 Commercial segment revenue was $316 million, down 13% as compared to Q2 2025. The decline here is driven by contract losses and volume declines, predominantly in our customer experience management offering, including our largest commercial client whose contract with us will end in the third quarter and is already incorporated in our outlook. Commercial adjusted EBITDA was $24 million, a decrease of $3 million year-over-year, and the adjusted EBITDA margin of 7.6% was up 20 basis points year-over-year.

While we incurred a couple of negative discrete items in the quarter, the results from our cost efficiency programs drove a stronger margin performance. Government segment revenue for the quarter was $215 million versus $238 million in Q2 2025. The drivers here were lost business and the timing of implementation activity of our state-of-the-art Medicaid platform in the government health care portfolio, creating a temporary dip in revenue. As Harsha mentioned, we finalized the New Mexico implementation early in the quarter, which completed the revenue recognition for this project, and we are now focused on ramping up the implementation of our new Virginia contract, which will drive new revenue in the second half of this year. Adjusted EBITDA was $51 million and adjusted EBITDA margin of 23.7%, down 150 basis points year-over-year. The revenue impacts as well as favorable reserve releases in the prior year were the drivers. Unallocated costs were $59 million for Q2 2026, a reduction of almost 10% versus Q2 2025, reflecting the continued progress with our cost efficiency programs in the corporate functions.

Let's turn to Slide 7 and discuss the balance sheet and cash flow. We ended Q2 2026 with approximately $240 million in cash on the balance sheet and negative adjusted free cash flow of $8 million for the quarter. Although adjusted free cash flow remained negative for the first half of the year, it improved by $81 million compared to the same period last year, primarily due to achieving payment milestones in our Government and former Transportation segments. Our adjusted net leverage ratio of 2.1 turns this quarter excludes EBITDA from discontinued operations, but includes the proportion of cash proceeds we expect to receive from the divestitures at closing. And our capital expenditure for the quarter was 2.6% of revenue, in line with our expectations.

Turning to Slide 11. You will see we have recalibrated our guide for 2026 to exclude our discontinued operations. Our revenue guide for 2026 is now a range of $2.15 billion to $2.25 billion, and our adjusted EBITDA guide is between $140 million and $170 million, which at the midpoint is a 7% adjusted EBITDA margin. That concludes the financial review of Q2 2026, and I'll now hand it back to Harsha. Harsha?

Thanks, Giles. Before we open the line for questions, I'd like to leave you with one final thought. Transforming a company of Conduent's scale takes time, but it's very predictable. While our financial performance this quarter does not yet fully reflect the full impact of the actions we have taken, we're making steady progress on the priorities that will create long-term value. This quarter marked an important milestone in that journey. The 2 portfolio transactions we announced further reshape Conduent, strengthen our strategic focus and demonstrate our commitment to disciplined execution and thoughtful capital allocation. At Investor Day later this year, we'll share the next phase of that journey, including a more comprehensive view of our long-term strategy, portfolio priorities, capital allocation framework and growth opportunities we see across our markets. We look forward to sharing more with you then.

Operator, we're now ready to take questions.

[Operator Instructions] Our first question comes from the line of Michael Kupinski with NOBLE Capital Markets.

Congratulations on executing on your initiatives. A couple of quick questions here regarding margins. Government segment margins improved meaningfully. How much of that improvement is structural because of the health care platform scalability versus maybe some temporary efficiencies or onetime items? And then excluding transportation, what is the realistic medium-term adjusted EBITDA margins for the remaining business? And I was just wondering if your previous goal of achieving 10% margins is still the appropriate framework? Or has the portfolio simplification changed that outlook?

So my reaction to your questions are the following. in this space, commercial and government, we really need to be -- and I'm looking at the segments individually, and I'm keeping transportation aside just for discussion purposes. We need to be in the mid- to higher double-digit margins. Then we minus the SG&A, that's the central SG&A, bringing us to a greater than 10% margin. So that goal remains unchanged. When you look at our benchmarking, our peers, they're able to do this. We need to do this. We need to do even better, even quicker, in my opinion. On the government side, there are 2 things happening. Anna Server, our leader for the government business is rapidly implementing AI in multiple areas. We don't go around talking too much about it and maybe we should. So I'm just going to give you one small example. We have a new fraud tool designed and owned by us called Verisite, assisted by Microsoft in the food stamp eligibility program that incorporates significant AI capabilities to identify patterns of potential fraudulent activity. The issue we face in the U.S. today is a tremendous amount of fraud.

So our focus and investment in AI is to help the governments of the United States, whether it's state local or federal, using AI to trap fraud and save money for the various stakeholders. So I'm actually now receiving calls from State Attorney General, Secretary of State, the governors of the state, thanking us for starting to implement some of this code. The other thing that Anna is doing for the margins to start changing quite rapidly in the government is a change in the headcount in how she's organized. And if you remember, 6 months ago when I came in, we had a different leader, and Anna Server has been now in this job about 4 months, and she's taking very rapid actions to change the business. So that would be my answer. So the outlook remains unchanged in terms of 10-plus percentage across the entire business.

Got you. And just a follow-up on your AI comments. Do you expect AI to become more of a measurable contributor to revenue growth? Obviously, you've concentrated on the cost efficiency initiatives, but I was just wondering if that is a prospect as well factored into your outlook?

Yes. I think it's going to be a very big difference in terms of how we are executing. So I'm going to just give you some examples, again, in the government side, and I can also go on the commercial side. Where AI is being used today is internally, porting, taking old code and porting it to new code. Second, -- we have a lot of requirements that governments ask us to fulfill. The validation of these requirements we're using AI tools. Third, testing scenarios. fourth, quality code checks. The biggest issue I saw as I walked into Conduent is the speed to implementation. Sometimes when you sign up new business, it was taking 9 months, 10 months, we're compressing the time to go live, which then -- and we're using AI to do that, which then means revenue accretion will be faster, accuracy in terms of our operations increases. And I'd say the clients' happiness space increases because they're having true added value. Now what this might result in is reduction of some of our cost structure because of this automation, which might ripple through the entire company. If you look at our number of employees that I began with, we have definitely dropped the number of employees in the company as each month has gone by more rapidly as time is going.

Our next question comes from the line of Gowshi Suri with Singular Research.

Can you all hear me?

We can hear you.

Okay. With the largest commercial client kind of rolling off, what does the client concentration on the remaining book look like? I know you mentioned this $100 million commercial wins. What does the client accounts look like? And is that improving with the next biggest clients?

Yes. So first of all, this client rolling off -- and if you remember, I was Chairman of the Board before I became CEO. So the previous CEO had mentioned it to the Board about a year ago that this large client had announced that they were wanting to roll off, and they have been rolling off. So that continues. Having said that, we have a reasonably diversified portfolio, but we do have depth, particularly in certain areas like banking and lending, health care, so on and so forth. So we don't have the exposure that we've had with this one client. So I think I feel pretty good going forward. Meanwhile, Kimberly Marshall, who runs our commercial sales side and George Webb, who runs commercial operations, they are making sure that they continue to bulk up step-by-step on the number of services we're offering existing clients. Going back a couple of calls, the number of services we offer clients today is somewhere between 12 and 15. But guess what, a client buys from us, 1.4 services. Our service density to clients is low, and we are intending to increase it. That's one side of it.

The other side is we're also going to go beyond the U.S. to increase our geography in where we start selling, whether it's Canada, whether it's Western Europe, whether it's Australia, it makes sense. There is a cost differential that we can take advantage of our large back offices in India, Philippines and Guatemala. So to me, going forward, I don't see the risk that we're experiencing with the one large client.

And just my follow-up. On the CapEx side, as you build out this next-generation Medicaid provider enrollment. Does that require a CapEx step-up in 2027? Or is there anything you're deferring to protect this year's cash?

Yes, it's Giles. So no significant step-up. That's right. It's just part of the normal course and speed of the CapEx that we've allocated to the business and the continued investments that we're making in what we believe is a market-leading technology stacks in the government space. If anything, I think, overall, as you look at the CapEx in -- across the company, we should see a tick down from both the transportation segment divesting as well as just more prudent allocation of capital across the business. .

And if I could sneak in one last question for Harsha. Now that you've had 6 months to review, what are the buckets that are still in the fixed was sell? Any color on how you're thinking about that?

Sure. So to begin with, as we've announced the sale of the Transportation business, transit and tolling. And just to remind everybody, we had committed to at least $200 million. And it looks like we're going to come out at about $234 million plus 7% in quarter. Meanwhile -- and one more thing. -- the amount of cash we're going to release out of the transportation sale is close to our market cap I think people need to really understand there is so much value inside Conduent. It's not reflecting in the stock price yet. Now on top of that, we have continuous inbounds on various parts of our business. As CEO, my job is to never say no and look at optionality and take a look at businesses for sale.

The good news is George and Ana our leaders in commercial and government want to give no excuses for me to sell. So they're moving ahead with changing the margin structure as rapidly as they can. But having said that, if somebody came to me and said, here's 20x EBITDA, 15x EBITDA, I think my CFO is going to press very hard for me to be not wanting to look at the deal. So there are a couple of small pockets of businesses we might look at. One additional thing for investors to know as an executive team, we're going through a detailed review of our strategy, and that includes front-end center where AI fits into our strategy we're going to be including our entire Board in the exercise, and it will be presented at the end of September at our Investor Day.

So to me, on the fixed cell growth, maybe there's another business or two, but I will tell you this, Giles, our CFO has an arm that is focused on looking at every inbound call. We get inbound calls on a regular basis. So we will continue to look at optionality. But what it just shows me is 2 small businesses, not very large, selling them the value realization is close to the market cap of the company. So to me, there's more that we might be able to do to unlever the company.

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

I wanted to piggyback on the leverage conversation. And maybe you could sort of discuss what your general views are as far as comfort levels of leverage or potential ranges that you might be targeting. So with the prepared commentary and remarks, the post -- with the proceeds or getting down to about a little over 2x. Maybe you could talk a little bit about how you see or where you want to be longer term on leverage levels? And then I have a follow-up after that.

Yes, Marc. So I think once we've got the transactions done, the leverage comes down to that kind of 2% range, I think as well, once we start to see the benefits of some of the activities, the transformation activities we've got going on, reducing the cost growth in the top line, reduce CapEx. -- enable us a little bit more flexibility to drive that leverage down further. So I think I think, certainly from my perspective, I'd like to be, as you look out in the next sort of 18 months to 2 years, I'd like to be in the sort of onetime levered range. But we've got work to do to get there, but we're on the right path to addressing that. .

Okay. And then that actually leads to sort of where I was starting with the next. Maybe you could talk a little bit about some the areas you may be targeting as far as the $100 million of cost savings. I mean I know the you've already made commentary around a lower employee count that you're already seeing, but maybe you can sort of talk maybe as to sort of at least sort of generalities as to where you're looking for those savings to come from?

Yes. I think 60% to 70% is headcount. 30% to 40% is relooking at our tech stack -- so the combination of the 2 is going to give us that of that, we have already identified a little more than half. We've already executed a small chunk and there's more to execute. So to me, and this is all clear in our heads, as a team. The biggest move that's happening, if you ask me, is in the commercial segment. So you should see margins change in the commercial segment. probably faster than anywhere because commercial has a lower margin and a much higher potential and a much larger business.

So we're seeing that the other area that we're looking at is right shoring. So again, the centralized SG&A has to be reduced and people are working through that as well. We have 2 firms professional firms working with us. One, on the cost side as well as how we approach sales. And then the second firm is focused purely on the technology. And between the 2, we're working aggressively. I told my team at the end of this year, my intention is to not have any consultants inside Conduent. This is my goal that after this year, we're done. We've rightsized margins are in the right step and the business starts growing the way we need it to grow.

Okay. Great. And then last one for me. I was wondering if you could -- you -- in your prepared remarks, you discussed meeting with clients and some of the takeaways there. Maybe you could just sort of give us sort of general views and thoughts as to some of the potential upside or maybe some of the things that were maybe new learnings or what have you or anything of those along those lines that you would be most optimistic about from those meetings?

Sure. The first, I would say major change that has happened in how we dialogue. And by the way, I did not know this. until my team started recognizing it and telling me this is different. I dialogue with many of our CEOs of our clients directly. One, it's not hard to reach them. Two, they actually want to hear from me. Three, they actually, at times, don't know, we have 15 services. So I'm going to give you small examples. I have spoken to more than 1 bank CEO in the top 10 banks in the United States. And they're like, "Oh, you have lockbox services you do document digitization, et cetera, et cetera. So they are excited.

The second is they're now inviting us to meetings, and this is not an RFP methodology. So they will invite us to a meeting where IS CEO, our Head of Commercial Sales, Kimberly Marshall, our CFO might be present or our Treasurer, including there will be a number of other folks in line management, meeting a bank starting with the CEO as well as a number on the other side. So we're staying across from each other, trying to figure out how we can partner together. The bank I'm referring to, I will not take the name. One of the things we're looking at is how do we work together when we have a few hundred billion dollars of payments going on in the government space.

How can we get more efficient for us and more efficient for the client. So there's a fair amount of dialogue. The other is Conduent Elevate, which is the mini convention we had in Chicago, we had huge client attendance, what did surprise me, we hadn't had 1 in a while. And guess what, we have a lot of interaction now as we're going through the RFP process, I directly participate with the Head of Procurement. I'll give you an example. There was a call with the -- I will not name the client, but you can figure it out. The largest health insurer in the country. And they had 60 CEOs. I was the only CEO asking questions. And guess what? Hence, we connected, and we're going further and further into the RFP process. This is the kind of dialogue. I don't shy I connect and my team jokingly said, let's not underestimate who or knows. It's better to go ask him and see if we can get it out. So we are being very aggressive in the marketplace. We're not sitting back because we're determined until I have revenue growing positive and double-digit margins, job is not done.

Thank you. Ladies and gentlemen, that concludes our time allowed for questions and we'll conclude our call today. We thank you for your interest and participation. You may now disconnect your lines.

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.