5 Things You Need To Know About Conduent’s Changing Fortunes

The company lost more than 35 percent of its value since this time last week, after disappointing revenues, a public spat with a board member, and an announcement by the CEO that he is resigning.

From Bad To Worse

The last two years have not been kind to the Xerox spin-off, which started life saddled with a billion dollars in assets it needed to divest, as well as a Medicaid fraud lawsuit it inherited, which mushroomed into a potential $2 billion liability.

Last month, board member Michael Nevin resigned via a public letter claiming the board’s chairman was “asleep at the switch” and questioned the decisions of CEO Ashok Vemuri (pictured). Conduent fired back that Nevin’s letter was actually being used as leverage by Carl Icahn in a board take-over attempt. Nevin is an Icahn employee.

While the two sides traded accusations, the company lost revenue. Its top client reduced volume, new business signings shrank by 39 percent, it lost a $140 million contract with the state of California, and it got hit with a $4.6 million fine by Florida for problems with the state’s toll collections. Conduent has settled the Medicaid fraud lawsuit, but took a $236 million hit in doing so. Vemuri announced he is resigning when a replacement is found, in the third quarter.

In the last week, the company’s share price went from $13.12 on May 3 to $8.40 on May 10, a loss of 35.98 percent.

5. CEO Ashok Vemuri Resigns

Vemuri announced his resignation ahead of an earnings call on Wednesday. During the call he said it was time for the company to “pivot” to new leadership, but provided no specifics about why he was leaving.

“It has been my privilege to lead as Conduent’s first CEO,” Vemuri said during the call. “Conduent has made significant progress since the separation by becoming a public company, driving transformation, laying the foundation to become a digital transformation company, as well as to a great extent, resolving the legacy issues that we inherited … as we enter the next phase of transformation, the board and I both thought it was a good time to bring in new leadership, a new leader and for the CEO transition to become effective.”

He was asked directly whether the downturn in revenue coupled with his departure, means analysts should consider the possibility that the company was up for sale, but he did not answer the question.

4. The Transition And Hunt For A New CEO

Vemuri said he will continue in his current role as CEO and as a member of the board until his successor is appointed, which the board expects to happen during the third quarter of 2019.

“The Company’s Board has initiated a search to identify the Company’s next Chief Executive Officer and is considering internal and external candidates as part of the process,” the company said an SEC filing. “The search will be led by a special committee of the Board, consisting of Nicholas Graziano as chairman, Joie Gregor, Scott Letier and Virginia Wilson. The Board has retained an executive search firm to assist with the process.”

Graziano is a portfolio manager with Icahn Enterprises. Letier serves on the Xerox board of directors, and works as managing director Deason Capital Services. Icahn and Deason worked together to unseat former Xerox CEO Jeff Jacobson and appoint their own leader, current Xerox CEO John Visentin.

3. The First Nevin Letter

In his first resignation letter, former board member Michael Nevin blasted the “asleep at the switch” chairman of the board Parrett, as well as an “ill advised” decision of the CEO, all while lambasting management and the legacy business process outsourcing (BPO) provider’s declining value.

“My most important grievance with Bill, which I consider to be a major problem for the board and all shareholders, is that he seems uninvolved and appears to be willing to recommend that the board rubber stamp whatever management proposes – even though management has made a number of very disturbing and costly decisions over the last year,” Nevin wrote. “Chairman Parrett, and sad to say certain other members of this board, are the quintessential example of one of the biggest problems in corporate America today – too many directors simply do not give a damn.”

Conduent claimed the letter written was part of an attempt by Carl Icahn to take over the board. Conduent said before the letter was published via an 8-K filing, that Icahn and Conduent board chairman William Parrett talked about Parrett stepping down.

2. ‘Setting the record straight’

In a follow up resignation letter titled “setting the record straight,” Nevin said his resignation was a response to the leadership of board chairman Parrett, and was not an attempt to take over the company’s board by his boss, Icahn.

“I was fed up with being misled by the Chairman of the Board and tired of the lax governance practices that I observed during my tenure on the board — pure and simple,” Nevin wrote in a letter filed yesterday with the SEC. “Any suggestion by Conduent that my resignation was somehow an attempt by my employer, Carl Icahn, to take control of the company’s board is unequivocally false.”

While he said Icahn and Parrett did indeed talk, it was about how the chair and CEO were culpable for the company’s lost value.

“Mr. Icahn told Chairman Parrett that he believed Parrett and CEO Ashok Vemuri were directly responsible for the 40% decline in Conduent’s stock price since last September for many of the same reasons mentioned in my resignation letter,” Nevin wrote.

1. The Changing Fortunes

Following Vemuri’s resignation announcement, the company posted disappointing first quarter earnings, with $1.16 billion in sales for the quarter, down 3.3 percent year over year. It was the second down quarter in a row, after reporting lower fourth quarter and FY18 revenues.

In its first quarter, the company also posted a $308 million net loss for an earnings per share loss of $1.49. Conduent said it has adjusted its revenue outlook for the year from growth of 1.5 percent to a 3 to 4 percent decline.

Conduent attributed the lower revenue to fewer new business signings, which were down 39 percent in the first quarter, the loss of a $140 million contract with the state of California, and reduced sales volumes from its largest customer.

In March, the state of Florida issued a $4.6 million fine against Conduent for ongoing problems with the roadway toll system that it runs in that state, refused further payment to the company, and ordered Conduent to add more workers to its call centers.

Florida Department of Transportation Secretary Kevin Thibault said in a statement: “One of the first directives I gave was to continue to withhold payments to Conduent for its performance since Go-Live in June of 2018. I’ve also instructed the Turnpike’s Executive Director to assess maximum performance penalties allowed under the contract for Conduent’s operational and performance deficiencies, which totals $4.6 million to date.”