Q2 2022 Exela Technologies Inc Earnings Call
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Good day and welcome to accelerate technology second quarter 2020, 'twenty financial results Conference call.
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On the BD Vice President of corporate development. Please go ahead Sir.
Thank you Nick welcome to our earnings call to discuss our second quarter results for the period ended June 32022, our earnings release and presentation are posted to the IR section of our website speakers on today's call are part charter executive Chairman and <unk> <unk>, our Chief Financial Officer.
Today's agenda will be as follows Paul will provide an overview of our results and update you on our strategic initiatives Shrikant will then walk you through our financial performance for the quarter and then we will take your questions.
We also launched the speak up platform for our shareholders to interact with the company. We plan to make this an integral part of our shareholder communications in the future.
Speak up can be found at shareholder connect dot <unk> Dot com you can also email us at <unk>.
Alright, except protect dot com with any questions.
Some of the matters, we will discuss in the call are forward looking and involve a number of risks uncertainties and other factors that could cause actual results to differ materially from those in such forward looking statements such risks and uncertainties are set forth in our presentation.
And with that I'll turn it over to par our executive chairman.
Thanks for that.
Good afternoon, and thanks to all of you for joining.
Our second quarter 2022 call.
Our revenue.
For this quarter was $266 8 million.
Adjusted EBITDA was $36 5 million.
This was an eventful quarter not ordinary by any means.
I have selected 10 highlights, which best illustrates our second quarter results and progress.
Finally, if you can turn to slide number four.
We kicked off our capital deployment strategy and the positive $70 million of 2026 bonds and XC hyphen S. T. S. L. L C.
Set aside for our shareholders.
Hope this is.
Plus step not the only one and healing our capital structure dislocation.
As many of you know cash is king in current markets looking for direction.
Which are threatened by the recession rising rates inflation and many challenges our global citizens are facing yes, we raised a fair amount of money from markets.
$58 million.
Equity in this quarter alone.
We completed.
Yeah.
We completed $150 million in securitization facility with PNC.
At attractive rates and we are happy about that.
This opens up new potential opportunities to raise debt at attractive prices.
For funding our business needs.
We also were prudent and reduced our debt by $118 million.
And we continue to look for additional opportunities to deploy capital.
But where it benefits us.
The quarter, we did this quarter, we did very good in winning new business over $229 7 million at all.
Highest amount of total contract value in a quarter at.
At least in over three years this success will be hard to repeat.
But we do like a good challenge.
We saw continued wins on VIX Alaska business.
Serving the small and medium business market.
So a substantial uptick in this business led by DMR and.
And drive sign of our flagship products.
For this market.
Our work from anywhere business model is also gaining traction.
Over 8549 employees.
Just over 50% are taking advantage of our WSI business model.
And we hope this will lead to substantial advantage.
In the future periods.
However, our efficiencies are not where they should be and this is part of our.
Current and future focus.
We have also been working on our savings.
We have identified potential savings for 2023 of $11 8 million that we are executing in.
In 2022.
And this includes $20 introduction of real estate in 2022 as well.
Another important development value.
The shareholders of <unk> now that <unk> has now become the largest holder of 2026.
We could not have accomplished this without a simplified management organization structure. We also completed the change these changes to empower our leaders and results in the pharma and these these changes and the results from the changes are evident in the form of new business.
Great.
Okay.
As you know the macro environment is affecting all of us.
Our <unk> is no exception.
Inflation.
Tight job market.
Work outage.
<unk> dollars have all many of these have negatively impacted our results and they have impacted us.
We continue to also invest in bench to support our customers.
And we look forward to the day when this cost <unk>.
Additional revenue.
Thereby contributes to profitability.
We are happy about winning sizeable business.
Now the hard the next part starts.
To get benefit from this business, we need to ramp up this business.
And we look forward to this becoming a part of our base business and providing incremental source of profits.
My message to you is simple we're gonna be prudent will be strategic.
And we will take advantage of the opportunities.
Depending on market conditions, we plan to sell some of our assets allocate allocate these proceeds.
From corporate actions that can benefit our shareholders.
And if it benefits us we will also have ambitions to purchase more debt.
Yeah.
Yeah.
Kindly turn to slide number six.
I will cover on this slide.
Our.
Sales successes.
And.
As you know our <unk>.
Objective is.
Is to grow profitable revenue and this quarter, we won $229 7 million.
In total contract value of new business.
While the majority of this business is over three years there is some.
That spans over five years.
It is a substantial growth.
Also over Q1 2022.
We're very happy about that.
We also did good on renewals and we also did good on recurring revenue.
Which came in at 98%.
That's estimated at 98%.
Our digital asset business I've mentioned this before.
Especially DMR and Drivetime DMR customers year over year grew.
Grew by 343%.
And drive time.
We reported 17, 101786% growth in users year over year.
We do offer shareholders benefit for signing up for <unk> and DMR.
I would highly recommend you should check it out.
Available that shareholder connect Diavik seller dot com.
Tech Dot com.
I wanted to share my experience.
<unk> been through several negative macro market cycles.
I have seen is that our customers.
When they face with changing negative macro conditions environments likelihood today hyster.
Historically, they tend to adapt and change their business model, we have the negative cycles.
They outsource more of their business partners like us.
I look forward to.
So that event this negative event, resulting in something positive for the <unk> group.
Group.
Let's take a look at slide number seven.
There are five messages I want to cover on this slide.
[noise] network outage.
Where we have proactively brought our entire infrastructure down for several days.
And shortage of staff and resource to deliver our backlog. These two items alone cost or delayed our revenue by $14 million.
Investment in bench.
To support our customer is running at an annualized rate slightly greater than previous quarter.
At $19 million.
We continue to support our customers to maintain our commitment.
In this very tight job markets.
Our business model to become better work from anywhere company.
As stable in Q2, but we anticipate.
The blend will be favorable will have favorable impact on our cost in future periods.
Let's take a look at slide number eight.
We adopted.
The work from any of your model in response to pandemic.
However, now has become an integral part of our global strategy.
52% of our people are working from any of them whatever they want.
And they are not in our offices.
Our technology platform to Uber is work and work cross workforce onto cloud continues to grow.
We now have over 15000 people on this platform.
And our plan to grow this this platform to over 25000 people.
This is our way to take action to control inflation.
And stabilize the job market negative trend and we will see a migration of bench investment.
But I talked to on the previous slide.
<unk> revenue in the future periods.
Which will bode well for our overall revenue and profits.
Moving to slide number nine.
Another advantage or benefit positive benefit that we can we are beginning to see is reduction in our real estate needs.
Our employees are.
Working from anywhere we have lesser need for real estate, we have earmarked 440000 45000 square feet.
Our real estate for exited in 2022.
This amounts to approximately $6 $3 million of annualized rent lease cost reduction.
We will not see these benefits in 2022 in entirety, we've only done about 15% of it is so far this year.
So the full year benefits will be in 2023.
We took steps last year and continue this year to simplify our organization.
Overcome our impediments and improve our focused event.
We empowered our leaders to run our businesses.
Well some of the assets by some of the debt only if it makes business sense.
Both.
Strategically and financially.
Our focus our strategy remains to deliver a fundamental value creation.
Leveraging all tools in our toolbox.
We look forward to engaging with our wideband global shareholders on our speak up platform that's been mentioned earlier.
We're rolling this out to listen to our shareholders in channels that are more prominent and.
More prominent for them and leverage our digital trends.
Thank you for being our shareholders.
And for your support with that I'll turn it over to Sherri <unk>, our CFO and there after we will open it up for questions.
Thank you.
Thank you Bob and thanks to everyone for joining us this morning.
Good evening, rather I will cover our consolidated results and segment revenue for our second quarter 2022 performance and provide an update on our growth and balance sheet initiatives.
We have done in the past, we're reporting both GAAP and non-GAAP numbers.
Cancellations or in our filings and in the appendix of the presentation.
Let me touch upon some highlights of our second quarter 2022 financial performance.
On a reported basis revenue was $266 8 million down 9% year over year and $273 million on a constant currency basis down six 8% year over year.
Gross margins were impacted due to the late June network outage inflation and staffing shortages.
Adjusted EBITDA was $36 5 million or 13, 7%.
Turning to slide 11, let me highlight the key drivers impacting revenue for the quarter.
The impact of the network outage adversely affected revenue by $9 million.
<unk> 5 million of delayed revenue that we expect to recover.
Currency exchange impacted adversely by $6 $2 million year over year and transition impact by $23 million.
Overall this led to a revenue decrease of $35 5 million and was offset by $9 3 million revenue game for a net $26 2 million of revenue decreased as compared to Q2 of 2021.
Additionally, we were not able to capture approximately $5 million of revenue during the quarter due to staffing shortage.
So let's quickly look at our segment revenue and financial performance for the quarter on slide 12.
Revenue for our <unk> segment was $119 million a decrease of 12, 6% from $217 3 million in the second quarter of 2021, primarily due to transmission revenue and currency translation.
Our healthcare solutions segment revenue totaled $56 4 million, an increase of 0.4% from $56 2 million in the year ago period.
The increase would have been more material, but for the network outage.
Strength of the segment was due to higher volumes and form of our healthcare payer customers.
Our legal and loss prevention segment revenue was $20 4 million or four 3% increase year over year, driven by an increase in legal claims.
Our gross profit came in at $49 5 million down $34 4 million or 41% year over year.
<unk> to gross profit for the comparative period is driven by the margin impact from lower revenue idled production costs as a result of the network outage an investment in bench costs.
Q2 of 2021 included a onetime noncash gain of $3 5 million from de recognition of an operating lease liability.
Sequentially cost of revenue increased by 4% of the cost of head count or bench costs were higher based on our customer forecasts.
Our gross profit margin for the second quarter was 86% down 11% from Q2 of the prior year and down 145 basis points sequentially due to a number of macro factors previously highlighted.
SG&A for the second quarter totaled $50 2 million up $13 8 million or <unk> 37, 9% year over year, and up 16, 6% sequentially and representing 88% of sales.
SG&A was elevated primarily due to higher employee costs as well as professional fees, including certain nonrecurring transaction related costs.
Note the SG&A costs in Q2 of 2021 was benefited favorably by $2 7 million due to asset disposal and other onetime gains.
Adjusted EBITDA was $36 5 million down 28, 4% from $50 9 million in the prior year period, and 90 basis points sequentially.
Our adjusted EBITDA margin for the second quarter was 13, 7% up 74 basis points from the prior year quarter and down 371 basis points from 17, 4% in the second quarter of 2021.
Q2 of 2022 included $15 5 million of nonoperating charges that impacted EBITDA.
<unk> $8 1 million of loss on extinguishment of debt related to the AAR securitization facility and also recorded a $7 4 million liability for a fair value a true up of their water exchange notes.
All of these are add backs under noncash and other charges category.
As a reminder, some of the other competence of the add back under other charges will include severance retention bonuses facility consolidation contract cost system integration and other transition costs.
Let us turn to slide 13 to discuss our actions to improve our margins.
Right thank costs due to inflation and tight job market are impacting our business. We have several actions underway to improve our operating profit.
From a pricing perspective existing cola provisions are insufficient under the current market conditions to effectively offset the cost pressures.
Apart from focusing on favorable pricing when contracts are up for renewal, we are proactively seeking price increases on our existing contracts.
We're targeting approximately $11 8 million of annual savings to benefit us in FY 2023.
As discussed earlier, our work from anywhere model is having a positive impact on our leased and owned real estate.
We have earmarked 445000 square feet per exit in 2022, resulting in annualized impact of $6 $3 million with an additional $5 5 million of annual savings executed in Q2 2020 to another area.
Our investment in bank, it's running at an annualized rate of $19 million, we continue to support our customers to maintain our commitment in this very tight job market.
Our investment in bench will convert to revenue as customer demand peak.
Turning to slide 14, and discuss our investments and continued deleveraging initiatives.
As we continue on the path to Delever the business, we want to mentioned some some of the highlights this quarter as of June 32022, our total liquidity was $72 million.
We closed a $150 million facility from PNC Bank initially at <unk>, plus 400 bed with an additional $65 million available, which we will use to fund incremental from our sales growth.
We also have plans to add our term loan of approximately 30% to 35 million to further expand liquidity AUM.
Overall the initiatives. We have completed will result in $10 million of annual interest expense reduction.
Our blended coupon rate is currently at 11, one 5%.
In line with our deleveraging goals. We continued this quarter to reduce the total debt our debt outstanding including interest bearing current liabilities declined by $180 million as compared to end of Q1, including the payoff of the old facility.
Lastly, excellence now become the largest shareholder largest holder of 2026 note.
In closing, we would like to emphasize that our strategy is focused on delivering fundamental value creation by leveraging global operating presence and continue to grow our assets.
We look forward to updating you on our progress following third quarter.
And with that operator, please open the line for Q&A.
Okay.
Thank you well now begin the question and answer session.
That's a good question you May Press Star then one on your Touchtone phone.
Using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble the roster.
Okay.
And please remember to limit yourself to one question and one follow up.
First question will be from Josh Ziegler Cantor Fitzgerald. Please go ahead.
Yes, hi, Thanks for taking my question I wanted to dive a little deeper into your $230 million of TPB that you won in the quarter a significant increase from <unk> what were some of the drivers behind that growth in our conversations becoming increasingly easier with new and existing clients as your balance sheet improves.
Sure Matt take that sure.
Josh.
Okay.
Ex PPP.
Is the technology led builds and payment.
Business.
The originated in our license that technology to Mastercard.
A couple of years ago.
In UK, and then in more and expanded into becoming a global platform that we've been migrating to.
So.
We're very excited about this this segment.
And the customers.
That used to be enterprise customers also now beginning to include smaller enterprises lending institutions as opposed to just banks and Bill Aggregators.
So we are beginning to see diversity in our customers and thereby we are beginning to win new business from new customers new logos.
And it's a technology led business.
Which means it's more digital lesser number of people more payments.
And.
That.
By nature of its business implies better margins.
Faster ramps.
So we are looking forward to winning more business in this space.
The differentiating ourselves from other bells and payment providers.
I hope I answered all your question, but if I didn't please go ahead.
After your question.
No that was helpful. Thank you very much for the color there and then I'd love to follow up on that.
Debt reduction strategy, given the recent large equity raises.
Announcer your press releases do you believe there is additional room to continue to repurchase and.
Reduce your debt burden over the next couple of quarters. Thank you.
Okay.
Yeah.
Josh.
We will continue to deploy capital as long as is prudent and gives us.
Financially.
Benefits advantage to lower our overall cost lower our interest rate.
And deploy the equity and the prop and the and the operating profit.
In esoteric.
Two deals.
De leverage.
The balance sheet.
And continuing to own more of the debt.
In the in.
Our subsidiary <unk> intermediate had issued.
For the benefit of all.
All stakeholders.
So that strategy Hasnt changed.
Continuing to add to it from asset sales.
<unk>.
Announced.
In the second quarter, but we look forward to selling some other strategic assets.
Our big assets, but some of those fatigue at strategic assets. So we could.
Add to the.
To the.
So the balance sheet cash and capabilities.
Who heel, whether it's equity whether it's our debt and also fund.
Our growing business.
Segment.
Like for example, the <unk> business the health care business.
SMB business.
Great. Thank you very much.
Thank you.
Thank you. Our next question will be from Zach Cummins with B Riley FBR. Please go ahead.
Yeah. Thanks, Hi, guys. Good afternoon I appreciate you taking my questions.
In terms of the global infrastructure shutdown.
Can you talk about the actions that were taken to remediate relationships with customers and have you seen any sort of additional impact from unexpected shutdowns.
Yes.
I don't know if I heard off.
The impact on the global network outage.
Feedback.
Yeah.
Look I think.
The best feedback is.
But we.
Our are fully operational and it took us a few days to make sure we were good at.
Majority of our business.
And as you can see from <unk> presentation.
The backlog.
Speaks highly of our mission critical nature that.
But our backlog during the days we were off.
<unk> rolled into July and some into August .
And.
Our relationship with our customers.
Remain solid.
Globally is solid and the fact that we were able to.
Actively bring it down and then bring it back up.
Talks about speaks.
Highly off our ability to.
Two.
Operate when.
When we need to make sure our customers data.
Is highly protected and remains protected.
But we are.
I think we learned a few lessons.
And those lessons are really positive.
Our customers have responded.
The positive and we also won some more business from them.
So.
All in all a good.
Understood that's helpful and in terms of gross margins I know those were impacted by the network outage here in Q2, but can you speak to some of the actions you're taking to try to at least sustain or potentially improve margins in the back half of the year just given some of the staffing shortages.
The wage inflation pressures.
The best way to.
The best way to grow our gross profit margins.
And gross profit dollars absolute dollars is to ramp up the business.
The highly profitable businesses that we have won.
We can suddenly we're suddenly doing our part in managing cost.
<unk>.
But some of these costs.
For example, a bench.
Really dependent upon the job market.
And we are fully committed to support our customers.
Even though it cost us.
Margins, but the fact that we have new business that's ramping up.
He is going to be highly accrue.
Accretive to the overall organization.
So we're looking forward to the.
The ramp.
Becoming base business.
Indeed in the coming quarters.
And Zach just to add to that.
I covered.
Additional details on slide 13 specific to the margins a couple of other points or sorry the.
Either the cola increases or more importantly price increases with.
On contracts that we can do.
So that's.
<unk> debt.
<unk>.
Of course, the rent reduction and cost savings that we will continue to.
Execute.
To improve our margins. So that's all part of the focus area.
Understood well, thanks for taking my questions and best of luck here in Q3.
Thanks, Doug.
Again, if you have a question. Please press Star then one.
Next question from Randall Cline Avenue Capital Group. Please go ahead.
Hey, guys. Thanks, Sir.
Taking the question so I'll try to keep it short because I, probably got more than one and one follow up but I'll do it again here first one just on the balance sheet.
Did the cash.
Effectively what that was raised in the second quarter.
Not that long ago, you announced obviously the 20 for one reverse split and the number of pro forma shares outstanding you can clearly back into the fact that there was no material incremental cash that was raised in so far as.
In the third quarter.
And any reason why that wasn't disclosed or are you just kind of figure you put that in the 10-Q or in the next.
And the next announcement just trying to understand why are you focused on June 30th.
There was a time, where you gave more kind of recent liquidity type updates.
Ron Thanks for the question.
I think you've covered a couple of items within your question there.
One liquidity, we've already talked about as of 630, and then from an ATM perspective.
We will have disclosure in the 10-Q, when we file that.
Okay, that's fine.
Kind of a follow up to a couple of other comments you made in recent question from that I think the first one for me so.
Clearly second quarter was a little bit.
Impacted messy quarter, because of the network outage and other things.
Slide 11 kind of goes to that pretty well that being said.
At a high level when do you kind of hope to see the benefits of.
The cost savings as well as the revenue so that you will actually see kind of quarter over quarter growth either on the revenue side, the margin side or the EBITDA side, I know youre not providing specific guidance, but just at a high level. How are you thinking about that right now.
You can forecast.
An easy environment.
Alright, and Thats, there is a certain level of unpredictability due to which we didn't provide guidance right that apart as we are going through this transformation process.
Some base, we anticipate a commodities headwinds but.
Q2, as an example, there the network outage was something that we had not anticipated that said Randall if you look at I can only point to history for now which is <unk>.
Three quarters of 20% or sub 20% margins.
We have laid out specifically, where the challenges are or where the compression is from what we're very focused on how to overcome that and goes back to the gross margin discussion or even with the SG&A I covered it extensively mainly to point out even though in this quarter SG&A was higher there were one time.
Including transaction costs and wall and debt. So it is really being focused on executing on the savings and overcoming the compression more importantly, like par covered.
Getting projects to ramp up.
Converting all of our new business into into bid.
So thats going to be the focus.
I will add Randall to treat cancer.
As we look to our future periods.
We won about $78 million in Q1.
One $229 million in Q2.
We have a recurring.
Business.
That's estimated at 98%.
Which means.
If things remain they are.
As <unk> said as we can.
That business ramped up.
And we keep our cost.
Under control and our SG&A.
That instead.
Instead of being $36 million.
$39 million.
Due to transactional and other one time charges is $50 million.
If demand sort of balance.
We are bound to see a rebound in our both topline and bottom line.
And we benefited from the fact that we have it built up a giant backlog.
This is a great position to be in a bad position due to job sharp shooting the number of people that you need to hire.
And.
But we have in our toolbox, we have what it takes.
To manage this type of <unk>.
Multiple lever some positive some negative.
And we are excited about the fact that we.
We're looking into.
Ending the second quarter with a big backlog.
Got it that's actually thank you that's actually I appreciate that that's actually an interesting way to think about it given the renewal rate increasing backlog and then just do what you can on the margin, especially on SG&A.
Certainly I think pointed in the right direction, hopefully hopefully that comes through.
So that's.
That's a very helpful way to put it so good luck and I appreciate it guys. Thank you.
Thanks Donald.
Thank you that concludes our question and answer session I will now go back Mr. Vincent <unk> for closing remarks.
Great. Thanks for everyone's time and interest in <unk> and we look forward to you joining us on our next call have a good good evening.
Or wherever you may be thank you.
Thanks.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Sure.
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