Q2 2023 Exela Technologies Inc Earnings Call

Good morning, and welcome to the <unk> Technologies' second quarter 2023 financial results Conference call. All participants will be in listen only mode should you need assistance. Please give please signal a conference specialist by pressing to Starkey followed by zero. After today's presentation, there will be an opportunity.

To ask questions to ask a question you May Press Star then one on your Touchtone phone. Please note. This event is being recorded I would like now to turn the conference over to Vince kind of EDI Vice President of corporate development. Please go ahead.

Thanks Alan.

Thank you for joining our second quarter 2023 conference call as per usual practice, our earnings release and presentation are posted to the IR section of our website.

On today's call are part childhood executive Chairman and Sri <unk>, Our Chief Financial Officer.

Today's agenda will be similar to previous call Paul will provide an overview of our results and shrink I'll walk you through our financial performance.

We expect this call to last last lesson happened out some no matter, who will discuss today's call are forward looking and involve a number of risks uncertainties and other factors that could cause actual results to differ materially.

Risks and uncertainties are set forth in our press release.

Without further Ado I'll turn over the call to par our executive chairman.

Thanks Lynn.

I all are improving metrics in the second cover all the result of many factors, but certain ones that.

Above all.

Yeah.

Focus on cost management debt reduction.

Our value proposition our services solutions.

Enhanced by evolving.

Hi.

Our results speak for themselves and I walked you through.

Two slides that highlight.

Highlights.

Let's turn to slide number three.

Our shareholders well geared towards summer.

Let's do a quick.

Walkthrough also accelerated glass.

We are approximately a $1 1 billion.

Business process automation theater.

Its presence in.

In over 20 countries.

Well in key markets and key industries for example banking insurance.

In commercial industries.

So I think some of the most recognized brands in the world.

And with 15500 plus employees strong.

Let's turn to slide number four.

We branded our European business, that's ex PPP Europe as many of you already know.

The proxy proxy was recently filed.

And that can be found by searching with the ticker symbol <unk>.

E F F E.

And if you are interested in learning more about this.

That proxy contains a lot of detail about this business.

Actually peak should stock trading independently under the symbol X V P.

On NASDAQ in the coming weeks.

The key message.

On this slide.

I'd like to emphasize.

Is that our customers trust us processing essential and key services.

With that let's turn to slide number five.

I have to admit it's very satisfying to the recognized industry leaders industry research organizations.

Of course being named the leader.

Is the best.

Ward, and I and I and I hope.

And we call them in coming quarters.

You can work.

Some of the others.

Food leaders.

Let's turn to slide number six.

Well selected Q2 highlights.

Our second quarter revenue was $272 million.

<unk> 9 million.

It was higher by two 3% year over year.

Our gross margins.

So another quarter of improvement.

Wanted to 22, 4%.

And keep an 8% year over year.

Adjusted EBITDA margins were the highest in the last seven quarters.

And came in at 15.1 person.

But not the highest we have achieved in the past.

So we have more work to do.

Our head count grew to 15549.

15100 <unk> sequentially.

Yeah.

A rising head count is related to rebalancing about operations across geographies.

More importantly, we are also making additional investments in many functional areas.

By adding people to strengthen our foundation.

Almost five almost two years ago, when I stepped into this role.

We had.

Too much debt a lot of that.

I emphasize my new role.

Our mission to reduce it.

In July of this year, we were able to finally complete another key milestone.

And reduce the long term.

Third party co.

I'll bet.

But almost.

One has.

Yeah.

Hello subsidiary SPP Europe .

As I mentioned will be listed shortly in the coming year coming co coming weeks.

And.

It will trade as a.

A majority owned subsidiary of.

<unk> technologies zinc dependent.

The strong management team and the board.

Let's turn to slide number seven.

It's not a secret that we have been through a rough patch.

Our teams have navigated the rough waters and can and continuing to win new business.

From existing logos and added some new logos.

We did lose some business and did not win.

And we were highly qualified for.

Our focus now is to leverage our foundation.

And focus on growth as a key objective as well.

I'm not satisfied with our sales.

And we have potential to do more.

We enter.

Our waters.

Before I hand off to share your thoughts.

Our CFO .

I'd like to reemphasize and we'll remain focused on.

On cost management.

That's a reduction and expanding our value proposition.

You bet.

Thanks, John .

Let me take it over.

Thank you Barbara.

Good morning, everyone. Thanks for joining us on this call.

I will cover our consolidated results and segment gross margin performance for our second quarter of 2023.

As we have done in the past it reporting both GAAP and non-GAAP numbers canceled.

Cancellations are in the appendix of the presentation.

Let's turn to slide nine to look at select financial performance highlights for Q2 of 2023.

In line with our internal projections revenue for the quarter was $272 9 million higher by $6 2 million or two 3% year over year, and lower by <unk> 7 million or 0.2% sequentially.

On a constant currency basis revenue was up two 5% or by $6 6 million year over year.

Gross profit was $60 9 million up 11.4 million year over year and up by three 7% $3 7 million sequentially.

Margins improved to 22.3% or 380 bps year over year and up 140 bps sequentially.

Adjusted EBITDA was $40 9 million up 12, 1% year over year.

17.8% sequentially and adjusted EBITDA margin for the quarter was 15% up 130 bps year over year and up 230 bps sequentially.

Moving on to Slide 10, I will cover our Q2 2023 performance in some more detail.

I T. P. S revenue was lower by $5 million or two 6% for Q2 year over year, and lower by $16 3 million or four 1% year to date year over year.

Revenue on our I T. P. A segment was impacted by lower volumes customer screen balancing portfolios attrition and currency translation blocks.

We experienced revenue growth on our digital assets group, which we call us back.

Within the I T. P S growing at 17, 2% in Q2 year over year, and seven 1% year to date year over year.

On a year over year basis, the gross margin on IDP segment is being impacted by our growth investments for expansion of services and cloud operation.

However, better cost management and productivity improvements.

Stabilized the gross margins on the segment, even with lower revenue.

18.5% per year to date 2023, compared to 18, 9% for year to date 2023, lower like 39 bps.

Gross margin was up 73 bps sequentially.

Health care solutions segment revenue was higher by $7 2 million or 12, 8% for Q2 year over year and higher by $13 7 million or 12, 1% year to date year over year.

Revenue growth in this segment is primarily driven by higher volumes from our new and existing customers.

We posted strong gross profit improvement.

<unk>, 5.5% for Q2 year over year, and 62% year to date year over year.

And gross margin growth of 716, but for Q2 year over year and 780 bps for the year to date year over year.

Gross profit and gross margin for the health care solutions segment was higher as compared to 2022, mainly due to savings from automation enable productivity improvements and a better workforce management to lower the bench costs being incurred during the first quarter and first year of 2022.

LLP our segment revenue was higher by 4 million or 19, 5% for Q2 year over year, and higher by 3 million or 8% year to date year over year.

Revenue growth in this segment is driven by higher demand for services.

Q2, 2023 gross margin was 38, 3% for the segment up.

1124 bps year over year and year to date 2023, the margins at 36, 4% up 980, 82, but year over year.

SG&A expenses in Q2 totaled 32 million.

Lower by $18 2 million or 36, 2% year over year.

And year to date 2023, SG&A expense was lower by $16 8 million or 18% year over year.

The decrease was primarily attributable to better cost management, resulting in lower employee related costs and lower professional fees.

In Q2, we recorded a gain of $6 5 million on sale of high speed scanner business.

SG&A expense decreased as a percentage of revenues to 11, 7% for Q2 of 2023 as compared to 18, 8% for Q2 of 'twenty to 'twenty four 'twenty two.

Operating income for Q2, 2023 was $11 2 million.

Compared with operating loss of $20 9 million in Q2 of 'twenty to 'twenty two that's.

That's an improvement of $32 $1 billion year over year.

EBITDA procure any twenty-three was $31 6 million compared to an EBITDA loss of $17 6 million and she'll do a plenty plenty to.

EBITDA margin for Q2, 2023 was 11, 6% compared to negative six 6% in Q2 of 2022.

As discussed earlier adjusted EBITDA for Q2, 2023 was $40 9 million, an increase of 12, 1% compared to $36 5 million in Q2 of 2022.

Adjusted EBITDA margin for Q2 2023 was 15%.

An increase of 131 basis points from 13, 7% in Q2 of 2022, and an increase of 230 basis points sequentially.

Co 0.7% in Q1 of 2023.

Turning to slide 11.

This slide highlights the completed strategic actions, thus far to reduce debt and interest expense to achieve a sustainable balance sheet for the company.

The chart shows the absolute reduction in long term liability from 1.6 or $8 billion in June of 2021 792 million. After the completion of exchange offer for 'twenty 'twenty six notes in July of 2023.

I wanted to also highlight.

That extra light does not have any additional cash interest on bonds to be paid in 2023, and we have the flexibility to defer nearly 50% of the cash interest in 'twenty 'twenty four.

We have the ability to repurchase up to $250 million of notes for up to 115 minutes.

In other words at a 40% discount.

You also raised a 40 million loan on July 11, 2026 maturity.

Let us turn to slide 12, and go over our near term and long term outlook.

Do you offer some guideposts for those modeling our business.

Our near term revenue growth target of 2% to 3% with a long term goal of 5% with a greater focus on AI solutions and services.

Our adjusted EBITDA targets, 10% to 13% in the near term and approximately 15% in the long term.

We'll continue to invest in growth, but the girl.

Both opex investment of approximately 10 million annually in the near term and a target capex of one 5% of annual revenue.

In closing we are pleased to see actual result in line to better than our internal modeling.

This concludes our financial review for Q2, if any of any three.

Alan.

Open the line for any questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

Our first question comes from Zach Cummins of B Riley go ahead.

Hi, good morning, Thanks for taking my questions and congrats on the solid results here in Q2.

I just wanted to start off by asking about the overall sales environment right. Now I think you mentioned some challenges just in the overall broader environment and maybe there was some business. There that you thought that you were in line to win that maybe you didn't go your way. So just curious on your overall thoughts on the sales environment right now.

Is that good morning.

What I referred to was when we ever going to enough patch.

We would like to win some of the bid some of the Rfps.

Let's be clubs after a rough patch.

We were not able to windows.

The business climate still remains challenging but however.

The business out of process automation.

I think I mentioned that in a couple of my other calls.

Yes.

Trading and meaning people when they reduce our customers when they reduced their head count they look for variable cost which means.

Companies like ours.

Benefit from providing.

That's scaled services.

During the periods of uncertainty in the macro environment.

So.

I think we are going to see some.

Good.

Good wins to help us.

Grow our business.

But our fundamental value proposition, obviously is driving stability recurring revenue.

And.

Yes.

There's very high renewal rate.

Yes.

Yes.

Thank you.

Understood. That's helpful. In Chicago I, just had one question around gross margin I mean can.

Can you talk about the improvement in theory gross margin specifically in the health care solutions segment, and what's kind of the right baseline to think about for gross margin moving forward, depending on kind of a seasonal fluctuations.

Hey, good morning, Thanks for the question.

The the current trends for the segment.

It's probably a good baseline for go forward again like you said, depending on the seasonality asphalt what what.

<unk>.

Leasing for us as I mentioned.

My narrative, it's the savings related to the automation productivity improvement that's coming through for the health care segment more than anything else. So it goes back to the cost management and savings actions that we have in place this year that's.

Resulting in the improved margins.

Understood and final question for me is just really around.

Some of your options to continue to strengthen the balance sheet and reduce debt.

Nice to see you complete the debt exchange in early July but can you just speak to some of the other options that they continue to reduce debt on the balance sheet and maybe even any incremental update on potential asset sale.

Zach.

One we'll have to defer that question answered to that question to a later date.

There's a lot of things that we're doing what.

But I hate to get ahead of my skis.

And.

But needless to say silicon said in his.

Let me cover the slide number 11.

About the debt reduction another opportunity for us to purchase that.

With up to $250 million of debt.

We are focused on.

And.

Being if we can exercise that at.

That contractual Oh ability.

So I would say give us some time.

It has been a.

A lot of work for us to get this far and successfully navigate them.

Really difficult waters.

And we look forward to.

Continuing to.

Strengthen our balance sheet by the reduction of debt and better cost management.

But also well also the value proposition of our services and solutions.

It's going to help us as we go forward.

Understood well. Thank you for taking my questions and best of luck with the rest of the quarter.

Thank you. Thank you. Thank you Sir.

This concludes our question and answer session I would like to turn the conference back over to par Cheddar for any closing remarks.

Oh, I wish all of our shareholders.

Very good rest of the year or can we see NES next thank you for joining us.

Best.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.

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