Exela Technologies, Inc. (NASDAQ:XELA) Q1 2023 Earnings Call Transcript May 12, 2023

Operator: Good morning and welcome to the Exela Technologies Inc. First Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Vince Kondaveeti, Investor Relations. Please go ahead.

Vince Kondaveeti: Thanks Kate. Thank you for joining us for our first quarter 2023 conference call. Our earnings release and presentation are posted to the IR section of our website. Speakers on today’s call are Par Chadha, Executive Chairman; and Shrikant Sortur, our Chief Financial Officer. Today’s agenda will be similar to previous calls. Par will provide an overview of our results and Shrikant will walk you through our financial performance. We expect this call to last under an hour. Some of these matters we will discuss in today’s call are forward looking and involve a number of risks, uncertainties and other factors that could cause actual results to differ materially. Such risks and uncertainties are set forth in our press release. So without further ado, I’ll turn the call over to our Executive Chairman Par. Par?

Par Chadha: Hello to everybody, and thanks for dialing into our call. We are excited about the progress that Exela has made and I look forward to sharing some of the highlights from our Q1 that will eventually become part of the value chain for all of our shareholders. Kindly look at slide number three, which we have talked about this and walked through this slide before, I’d like to call out one important change. In the bottom, it says approximately 15,000 employees. This number a year ago was about 17,000 employees. However, the important message here is not the 15,000 employees is that we are prepared with a substantial amount of flex capacity because of the business model that we have chosen, so that we are prepared for growth as needed.

Let’s look at slide number four. We continue to charge along in Europe. Our business there has been renamed as XBP Europe and it reaches majority of the population in some of the key markets. One highlight from Europe that happened after Q1 was closed. So we won in Europe one of the largest transactional deal in its history. Let’s look at slide number five. If you look at the bottom right hand we started our industry coverage by being called Hot Vendor. And look at the top left hand we are now being named Leader three times, so in migration and recognition of our services over time. And I look forward to adding one more in very near-term recognition as a Leader. And I look forward to the day, when we set out at being Hot Vendor or a Major Contender or a Major Player will be Leaders in all solutions and services the company offers.

Slide number six. If you would kindly turn to this. In this slide, I’ll cover some of the highlights from our Q1. Our revenue grew by 2.5% over sequential quarter. And remember our headcount went down by almost 1,000 people but general revenue grew. Our margin also improved partly because of the savings. We’ve talked about savings and the improvement plans, which totaled between $65 million and $75 million for 2023. So the margin improvement is both the quality of revenue, but also partially due to the flow-through that we’re beginning to see through, almost 240 bps increase of gross profit margins over the full year 2022 margins. Payroll, which is another way to look at this reduced by $5.5 million. And year-over-year, it reduced $3.5 million.

So that tells us there is still some segment costs that we’re going to take out as the year progresses and our flow-through. The geography of our CapEx is changing. We used to invest primarily in CapEx to both for growth as well as for maintenance in our data centers, PCs, servers, software licenses things we build. So because we’re now in the cloud and we are not — we don’t own the cloud so our operating expense or OpEx as we call, it is increasing and we are estimating that going to increase to $10 million. But at the same time, our CapEx has gone down from 2% at the year-end to 1.5% in Q1. And that’s going to stay this way for all of 2023. But it does have an impact of reducing on a comparable basis our income because OpEx sits in a different part of the geography of our financial profit and loss statement.

We did good. We won $64.9 million of TCV. And we won a lot of logos. But let’s look at Slide number 7. We continue to have stable conversion from pipeline into TCV. We also did okay on renewal rates 94%, translates to $43.3 million of TCV. We remain stable on the recurring revenue at 98%. And our digital assets DMR and SMB, it continue to grow in lower three digits. All in all, that translates to about 243 logos many of them are SMB logos, but they also include some of our enterprise wins. One call-out is that it’s sort of contrarian, but it’s worth mentioning that in uncertain macroeconomic environment that we are seeing today. My historical experience is that our business and businesses like ours grow because our customers outsource more of their needs to companies like ours.

So this in some ways bodes well for us. And we have additional digital asset solutions and numbers very exciting stuff and I look forward to sharing that in the coming Shareholder Connect and calls like today. Let’s look at Slide number 8. Some of the corporate actions key corporate actions that are underway. As you know we have the special meeting of the shareholders at 10 a.m. today. I promise you it will not be adjourned. We’ll publish the results as early as today, but more likely with all the appliance and the filing we have to do more likely it will be tomorrow. And we have been working on the value creation, strengthening of the balance sheet, improvement of our liquidity. These translate to the three projects and some more that are not mentioned here.

For example Project Neon we have a sale process underway for that. The bankers are working hard to get that process not only underway, but reach its final destination. Our XBP Europe transaction will continue to drive it forward. And we hope to share those results while it reaches its final destination. And also in a very important part of addressing our 2023 and maturities, but also getting — expanding our liquidity strengthening our balance sheet initiatives like the recapitalization of Exela Technologies BPA is one of our largest subsidiary inside of a public company Exela Technologies Inc. We continue to make — continue to discuss made progress with a select group of vendors which we announced on March 30 2023. These initiatives obviously on a total will help create value, but also strengthen our balance sheet and expand our liquidity.

So they are very important and I look forward to sharing and speaking to you as some of these initiatives get completed. With this high level update, I will hand it off to Shrikant, our Chief Financial Officer. Over to you Shrikant.

Shrikant Sortur: Thank you, Par. Good morning everyone and thanks for joining us on this call. I will cover our consolidated results and segment revenue for the first quarter 2023 performance. And 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. Let’s start with slide number 10 to look at select financial performance highlights for Q1 of 2023. In line with our internal projections revenue for the quarter was $273.6 million higher by $6.7 million or 2.5% sequentially and lower by $5.8 million or 2.1% year-over-year. On a constant currency basis revenue was down 90 basis points or by $2.6 billion year-over-year. Gross profit was $57.1 million up $9 million sequentially and up $1.2 million year-over-year.

We also saw the largest improvement in operating income the best in the preceding four quarters, primarily driven by improved gross profit. SG&A and intern EBITDA was negatively impacted by transaction costs of approximately $5 million related to Recap XBP Europe and ETI. Adjusted EBITDA was $34.7 million for the quarter and adjusted EBITDA margin of 12.7% was down 4% year-over-year. Of the $65 million to $75 million of cost savings from annual improvements estimated in 2023 approximately $30 million of annual run rate savings is beginning to flow through our reported financials. Turning to slide 11, I will cover the broad trends in the income statement. I’ll discuss comparisons that are sequential quarter as well as year-over-year. Let’s begin with ITPS.

ITPS revenue was down $11.3 million or 5.5% for Q1 year-over-year and higher by $8.9 million or 4.8% sequentially compared to Q4. Revenue on our ITPS segment was impacted by lower volumes and currency translation plus year-over-year. Sequentially, we experienced revenue growth in our integrated communication services and build and payments business. On a year-over-year basis, the gross margin on ITPS segment was impacted by our growth investment for expansion of services and cloud operations and was down approximately 15%. For sequential quarter, Q1 over Q4 gross margin improved by 22.6%, primarily due to the flow-through of savings and indicate stability. Healthcare Solutions segment posted solid revenue growth of 11.4% or $6.4 million in Q1 year-over-year.

This is primarily driven by continued acceptance of solutions and services and higher volumes from existing customers. Sequentially, the revenue was lower by 3.5% or $2.3 million due to seasonality impact. Gross margins for the Healthcare Solutions experienced growth 65.3% for Q1 year-over-year and 6.8% sequentially. Gross margin was higher as compared to 2022, mainly due to automation-related productivity improvements and — that was due to lower bench costs we incurred during the first quarter and first half of 2022. Gross margin on our LLPS segment was higher by 22.6% year-over-year and 36.5% sequentially on relatively flat revenue, primarily due to savings and better cost management. Our growth investments for expansion of services and cloud operations are expected to impact our gross margins and a portion of our adjusted EBITDA.

SG&A expenses in Q1 totaled $44.4 million higher by $1.3 million or 3.1% year-over-year and higher by $5.5 million sequentially. The increase was primarily attributable to higher professional fees related to transactions as discussed earlier. Year-over-year employee-related costs as well as other infrastructure costs was lower by approximately $3 million. Operating loss for Q1 2023 was $6.9 million compared with operating loss of $7.3 million in Q1 of 2022. As highlighted on the prior slide, this improvement in operating income as compared to the last four quarters is primarily driven by savings flow-through and improvements in gross margins and our cost structure. EBITDA for Q1 of 2023 was $18 million compared to $3.5 million in Q1 of 2022.

EBITDA margin for Q1 2023 was 6.6% compared to the 1.3% in Q1 of 2022. And finally, adjusted EBITDA for Q1 of 2023 was $34.7 million, a decrease of 4% compared to $36.1 million in Q1 of 2022. Adjusted EBITDA margin for Q1 2023 was 12.7%, a decrease of 25 basis points from 12.9% in Q1 of 2022. Let’s turn to Slide 12, and go over our 2023 objectives. We would like to reiterate the three objectives for 2023, which we covered on our Q4 earnings call as well. One, grow revenue in low single digits and improve adjusted EBITDA margin by 200 bps. We expect adjusted EBITDA in 2023 to materially benefit from flow-through of savings actions. Second, maintain growth investment particularly in our cloud operations, while keeping our maintenance CapEx at 1.5%.

While we are focused on initiatives to improve gross margins and operating income, we are also investing in growth. In 2022, we invested approximately $11 million to expand our services in SAO, data science, technology and digital solutions in addition to investments into our strategic shift to cloud operations. We expect to invest approximately $10 million, during 2023 as well. These investments will provide improvements to our EBITDA over time. CapEx for Q1 2023 was 1.1% of revenue. Third, we will continue to focus on strategic actions, to further reduce debt and interest expense, expand liquidity and achieve a sustainable balance sheet for the company. In closing, we are pleased to see actual results in line, to better than our internal modeling.

Our teams are executing well on both growth and savings initiatives. This concludes our financial review for Q1 2023. With that, Kate, would you please open the line for Q&A.

Q&A Session

Operator: We will now begin the question-and-answer session. The first question comes from Zach Cummins of B. Riley Securities. Please go ahead.

Zach Cummins: Yes. Hi. good morning, Par and Shrikant. Thanks for taking my questions. Congrats on the margin improvements here in Q1. And just to that point with gross margin, nice to see the sequential improvement especially versus Q4. How do you think about the progression of that metric throughout this year, especially as you continue to stabilize that revenue base and see some of these cost actions flow through the P&L?

Shrikant Sortur: Yes, let me take that first and then Par, you can — go ahead.

Par Chadha: Please, do. Please do. Thanks, Shrikant.

Shrikant Sortur: Zach, thanks for the question. A couple of pointers. As we have discussed in past calls as well as today, we expect the savings flow through to continue to provide improvements to gross margin. One other relevant point for Q1, potentially is, we had discrete items including impacts from our growth investments, as well as another example is from a Q1 perspective, the revenue mix sometimes tends to have lower margin revenue in Q1. So, that’s encouraging signs for us to know that, we can be on a path of furthering our gross margins in the following quarters. Par, if you want to add, feel free to add the business perspective.

Par Chadha: I think the revenue stability, recurring revenue at 98%, as well as renewal and a pipeline that we are converting stably into TCV. And Zach, the fact that we also won in Europe, a large transaction that’s going to start entering into our revenue in — as early as — as late as third quarter possibly, maybe we get a month or so of the benefit in Q2, it gives us a more clarity on the revenue growth, which is why we’re beginning to give guidance about low single digit. And backed by the $40-odd million in flow through, $30 million that we beginning to see in Q1, but we think we can drive that further up towards $40 million. It’s very — it feels — it’s very encouraging. We feel very good about it.

Zach Cummins: Got it. Got it. That’s helpful. I appreciate the additional context. And just my, one follow-up question and not sure, how much insight you can provide, but in terms of recapitalizing the balance sheet and addressing near-term maturities. Any sort of updates you can provide along the sale process or how things are progressing along that front here to address these maturities here in the coming months?

Par Chadha: So there are two — I think there are two questions there. One is, the sales process and one is the recapitalization. We — as I said in my talk we are making progress on both the sale of assets I would say the small assets, is progressing. Typically these things take six to nine months. We started in first quarter. And we are — there’s a lot of very hyperactivity across as you can imagine that the financial sponsors companies are interested in this particular style of asset. So it’s — we hope to share more when we get to the finalization, but probably more in third quarter than in second quarter. And the recapitalization we first announced that on March 30th, we continue to chug along. And as we reach the — as it gets converted into what we typically call, offering memorandum, we are — we have selected the banks for the offering memorandum.

We’ve got the lawyers. So we have lots of people working. And you see those expenses hitting our SG&A to the tune of about $5 million in the first quarter. So I hope, one of these days that they become sort of expenses, they result in higher liquidity and they address and strengthen our balance sheet. But I look forward to that day.

Zach Cummins: Thank you. Understood. Yeah. Understood well. Thanks for taking my questions and best of luck here with the rest of the quarter.

Par Chadha: Thank you very much guys.

Shrikant Sortur: Thanks Zach.

Operator: There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Par Chadha, for closing remarks.

Par Chadha: Thank you everybody for joining our call. And I encourage everybody to join us during in quarter in our Shareholder Connect and use our shareholder platform that we call SpeakUp, to send questions. So we can remain engaged on items that are important to you. And I am very grateful for your support. And thank you for joining today. And wish you a very happy rest of Thursday. And look forward to seeing you soon.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.