Exela Technologies, Inc. (NASDAQ:XELA) Q4 2022 Earnings Call Transcript

Exela Technologies, Inc. (NASDAQ:XELA) Q4 2022 Earnings Call Transcript April 4, 2023

Operator: Good day and welcome to the Exela Technologies Fourth Quarter 2022 Financial Results. Please note this event is being recorded. I would now like to turn the conference over to Vince Kondaveeti. Please go ahead.

Vince Kondaveeti: Thank you, Dave, and thank you, everyone, for dialing in to discuss our fourth quarter and annual results for the period ended December 31, 2022. Earlier, our earnings release and presentation were posted to 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 define an overview of our results and update you on our strategic initiatives, and then Shrikant will walk you through our financial performance. We’ve been in communication with many investors via Speak Up, and we hope that you’re finding it useful. We expect this call to last under an hour. Some of the 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 from those in such forward-looking statements.

Such risks and uncertainties are set forth in our press release. And with that, I’ll turn over our call — the call to Par, our Executive Chairman. Par?

Par Chadha: Thank you. Good evening and thanks for dialing into our call. We managed to accomplish many of our objectives that we set out for 2022. However, I’ll be remiss in not pointing out this was a very challenging year for us. Through all this, we maintained our focus to make operational improvements and balance sheet improvements. I’ll cover that along with Shrikant in some more detail in our presentation today. Let’s start with Slide #3. Let me call out some highlights for our shareholders familiar with Exela and our new shareholders. Exela is the leader in the business process management solution with $1.1 billion in revenue, proven track record in many of the services we offer, referenceable customers. I’d like to point out some of the stats have changed.

Because we adopted work-from-anywhere business model, it has led to some positive reduction of operating facilities worldwide. It also — we also were able to reduce our overall head count. Now we stand at 16,000 people strong. We added some new services that you see in the box on the right. Data science and analytics, hyperautomation, work from anywhere, finance and accounting are some of the additional services that were smaller that are beginning to grow. These investments, we hope, will add to our profitable revenue growth in future periods and it’s also an example of our award-winning services solutions from our customers. Let’s switch to Slide #4. We are proud of the fact XBP Europe solutions reach most of the populations in key markets.

Our goal in 2023 and beyond is to leverage the foundation we have built over many years for further profitable growth. More on that later also. Let’s switch to — let’s look at Slide #5. Many of the industrial research organizations that cover our industry are beginning to cover Exela over the last several years since we went public. In that period, we have won many awards, recognitions, and some of our services are moving up in the food chain into the box sometimes referred as a Magic Quadrant. Our goal focus is to achieve more of the solution and service into the box. It’s a very important endorsement of our strategic value proposition and that we are confirmation that we are on the right path. This extra seal of approval is also important for our new customers, acquisitions and for our existing customers as they look to vendors for new service offerings.

You can count on us to keep this in our focus. Let’s look at Slide #6, please. Our revenue for 2022 came in at $1.077 billion and our EBITDA — adjusted EBITDA came in at $139.9 million, 7.7% revenue drop, while revenue dropped only 4% if you exclude the impact of rising costs, including inflation, tight job market, business mix, rising dollar, which was very negative against us this past year and onetime event. I refer to the network outage that we suffered in the middle of the year. We — our annual revenue — I’m sorry, our adjusted EBITDA was materially impacted as well to the tune of $33.4 million. In addition, to the cost management that we shared with you earlier in the quarter, the first quarter of this year, the operational improvements we are working on in the range of $65 million to $75 million are primarily meant to improve our earnings over 2021 for 2022.

However, the macro events and the onetime events made our actions less potent. With these actions still continuing, we hope to do better in 2023 and restore our adjusted EBITDA percentage to historical levels, that means prior to 2022 when our margins were much better. In 2022, our ITPS and health care services segment both demonstrated good wins for our services. Health care segment grew 10.9%, while ITPS was lower by 12.9%. We are very — we are particularly happy with the progress of our digital assets portfolio continues to make. I’ll cover that in a little more detail further in the presentation. It’s hard not to as they continue to clock higher growth rates. It’s a good example of value we offer and, of course, the success of digital marketing.

As you know, we filed the merger proxy with SEC for pending merger with NASDAQ and the NASDAQ Listing for our XBP Europe business and look forward to unlocking the value that will accrue to our shareholders. We continue to be the largest holder — owner of debt issued by our subsidiary, Exela Intermediate. We added a little more in the first quarter of 2023 by purchasing some of the 2023 notes. The other very important item to note is that we in 2022 reduced our debt by $141 million. But the total amount of debt we either purchased or extinguished or modified was over $296 million, broken up into $162.9 million was that was due in 2022 and $133.3 million that was due in 2022. Considering the macro event, this was not an easy task. But we accomplished and there is more for us to do.

Let’s switch to Slide #8. What’s our objective for 2023? Our goal for 2023 is to reduce our debt in the range of $250 million to $500 million. This is an incremental reduction to what we did in 2022. We are in discussion with certain lenders to accomplish this. With the support of Exela entities, we will be able to accomplish a smaller quantum of reduction. However, with the support of our lenders, we can accomplish a much larger quantum of reduction. That’s our goal. And if we succeed, we would have achieved our objective of having a sustainable balance sheet for Exela Intermediate. As many of you know that it is important to highlight, this is the only entity in Exela remaining with high leverage as all other Exela entities are almost debt-free.

Let’s switch to Slide #9. I’d like to emphasize that our shareholders own both the box in the left and the right. The difference on the box on the right is that it alone has a value of about $390 million and is materially debt-free. And the box on the left, which also, you as our shareholders are, our goal there is to enable the company to reduce the debt that’s carried by the Exela Intermediate, as I mentioned in my previous slide, which will enable us to start marching towards reducing the deep discount, the deep intrinsic value discount our company severs. We have much to do to accomplish this. And I hope to share with you those as — share with those results as we progress through this year. Let’s look at Slide #10. These are interesting numbers.

And our goal for 2023 is to finally achieve growth both in revenue and our adjusted EBITDA. I would be remiss if I did not say barring any new events, I do not want to revisit the hazards of the past 3 years, where best laid plans were not to — were modified or we were not able to meet due to pandemic and many other issues. Let’s look at Slide #11. We’ve done an extensive, as you can see on this slide, extensive amount of work to improve our operations. In summary, are estimated between $65 million to $75 million in savings. We anticipate a material amount of these savings will flow through in 2023. In my experience, there is always some movement. And if Mr. Murphy, who struck each of the last 3 years does not strike, we hope to accomplish a turnaround both in our operating performance as well as reduction of interest and reduction of the quantum of debt with — in the Exela Intermediate that has a lot of debt outstanding.

I do expect some of these savings will roll into 2024. Our strategic goal with these actions is to get back on track before — where we were before the pandemic and the economic uncertainty that took us off the course. With that, I will hand over to our CFO, Shrikant Sortur, to discuss additional details about our financials. And I’ll join you back for questions later.

Shrikant Sortur: Thank you, Par. Thanks to everyone for joining us on this call. I will cover our consolidated results and segment revenue for our fourth quarter and full year 2022 performance and provide an update on our balance sheet improvement initiatives. 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 me begin on Slide 13 with a look at the highlights. 2022 revenue was $1.08 billion, down 7.7% year-over-year on a reported basis or approximately 4% down after excluding onetime events and currency impact. We have a stable revenue base with high recurring revenue and a large pipeline, which is encouraging. Q4 of 2022 revenue of $267 million was down 9.3% year-over-year and 7.3% on a constant currency basis.

However, the revenue on a sequential basis was up by 1.1%. Gross profit for the year 2022 was approximately $200 million or 18.5% of revenue and lower by $78 million year-over-year 2021. In 2022, we experienced rising costs impacting our margins, including inflation, tight job market, business mix and onetime events. Adjusted EBITDA of $139.9 million for the year was lower by $33.4 million over 2021. As briefly discussed, we implemented actions expected to achieve savings in the range of $65 million to $75 million beginning in Q4 of 2022 and into 2023 gives us a good expectation that adjusted EBITDA in 2023 to materially benefit from flow-through of these savings actions. Turning to Slide 14. I will cover the broad trends on the income statement since there’s a common theme across the scenarios on this slide.

Let me begin with the Healthcare Solutions segment that posted solid revenue growth for all 3 scenarios. We experienced revenue growth of 15.5% in Q4 year-over-year, 7.2% for sequential quarter and 9.8% for the full year. This is primarily driven by continued acceptance of our solutions and services and higher volume from existing customers. Gross margins for the Healthcare Solutions also experienced growth, 55.1% for Q4 year-over-year and 20.8% sequentially. Gross margin was down by 11% for 2022 as compared to 2021 mainly due to the higher bench costs we incurred during the first half of the year. ITPS revenue was down by 14.7% and 12.5% for Q4 and 2022 year-over-year, respectively. Revenue on our ITPS segment was impacted by lower volumes, currency impact, staffing impact and network outage-related onetime impact.

Apart from cost inflation, our growth investments for expansion of services and cloud operations impacted the gross margin for the ITPS segment, which was down approximately by 35% year-over-year. For sequential quarter, though, Q4 over Q3, revenue was flat and gross margin improved by 2.4%, indicating stability as well as flow-through of savings beginning to come to fruition. The revenue and gross margins on the LLP segment remained relatively steady compared to prior year. SG&A expenses in 2022 totaled $176.5 million, higher by $6.7 million or 4% year-over-year. The increase was primarily attributable to higher employee-related and other cost inflation. Our operating loss and net loss on a GAAP basis and EBITDA on a non-GAAP basis for Q4 of 2022 as well as full year 2022 was adversely impacted by noncash goodwill impairment charge of $142 million in Q4 and $171 million in total for 2022.

Approximately $200 million of noncash charges on the income statement accounted for the $273 million of change to net loss compared year-over-year 2022 versus 2021. Let’s turn to Slide 15 to discuss the segment revenue on a year-over-year basis. A quick look at our segment revenue performance for 2022 year-over-year with a summary revenue walk on this slide provides a better view of the revenue drivers on these segments. ITPS revenue was adversely impacted by approximately $23 million for the year due to currency translation in addition to $13.6 million due to network outage impact. Net of these 2 impacts, the revenue decline on ITPS year-over-year was 8.3% as compared to the reported 12.5%. Health care segment had a strong year with new wins and higher volumes as discussed on the prior slide.

Overall, our current revenue base is stable and diversified from a customer industry and geography standpoint. Exela’s diversified entrenched customer base, along with a large pipeline and demand for our solutions and services serving large markets and our many years of investment, position the company well. Let’s turn to Slide 16 and go over some of our growth investments in 2022 and beyond. While we are focused on initiatives to improve gross margins and operating income, we are also investing in growth. In 2022, we invested in approximately $11 million to expand our services in FAO, data science, technology and digital solutions in addition to investments into a strategic shift to cloud operations, all of which will provide improvements to our EBITDA over time.

Our capital expenditure in 2022 was approximately $22 million and was 2% of our revenue. 2023 CapEx is estimated at 1.5%. Moving to Slide 17, I’d like to discuss updates to our balance sheet initiatives, including debt levels. As briefly mentioned on one of the earlier slides, $296 million in aggregate debt was extinguished in 2022 and through the filing date. $163 million of which was due and paid off in 2022, an additional reduction of $133 million between term loans, BRCC term loan and repurchase of 2023 notes was completed in total. Our blended coupon rate at year-end was 11.14%. Our focus for 2023 will be to further reduce debt and interest expense and achieve a sustainable balance sheet for the company. In closing, we would like to emphasize these 3 key objectives for 2023, which we covered on earlier slides: one, grow revenue and improve adjusted EBITDA; second, maintain growth investments, particularly in our cloud operations while keeping our maintenance CapEx at 1.5% levels; and third, target debt reduction in the range of $250 million to $500 million with strategic actions in progress to improve our liquidity and reduce total debt, thereby reducing cash interest.

Thank you for joining us today. With that, I open the line for questions.

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Q&A Session

Operator: Our first question comes from Zach Cummins with B. Riley Securities.

Zach Cummins: Yes. Hi. Good afternoon. Thanks for taking my questions. And I guess, my first one is really centered around your plans to reduce debt this year, I think laying out a target of $250 million to $500 million in debt reduction. I mean, can you give us a sense of some of the pathways to getting proceeds to meaningfully make a dent into your current balance sheet and reduce that overall debt?

Par Chadha: Zach, yes. Shrikant, if you don’t mind, I take that.

Shrikant Sortur: Go ahead.

Par Chadha: Zach, we filed an 8-K a couple of days ago, which has a highlights of the discussions, a term sheet that we’ve been discussing. It lays out the foundation of how we achieve that debt, at what prices we achieved that debt. The components of that are, one, if you were to execute on that plan, we would get approximately 20% of the amount of the quantum of debt reduction from the consenting lenders, including ETI entities that own the debt. Second is we have hired bankers. You’ll recognize the name, which I won’t share on the call today. We’ve hired bankers who launched a sales process for one of our subsidiaries. That’s not part of the Intermediate, the borrower, as we call it. And the goal for that would be for us to provide ETI to provide support from the proceeds from the sale of that asset, which will permit an additional purchase of debt at a pre-agreed price of approximately $250 million.

So when you look at the combined that discount of debt that we achieved and the purchase of debt, and there are more details, so I won’t cover all the details. But I refer — I would kindly refer you to see all the details that are listed in the 8-K filing. I’m happy to take more questions on this topic, if you want, on a sidebar, giving others a chance to ask other questions.

Zach Cummins: Yes, perfect. No, Par, that’s appreciated. And just my one follow-up question is just around operational performance. I mean nice to see the continued strength in terms of new business wins. I guess maybe this is geared towards Shrikant, but can you talk about some of the cost-savings initiatives? Appreciating that you broke out kind of the subcategories where you expect to realize some of these expenses in the savings, but can you just give us a sense of how that should begin to flow through the income statement and the financials as we progress through 2023?

Shrikant Sortur: Sure.

Par Chadha: Yes. Shrikant, it’s targeted at you, but if you want to talk about what they are and which stop, I can fill in. So you take it.

Shrikant Sortur: Sure, Par. I’ll lead by a couple of data points and happy to — for you to take over from there. Zach, I think even from an IT peers perspective, one quick data point that I had pointed out sequentially, we had a marginal improvement in the gross margins for ITPS segment, right? That’s indicative of the actions that we have started to take in Q4 of 2022 to flow through. That’s one data point. Second one, obviously, there was a slide where we broke out. Our focus is really on automation-related savings and investment into cloud infrastructure. We shall change the mix of how we do from a productivity perspective. And then, of course, real estate as well as other savings that we have listed. So Par, feel free to add to that.