Exela Technologies - Earnings Call - Q3 2024

Executive Summary

• Q3 revenue was $269.2M, up 6.3% year-over-year; adjusted EBITDA was $14.6M (up 6.7% sequentially), while GAAP net loss was $(24.9)M; gross margin fell to 20.2% on higher postage costs.
• Segment mix: ITPS grew 11.5% YoY; HS declined 5.3%; LLPS declined 2.4%; ITPS also grew strongly sequentially on a large existing-customer project.
• Liquidity/capital: positive operating cash flow of ~$5M in Q3; however, management disclosed going-concern uncertainty and ~$(50)M cash interest due on Jan 15, 2025 for the April 2026 Notes.
• Stock delisted from Nasdaq on Nov 8, 2024 and now trades OTC Pink (XELA, XELAP); later in Nov, Exela exchanged 1.53M Series A preferred shares into ~21.39M common, reducing preferred overhang and increasing common float.

What Went Well and What Went Wrong

• What Went Well
  • Revenue growth and sequential EBITDA improvement: “We reported third quarter revenues of $269.2 million, up 6.3% year-over-year… Adjusted EBITDA was $14.6 million”.
  • Commercial momentum: Renewed ~$113M of TCV; won ~$40M of new ACV; added 81 new logos in Q3.
  • Operating cash flow turning positive: “Our cash flow from operations also continues to improve with $5 million of positive cash flow from operating Q3.”.
• What Went Wrong
  • Margin pressure from inflationary inputs: Gross margin declined to 20.2% (down 330 bps sequentially; down 140 bps YoY) “primarily due to higher postage costs in the quarter”.
  • LLPS margin downdraft: “LLPS margins were down approximately 1,000 basis points” (project cadence).
  • Listing status and financial risk: “Exela was delisted from NASDAQ” in November; 10-Q highlights substantial doubt as a going concern and ~$50M interest due Jan 15, 2025, alongside other near-term maturities.

Transcript

Operator (participant)

Good day, and welcome to the Exela Third Quarter 2024 financial results. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key 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 a touch-tone phone. To withdraw your question, please press star and then two. Please note this event is being recorded. I would now like to turn the conference over to David Schamis, President of Investor Relations. Please go ahead.

David Schamis (President of Investor Relations)

Thank you, Operator, and good afternoon. Welcome to our earnings call to discuss our third quarter results for the period ended September 30th, 2024. Our presentation has been posted to the IR section of our website. On today's call will be Matt Brown, our Interim Chief Financial Officer. Some of the matters we will discuss on 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 presentation. With that, I'll turn the call over to Matt.

Matthew Brown (Interim CFO)

Thanks, David. Good afternoon, everyone. Let's start on slide eight, financial highlights. We reported third quarter revenues of $269.2 million, up 6.3% year over year. Information and Transaction Processing Solutions increased by 11.5% year over year, while Healthcare Solutions and Legal and Loss Prevention Services declined by 5.3% and 2.4% year-over-year, respectively. Sequentially, Q3 was up 22.4% in ITPS, primarily driven by a large project from an existing customer, while down 6.7% in Healthcare Solutions and down 28.8% in LLPS due to project fluctuations. Q3 gross margins were 20.2%, down 330 basis points sequentially and 140 basis points year over year, primarily due to higher postage costs in the quarter. LLPS margins were down approximately 1,000 basis points, while ITPS margin was down 100 basis points and healthcare margin was up 160 basis points.

SG&A was down about 1% year over year and 16% sequentially, driven by reductions in legal and professional fees as well as employee-related costs. We're continuing to make investments in new business divisions such as Reactor.AI and shifting from CapEx to OpEx as we move our data center infrastructure to the cloud. Year to date, we've consolidated over 300,000 sq ft of real estate and have approximately 65,000 sq ft of additional consolidations in process for the fourth quarter. We have made good progress on savings initiatives and still have significant opportunities for margin improvement throughout the rest of the year. We had a net loss of $24.9 million, an improvement of $2 million sequentially. Adjusted EBITDA was $14.6 million. In terms of highlights, we achieved solid revenue growth and 6.7% sequential improvement in our adjusted EBITDA. We also renewed over $113 million of TCV in the quarter.

We are seeing growth opportunities with approximately $40 million of new ACV won in the quarter and 81 new logos added. Our cash flow from operations also continues to improve, with $5 million of positive cash flow from operating in Q3. In terms of lowlights, Exela was delisted from Nasdaq earlier this month due to failure to meet the exchange's $35 million market cap minimum requirement for 30 consecutive business days. We will continue operating on a business-as-usual basis with no disruption to our operations or financials. Our focus for the rest of the year is to continue growing revenue, increase gross margin, and strategic growth initiatives. We are optimistic about achieving many of our objectives this year as we continue to focus on improving profitability and liquidity. Thank you, and we will now open the line up for questions.

Operator (participant)

We will now begin taking questions and answers. If you have a question, please press star and then one. Our first question. We'll pause for a moment to assemble our roster. You're showing no questions. This concludes our question and answer session. Thank you for attending today's presentation. You may now disconnect.