Exela Technologies Inc (XELA) 2019 Q1 法說會逐字稿

Good day and welcome to the Elexia Technologies (sic) [Exela Technologies] First Quarter 2019 Financial Results Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Jim Mathias, Vice President of Investor Relations. Please go ahead.

Thank you, Lindsay. Good afternoon, everyone, and welcome to the Exela Technologies First Quarter of 2019 Conference Call. I'm joined here today with Ron Cogburn, Exela's Chief Executive Officer; and Jim Reynolds, our Chief Financial Officer.

Our agenda for today's call is as follows: Ron will provide an overview of our first quarter results and update you on our strategy. Jim will then discuss our financial performance in greater detail. We will then take your questions.

Today's conference call is being broadcast live via webcast, which is available on the Investor Relations page of Exela's website, investors.exelatech.com. The telephonic replay of this call will be available until May 16 of this year. Information to access the replay is listed in today's press release, which is also available on Exela's Investor Relations website.

During today's call, Exela will make certain statements regarding future events and financial performance that may be characterized as forward-looking under the Private Securities and Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks and uncertainties and are based on current expectations and assumptions. We undertake no obligation to update any statements to reflect the events that occur after this call, and actual results could differ materially from any forward-looking statements. For more information, please refer to the risk factors discussed in Exela's most recently filed periodic report on Form 10-K, along with the associated press release and the company's other filings with the SEC. Copies are available from the SEC or the Investor Relations page of Exela's website.

During today's call, we will refer to certain non-GAAP financial measures. We believe these non-GAAP measures provide additional information on how management views the operating performance of our business. Reconciliations between GAAP and non-GAAP results we discuss on today's call can be found on the Investor Relations page of our website.

During today's discussion, please refer to our press release and investor fact sheet which are accessible on the Investor Relations page of our website, investors.exelatech.com. In combination with today's discussion, we believe our press release and our expanded fact sheet results in a more efficient review for our stakeholders, and as a result, we do not believe slides are necessary going forward.

We will now begin by turning the call over to our CEO, Ron Cogburn. Ron?

Good afternoon and thanks, everyone, for joining us today. As Jim just mentioned, I hope by now you've had the opportunity to review our quarterly materials available on our Investor Relations website. We are pleased with the solid first quarter results and we are excited about the remainder of 2019. On a constant currency basis, our revenue of $410 million grew 4% year-over-year, and adjusted EBITDA of $75 million grew 8% year-over-year. Our first quarter adjusted EBITDA margin was 18.3%, an increase of 60 basis points from 17.7% in Q1 of 2018. The improvement in margins validates the path that we are traveling to transform businesses through our automation as we get the benefits of executing our remaining cost savings initiatives.

Growth was backed by our growing and profitable pipeline and the continued ramp of our existing customers. Our Digital Now strategy continues to win business by leveraging our best-in-class technology and support services. Our goal is to continue to accelerate the digital transformation of our customers through expanding engagements across multiple layers and to be their technology and business process automation partner.

As we continue to grow and service our new and existing customers, we have seen an acceleration in our initial costs associated with these wins. As a result, we have added to our employee base and have seen an increased use of working capital. These trends should reverse in the back half of the year. Further, we continue to exit low margin contracts where customers do not have a path going forward towards automation. On a sequential basis, we expect revenue to be similar to Q1 and improve materially in the third and fourth quarter. Accordingly, based on our current pipeline, we are reaffirming our 2019 outlook.

As I mentioned a moment ago, we added to our employee base due to these wins. At the end of this quarter, our total headcount rose to 22,976 as a result of adding 929 FTEs. Our customer awareness is rising, and our solutions are well received. This year, Exela was ranked #18 on the Everest Group of BPS top 50 list, improving from #22 last year and from #35 the year before. With our digital solutions, we have posted consistently strong scores for market impact, vision and capability across multiple categories such as F&A digital augmentation suites, banking digital capabilities platforms, health care process automation and P&C insurance services.

In executing our strategy of working to accelerate the digital transformation of our customers, we're making significant progress on our savings initiatives that we've identified throughout the organization. We expect to execute on a material portion of our remaining $56.4 million in identified savings during the remainder of 2019, which is detailed in our fact sheet.

Digital transformation and execution of our initiatives will drive the future convergence of adjusted EBITDA to EBITDA.

In early April, we launched Exela's SmartOffice. We're excited to bring the Internet of Things to the workplace. In conversations with our customers, there is an increased demand for automation and enhanced user experience. Utilizing our integrated technology products, SmartOffice was created to improve the overall user experience. We believe it represents the next wave in workplace optimization.

With SmartOffice, Exela can work with customers to interconnect previously disconnected technologies to better suit the modern office environment. The offering can transform the front office, energy and facilities management, logistics and fulfillment and provides on-demand services with connected devices to facilitate green initiatives and to reduce waste. The solutions included in SmartOffice are supported by a single sign-on capability which helps visitors accelerate registration and increase visibility to workflows and compliance.

Exela's business process automation continues to drive favorable revenue per FTE.

Now I'll take a moment and briefly cover some of the annual statistics that we discovered -- discussed on our Q4 2018 call in March of this year. From 2017 to 2018, we increased our revenue per FTE by 11% on an organic basis to $73,000 at 9% on an actual basis to $72,000. With 2018 revenue per FTE of $72,000 and as the composition of our workforce evolves, I believe a few longer-term trends should also be continued -- or followed. For example, in the Americas, automation provide to processes drives higher efficiency and throughput which enable headcount reductions. As Exela ramps enterprise contracts such as the global bank contract I mentioned earlier this year, implementing our automation enables workers to do more. In Europe, we see a great opportunity to continue to grow our footprint and our revenue. Looking at the rest of the world, we have a global delivery model that is driven by automation. On a geographic basis, the global model enables us to be location agnostic which benefits our customers and provides us with the opportunity to drive towards an optimal cost structure.

I want to review a few customer and revenue metrics we refresh on an annual basis as well that we believe are essential in tracking Exela's progress and execution.

We have a diverse revenue base with our top 20 customers representing 36% of our revenue, the top 100 represents 61% of our revenue and our top 200 customers represent 73% of our 2018 revenue. With high customer retention, our diverse revenue base provides us with top line visibility as well as significant opportunity to add additional statements of work to existing customers.

At the end of the first quarter, 83% of our revenue is now found in the Americas and 17% was from Europe. As you know, in the past, we have discussed our strategy to increase wallet share within our existing customers. At the end of 2018, we had 10 customers generating $25 million in annual revenue, an increase from 6 at the end of 2017. We also added 62 customers generating over $1 million, reaching a total of 259 customers. Both the increases in the $25 million and $1 million customers demonstrate the effectiveness of our efforts to grow within our existing customers and gain wallet share.

Now here's an update. During the first quarter of 2019, we have 2 existing customers which are now expected to generate over $25 million in additional annual contract value, and we have 5 customers, existing customers, now expected to generate over $1 million in additional annual contract value.

These customers are in the largest and growing industries that we serve which are banking and financial services and health care. When I look at our pipeline and the ACV we are adding, I expect these positive trends will continue.

We are off to a great start in 2019. The team is focused on transforming pipeline into revenue and we are working with our customers on their digital transformations.

And now I would like to hand the call over to Jim Reynolds, who will discuss our financial results in greater detail. Jim?

Thanks, Ron. First quarter revenue totaled $403.8 million compared to $393.2 million in Q1 of 2018, an increase of 2.7%. On a constant currency basis, revenue was $409.8 million, an increase of 4.2%.

Looking at revenue by geography, our revenue mix was 83% in North America and 17% in Europe. This compares to 90% in North America and 10% in Europe in Q1 of 2018.

Moving to our segments. Revenue for our ITPS segment was $324.6 million, an increase of 4.1% year-over-year, driven by a ramp-up of contracts using our Digital Now model and the impact of growth investments. Our growth in ITPS was negatively affected by exiting certain low-margin contracts and currency headwinds of approximately $6 million on a year-over-year basis. Our Healthcare Solutions segment grew 4.6% on a year-over-year basis, totaling $61.3 million, up from $58.6 million in the first quarter of 2018. The quarterly results in health care were consistent with our expectations. Our legal and loss prevention segment revenue, or legal, declined 21.2% on a year-over-year basis to $17.8 million. We had few large projects that were active in the first half of 2018 that settled midyear and had not been able to replace. Results in legal are events-driven and project-based and can cause our revenue to be lumpy between quarters.

Gross margin for the first quarter was 24% compared to 25.3% in the first quarter of 2018. Gross profit margins were lower primarily due to higher initial costs related to new revenue, including scaling of $60 million in ACV during the first quarter and lower revenue in our legal segment. We expect gross margins to improve in the future as revenue scales to steady-state and the conversion of our savings initiatives.

SG&A for the quarter totaled $49.9 million and was 12.3% of revenue compared to 11.6% of revenue in the first quarter of 2018. The increase in SG&A is driven by our continued investment in our customer-facing organizations as well as higher costs associated with being a public company, including higher stock compensation-related expenses.

Our adjusted EBITDA for the quarter totaled $74.1 million, an increase of 6.5%, and a (sic) [our] margin in the first quarter was 18.3%, an increase from 17.7% in the first quarter of 2018. The improvement in adjusted EBITDA margins was mainly driven by revenue growth and by continued realizations of savings flow-through but were partially offset by investments the company made for growth.

I want to discuss in greater detail the differences between EBITDA and adjusted EBITDA. The primary variance between the 2 are optimization and restructuring charges. This adjustment relates to investments we have made to achieve cost savings and a majority relates to headcount. During the first quarter, optimization and restructuring expenses totaled $25.8 million. This increased over Q1 of 2018 as we're incurring additional upfront cost for a few large projects. We expect this trend to continue in 2019, but decline in the year -- later quarters.

Our 10-Q and press release present our cash flows and balance sheet. Liquidity at the end of the first quarter was $57.9 million, and total net debt was $1.459 billion. Cash flow from operations in the first quarter decreased significantly. This was due to approximately $20 million in working capital usage from acceleration in our initial costs related to ramp of new revenue. We have added approximately 900 employees, and as a result, payroll costs are paid biweekly with receivable collections following between 60 and 65 days. This is why we saw a drag in our AR-related growth. In addition, working capital was negatively impacted by approximately $25 million due to the timing of interest payments. Our $50 million interest payments are made every January and July.

CapEx for the quarter was $13 million or 3.2% of revenue. This is slightly higher primarily due to the ramp of the new revenue I discussed earlier. We still feel comfortable with CapEx being in the 2% to 2.5% of revenue range, unless we have similar new bid contract ramps in the remainder of the year. At March 31, 2019, our NOL balance totaled approximately $260.6 million, which is available to offset future cash taxes. Our buyback program on stock remains in effect, but we did not purchase any additional shares in the first quarter of 2019, although the settlement of some shares purchased in Q4 2018 took place in the 1st week of January.

With respect to our current business outlook, we are not making any changes to our full year 2019 guidance. In Q2 of 2019, we expect revenue to be similar to Q1 and improve materially in the third and fourth quarter based on our strong pipeline, which is in late stages.

In closing, we have a solid start to 2019. We are pleased with our results as we work to drive revenue and EBITDA growth going forward.

That concludes our formal comments. Operator, with that, please open the queue for questions.

(Operator Instructions) Your first question today comes from Dan Dolev from Nomura.

I've got actually 3 quick questions. I hope that's okay. Can you give us the impact of M&A, the exact impact of M&A in the quarter?

So thanks for the question. With respect to the impact of M&A, you look at our ITPS, if you exclude the contracts, low-margin contracts we exited during the year, offset by the acquisition we did in the spring, our organic growth rate was approximately 3%.

Right, but that's excluding the margin, the low-margin contract, right, that you...

That is correct.

Got it. And did Asterion was at, what, like $16 million? Or less than or more than that in terms of contribution?

We didn't give out specific numbers for Asterion, but it was approximately in that range.

Got it. And if you look at sort of the 3 segments, actually, like both ITPS and health care sort of fair to roughly in line with our expectations. I feel like the legal segment was somewhat below we were expecting some positive growth this quarter. So what was driving that? And when can we expect positive growth from that segment?

Yes, thanks. Within the legal state, our segment, the revenue was really project-based and lumpy. We had some great cases in the end of -- in 2018, that finished up midyear related to notifications, and we just haven't seen the scale. We still have a large number of cases hitting singles and doubles in revenue, but there have not been the large cases we've seen historically. So while we're a little disappointed, we think that given the pipeline, there's opportunity for growth of the second half of the year.

Your next question comes from Joseph Foresi with Cantor Fitzgerald.

This is Drew Kootman on for Joe. You guys mentioned the pipeline remains strong. I was just curious, are you seeing an increase in the pipeline due to Digital Now? Or maybe you could just touch on how Digital Now is sort of changing the pipeline? Or what you're seeing through that?

Drew, that's the right question, and that is the conclusion. I think I've mentioned last quarter the growth in our pipeline year-over-year is almost double what we have seen previously before all opportunities related to Digital Now. And as we move forward, we're beginning to see a pickup in the interest in SmartOffice. And so all of these have come together from an enterprise level with the pursuit that we've created with our strategic dealing teams now, I think that's part of the other reason we've seen our pipeline grow. So we're very excited to see how that plays out because we believe we have a higher opportunity or a better opportunity for a higher conversion rate of that pipeline.

Okay. And then I saw the little slide in Exela regarding the synergies, but I was wondering, could you update us on some of the synergies and what you expect moving forward and the timeframe around that?

Yes, so within our fact sheet, we lay out the savings. They're approximately $56.4 million primarily in head count. We -- when we look at 2019, we feel very good that a majority of these will be taken in our results in this year and we'll have a ramp up. But we are going to be cautious because it does cost cash to implement some of these savings. So we're going to be very prudent.

Okay. And then 1 more if I could just sneak it in on health care. Looks like health care actually had decent growth, especially compared to last year. I was wondering if you could just touch on if you expect that moving forward or what your thoughts are around the health care segment.

Sure. With the health care, we're excited, we closed on a small health care asset at the end of the year. It gave us a great partnership moving forward that we will continue to leverage. So we feel really positive about where we are on a go-forward basis in health care.

Your next question comes from Brian Essex with Morgan Stanley.

I was wondering if maybe you could talk a little bit about some of the relationships with existing customers. I know that recently you guys had, in particular, a pretty large lockbox win with a big bank. How much new business are you able to penetrate existing customers with? And how much of that pipeline does that account for within your visibility for the year?

So Brian, this is Ron. I mean, that's a good question. Let me help clarify that, the conversation around that big bank. So this is our Digital Now strategy, and so there's multiple lines of service. Certainly, there is remittance processing involved with this. But the longer this customer has our technology platforms in place, the more services we'll begin to roll out through that customer. So when you think about how we've grown historically, it has been through our existing customer base, and it has to do with the ability to land and expand. So this bank was a great customer example. They had been a customer for almost 10 years. We did a handful of services for them. That gave us the opportunity because they trust us to be able to go in and present a more complex and more integrated type of offering that would reach throughout their entire organization. So as we sit here today, I think we mentioned last time, they liked it so much, they increased the term of the contract and as well as the fund. So when we look at our pipeline, which is the question, we see lots of opportunities like this that are similar where we've had a great relationship with a large existing customer. They have now allowed us to come in and propose to them a more integrated solution that uses all of the layers of our technology. We call it our 7-layer stack. If they say yes to the seventh layer, they're going to be fully integrated with us and our technology and our services and our solutions. So that's really sort of a foundational strategy we're using.

Okay. And then maybe just a little bit on the seasonality. And I think you pointed to a little bit of softness in the quarter with a better looking kind of pipeline at the end of the year. But I think 3Q, I think from prior conversations, tends to be a seasonally softer quarter. Do you think some of these volumes kind of pushes in to the back half of the year? And I guess how do we get comfortable or how do we have confidence in that, that's actually going to pull through?

Good question. This year, we closed $116.5 million in ACV. We're ramped up $60 million by the end of Q1. And although there's some softness we see in Q3, typically due to Europe, a lot of the revenue is more back-end loaded, but are pretty confident in the back half of the year seeing material growth.

Okay. And then maybe just a quick one for Jim, I mean, you mentioned headcount-related drag on working capital. I mean, how do I get a sense that -- I see it on the cash flow statement, not really apparent on the balance sheet, how do I wrap my head around, it looks like about $15 million, I guess, that compared -- lower compared to last year on a payables and accrued liabilities? Where does that kind of flow through? And how do we think about that kind of reversing out in the remainder of the year?

Sure. We ramped up these large projects at the beginning of this quarter towards the mid, so we did have a fair amount of AR drag with these larger contracts. Obviously, we're paying payroll, which impacts the overall cash balance. But this starts to reverse. Typically, our working capital comes back in the second quarter. We do, right then, we have a little bit of a drag in the third quarter related to our bond payment, our interest payment, and then it comes back at the back end of the year.

(Operator Instructions) The next question comes from David Phipps with Citigroup.

So when we look at the sequential progress, will be about flat quarter-to-quarter, and how would you expect some of the different businesses to perform? Do we expect -- is there anything big or small change from the litigation side of the business? Or is it that things kind of flattening out in general over the 2 -- over the 3 sectors?

So we don't give specific guidance by segment, but if you look historically, we've seen growth within our ITPS. And then we feel really good about how we're positioned within health care this year. Within our legal, it gets a little lumpy from quarter-to-quarter. We've kind of been ramping down slightly from a revenue perspective. We think this is at least the baseline and hope to grow from here as the pipeline converts within our legal group.

Okay. And then if we look at some of the margin progression, you've made some nice margin progression in the past 5 quarters. And would you expect to continue to make margin progression in the June quarter even though revenues will be roughly flat?

So we don't give out specific quarterly guidance, but what I would tell you is, as the saving initiatives flow through the P&L, a majority of those run through our cost of goods sold. As we put our technology in and take out people and headcount, you'll start to see the gross margin turn, which we expect.

Okay. Because you added about 1,000 employees during the quarter so that would suggest that you're set up for new business or you're going to have a little bit of extra costs. Maybe you can talk through that a little bit because if we're flat but we have more cost to more employees, it seems like that you're going to have little bit of margin pressure unless you have some cost savings to offset that.

Yes, absolutely. We've added, like Ron said, about 929 employees which almost all in the production in the cost area. And as we ramp these contracts, our revenue hits steady state and we put in our technology and start to see the benefit in margin expansion. So we're well underway with respect to these contracts.

Okay. And then finally, on the M&A outlook, how's the pipeline look for Exela right now?

So as we said at the end of Q4 as part of our guidance, we're not anticipating any acquisitions. There's always a pipeline for them, but we're really going to focus this year on deleveraging.

Your next question comes from Eric Bourassa with Jefferies.

This is actually Todd Morgan. Two things. Number one, people talked a little bit about the legal division, and you've mentioned that it's lumpy. How kind of integrated is that business in with the rest of the company? How important is it to the overall kind of growth story of the company? And are there other options you might consider again as a kind of the first question. And then the second question, I was hoping you could talk a little bit more about restructuring and optimization costs that you have here. I mean they've been persistently high. I guess you've defined those as being the salary and benefits for folks that are -- at this part of that optimization process, but is there any -- can you give us any kind of understanding of what kinds of people those are, what those kinds of expenses are and how the those might trend as we look forward?

Sure. Good questions. With respect to our legal segment, we've gone and we view significant opportunity. When we brought in Enterprise Solutions into the mix, they have a fair amount of business with legal, law firms, et cetera, that are being included within our ITPS. So we see an opportunity to expand our legal services with that relationship. Although it's not completely integrated from a facility location, it's still somewhat separate. We view it as there's a significant revenue synergy or opportunity by leveraging those relationships. In addition, what I would tell you, in addition, we've hired a new individual that's responsible to help us drive our legal business and we're excited about having him on board.

I think the second question related to the optimization and restructuring. Optimization and restructuring charges are primarily headcount-related charges. As we transition for a more managed analog-type solution to a digital solution, we need time, and we have people doing non -- probably not-as-productive services. And as you put in the technology, you start to have the ability to take out headcount. In addition, in a lot of these clients, there's third-party technology that's being used. And part of Exela's suite and putting in our technology, we're able to reduce the overall cost to perform that services. So if you look at optimization, we feel good as we have some of these large projects, it will take us a little time to work through, but we expect optimization to trend down over the quarters.

We have one last question from [Matthew Sanchaefer] with Matrix Financial.

Sorry, I have been advised this concludes our question-and-answer session. I would like to turn the conference back over to Ron Cogburn for any closing remarks.

Yes, thanks, everyone, for joining today. We look forward to speaking with you again over the next quarter, and we always extend an invitation to any of the shareholders and analysts to come by and visit with us at our technology centers, our innovation centers. They're in the New York area, Dallas, London, Amsterdam and, of course, in Los Angeles. Thanks, everyone, and goodbye.

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