Exela Technologies Inc (XELA) 2020 Q1 法說會逐字稿

Good day and welcome to the Exela Technologies First Quarter 2020 Financial Results Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Will Maina, Investor Relations. Please go ahead.

Thank you, Sean. Good afternoon, everyone, and welcome to the Exela Technologies First Quarter 2020 Conference Call. I'm joined here by Ron Cogburn, Exela's Chief Executive Officer; and Shrikant Sortur, our Chief Financial Officer. Following the prepared remarks made by Ron and Shrikant, we'll 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 at exela.com. A replay of call will be available until July 7, 2020. Information access to replay is listed on today's press release, which is also available on the Investor Relations page of Exela's website.

During today's call, Exela will make certain statements regarding future events and financial performance that may be characterized as forward-looking statements under the Private Securities 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 recent 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'll refer to certain non-GAAP financial measures. We believe these non-GAAP financial measures provide additional information on how management views the operating performance of our business. Reconciliations between GAAP and non-GAAP results we discuss today can be found in the Investor Relations page of our website. Please note the presentation that accompanies this conference call and investor fact sheet are also accessible on the Investor Relations page of our website.

I'd now like to turn the call over to our CEO, Ron Cogburn. Ron?

Good afternoon, and thanks, everyone, for joining us today. I'm pleased to announce that we filed our Form 10-Q for the 3 months ended March 31, 2020, last evening. We are now current on all of our reporting requirements to the SEC and -- under our debt agreements, and we expect to be a timely filer going forward. I want to thank our finance and legal teams for all their hard work in completing this process.

I will begin with an overview of our first quarter 2020 results, business highlights and current trends. I'll then turn the call over to Shrikant Sortur for a more detailed review of our Q1 performance and to discuss our second quarter and 2020 outlook. After Shrikant's presentation, I will come back and talk about our priorities for 2020 and some recent business updates, including our response to COVID-19 pandemic.

Now let's turn to Slide #6. Our first quarter 2020 total revenue on a constant currency basis was $367.2 million, down 9% year-over-year, but above our expectations. We generated $44.4 million of adjusted EBITDA on a constant currency basis in Q1. Our adjusted EBITDA margin was 15% when excluding pass-through and low-margin customer exit revenue. And we ended Q1 with $97 million of global liquidity, which has increased to $106 million by the end of the second quarter.

Our first quarter revenue performance mainly reflects our exit from certain customer contracts and statements of work which are not strategic to the fit for Exela's vision. You may recall that we discussed this strategy on our June 9 call as well. However, I would like to provide you with more detail today as it is an important part of our ongoing business transformation that will continue to impact our results in the near term and will enable us to achieve our strategy of improved operating income and free cash flow performance over the long term.

As we discussed on our Q4 call, our focus for 2020 and beyond is to continue to drive growth in our base business by expanding with our existing customers, especially among our top 200 within our BFSI and healthcare customer portfolios as well as winning new customer logos. At the same time, we're aligning ourselves away from unpredictable nonrecurring revenue that is unlikely to achieve our long-term margin targets.

During 2020, we will continue to exit certain contracts and statements of work with little or no margin contribution and no opportunity to improve their contribution through digital transformation and automation. We refer to revenues from these contracts as transition revenue.

As of January 1, we had approximately $150 million of annual transition revenue that we will exit over the course of this year. And as such, we will continue to absorb this transition in our top line growth metrics. However, it's important to note that declining transition revenue is also expected to have a positive impact on our gross margin profile. We have a plan in place, and we're working diligently to rebalance our resources, set cost and optimize our business for a reduction in these low-margin revenues this year. We will continue to provide you with updates and supplemental information on the impact on our results by transition revenue in future calls.

Our base business is where we are focused for growth, which represents what we believe is a very strong foundation for improved future performance. We believe our base business will be the best indicator of our success and our growth potential going forward.

Now moving to some recent business and market trends. From a volume perspective, based on our current visibility, we expect the impact of COVID-19 on customer volumes to be the most significant in the second quarter of 2020 before showing improvement in the second half of the year as conditions begin to normalize.

For the second quarter, we expect total revenue to be between $300 million and $305 million, reflecting a negative $35 million to $40 million impact from COVID-19. As part of our operational improvement efforts, we reduced our headcount by approximately 4% year-over-year or 920 FTEs in the first quarter. And in response to the current slowdown, we reduced the active workforce by another 3,000 FTEs in the second quarter.

Looking to the second half of 2020, we will continue to carefully balance our cost base against our expectation for increased volumes as well as the exit of our transition revenue. Overall, we anticipate that volume improvement combined with our cost initiatives will lead to improved gross margin performance in the second half of 2020.

From a new opportunities perspective, the realities of COVID-19 are leading our customers to increasingly explore business process automation initiatives that enable them to reduce cost and operate effectively in the new normal. This trend is having a positive effect on our new business wins, showing strong growth so far this year.

On a year-to-date basis, our closed won deal have increased by 52% in the Americas and 58% year-over-year in EMEA, driven by increased demand for work-from-home solutions or what we call home office, Digital Mailroom solutions and our payment offerings. We're pleased with the momentum that we're seeing in our sales metrics, and we're optimistic it will benefit our growth in the second half of 2020 and into 2021.

I will turn the call over to Shrikant at this point to discuss our results in greater detail. Shrikant?

Thanks, Ron. Good afternoon, and thank you all for joining us. In my discussion today, I'll refer to both GAAP and non-GAAP results. As a reminder, reconciliations to these metrics are available in our earnings material. Any reference to the corresponding period of fiscal 2019 includes restated results for the interim period of 2019.

Let's start on Slide 7 with a review of our first quarter 2020 results. Revenue for the first quarter totaled $365.5 million. On a constant currency basis, Q1 revenue was $367.2 million, representing a decline of 9.2% year-over-year.

Moving to our segments. Revenue for our ITPS segment was $284.1 million, a decrease of 12.6% year-over-year from $325.2 million in the first quarter of 2019. As Ron mentioned, this decline was primarily driven by our transition revenue as we exited contracts and statements of work that were nonstrategic to our long-term vision, are unlikely to achieve our long-term target margins. This was partially offset by growth from existing customers and new rent.

Our Healthcare Solutions segment revenue totaled $64 million, up 4.4% year-over-year from $61.3 million in the first quarter of 2019. Our results of the Healthcare Solutions was attributable to increased volumes with existing clients.

Our Legal and Loss Prevention segment revenue, or LLPS, was relatively flat at $17.3 million in the first quarter compared with $17.8 million in the first quarter of 2019. The gross profit margin for the first quarter was down 324 basis points year-over-year to 20%. The gross margin decline was primarily due to our revenue decline offset the continued transformation and cost-savings initiatives.

It's important to note that the impact of transition revenue on our Q1 margins was more significant as the revenue decline is preceding our reduction of stranded costs associated with the transition revenue. Looking at the second half of 2020, we expect our gross margin to increase, benefiting from higher customer volumes, particularly in health care and in payments; and for our cost initiatives, including reducing stranded costs associated with our transition revenue.

SG&A expenses for Q1 totaled $50.4 million, up 1.4% year-over-year and represented 13.8% of revenue. Net of onetime transaction cost related to the sale of our TBG business and our new AR facility, SG&A declined 5% year-over-year, driven by lower revenue and cost-saving initiatives.

Depreciation and amortization expenses was $23.2 million, down from $26.6 million in Q1 of 2019, but essentially unchanged as a percentage of revenue.

Operating loss for the first quarter of 2020 was $2.2 million compared with operating income of $16.5 million for Q1 of 2019. The year-over-year decrease in operating income was primarily due to lower revenue and gross profit.

Turning to EBITDA and adjusted EBITDA. In Q1 of 2020, we generated EBITDA of $54.6 million, up from $38.9 million in the prior period. Our largest adjustments to arrive at the adjusted EBITDA included noncash and other income and charges and optimization and restructuring expenses, also called as O&R expenses. We'd discuss the add-backs to adjusted EBITDA in more detail on Slide 8.

Our adjustment for O&R expenses totaled $13.1 million in the first quarter of 2020, down $1.7 million sequentially and $10.6 million year-over-year. Looking at the rest of 2020, we anticipate O&R expenses to land between $12 million and $18 million per quarter.

We recorded $4 million of transaction costs in Q1 2020 related to the TBG asset sale and our AR facility. We expect to book additional transaction costs in Q2 related to the amendment of our credit agreement for these expenses then to roll off in the second half of 2020.

Finally, we had noncash and other income adjustments of a net negative $28.5 million in the first quarter of 2020. This includes a onetime noncash gain related to a TBG asset sale of $35 million that was offset by $7 million of noncash and other charges. For the remainder of 2020, we expect trends to be in line with Q1 2020 or some of our recent prior quarters adjusted for onetime charges or gains like TBG asset sale, which was one-off.

Adjusted EBITDA for the first quarter was $44.4 million, a decrease from $76.4 million in Q1 of 2019. Adjusted EBITDA margin for the first quarter of 2020 was 12.1% compared with 18.9% in the prior year period, a 670 basis point reduction. Excluding pass-through revenue and low-margin client exit, our Q1 2020 adjusted EBITDA margin was 15%. The reduction for the comparative period was driven by declining revenue and the pressure that put on the cost model, resulting in the gross profit decline and, in turn, impacting our adjusted EBITDA. The remaining reduction was mainly attributable to the lower comparative O&R expenses.

Now let's move to Slide 9 to discuss our liquidity. We covered some of these items on our Q4 earnings call. I would like to refresh and build upon our prior discussion. Our liquidity at March 31, 2020, was $97 million, up from $31 million at year-end 2019. And our total net debt was approximately $1.52 billion. As we discussed on our last call, our total liquidity improved to $106 million as of May 29 and has remained consistent through the end of the second quarter.

During the first half of 2020, we took several steps to stabilize and improve our liquidity position. As we previously announced, we executed on a new $160 million accounts receivable facility and also completed our first asset sale for approximately $40 million. In addition, we have applied for U.S. federal stimulus and other regional government COVID-19 aid relief, and we have exercised certain CARES Act provisions, including deferral of our payroll tax match, for the remainder of 2020.

We will continue to explore and implement additional actions to improve our liquidity this year. This includes our plan to complete additional asset sales of between $110 million and $160 million, accelerating the alignment of our business to our traditionally working capital-light model and executing against our planned cost initiative, including cutting stranded expenses associated with our transition revenue.

Before I hand the call back to Ron, I would now like to discuss our second quarter and full year 2020 outlook. For the second quarter of 2020, we expect total revenue to be in the range of $300 million to $305 million, which includes approximately $35 million to $40 million negative impact from lower volumes, primarily from certain health care and BFSI clients as a result of the COVID-19 pandemic and $5 million of decline attributable to the sale of TBG business.

As we mentioned on our June 9 call, given the uncertainty surrounding COVID-19 and its impacts on our visibility, we're delaying providing financial guidance for full year 2020. I would like to, however, reiterate factors that we expect will impact our performance for the balance of this year. First, as Ron mentioned, we expect the adverse effects of COVID-19 on customer volumes and our financial results to have the most impact in Q2 before improving in the second half of 2020 We caution, however, that continuation of COVID-19 outbreak could further impact the market and our performance.

Second, we'll continue to see a decline in transition revenue as we exit these contracts and statement of work through rest of 2020. Third, in response to COVID-19, we're adjusting our capacity and cost structure, including scaling back our FTEs and certain discretionary compensation. In addition, we will be reducing the stranded operating costs associated with our transition revenue.

Improved volumes in the second half of 2020, combined with our cost initiatives, should lead to more normalized gross margin performance in the second half of the year. And finally, our capital allocation policy is to prioritize improving our liquidity and cash flow. We continue to pursue an incremental $110 million to $160 million in noncore asset sales in support for our strategy over the next 18 months.

With that, I'll turn the call back over to Ron. Ron?

Thanks, Shrikant. Let's now turn to Slide #11 and discuss our key 2020 objectives to driving improved operating income and cash flow generation.

First, Exela is accelerating the alignment of businesses acquired since 2017 by moving away from the capital-intensive model, which is FTE-based contracts, funding the payroll cost first and then collecting the revenue later, to its traditional model where the services are less FTE-heavy like DMR or home office, where the working capital need is minimal and there is no upfront costs that need to be carried before collecting revenue.

Second, we are focused on driving growth of our base business. This includes expanding with existing and new customers within our banking, financial services and insurance and health care industry segments, where we provide mission-critical billing and payment solutions.

Our recent partnership with Mastercard-Vocalink in the U.K. for Request to Pay solutions and our extended relationship with the Co-operative Bank by launching confirmation of payee services are great examples. Our year-over-year increase in the business signings is a trend we believe that illustrates our focus on this matter.

Third, we're increasing our focus on helping customers accelerate their digital transformation with solutions that address the new normal in the wake of to COVID-19.

As I mentioned earlier, we have seen an increase from customers seeking our word-from-home solutions or home office, Digital Mailroom solutions and payment offerings. We have 81,000 users already live on our home office portal, with an additional 56,000 users being onboarded.

Third, we're focused on improving our cost base to both react to the short-term slowdown caused by COVID-19 and to improve our cost structure and drive higher margins over the long term. We reduced our headcount by 4% year-over-year in the first quarter, and we will continue to optimize our headcount for the exit of transition revenue through the remainder of 2020.

Finally, as part of our emphasis on our base business and also improving our liquidity, we will continue to exit certain nonstrategic businesses via asset sale. As we discussed, our goal is to raise an incremental $110 million to $160 million of proceeds through this process for a total of $150 million to $200 million.

Now ending with Slide 12, I would like to summarize our response to COVID-19 and why we believe we are well positioned to weather this current environment and emerge a stronger company as conditions begin to improve.

First, our rapid response enabled us to ensure the safety of our employees and business continuity with nearly uninterrupted services to our customers. Shortly after the onset of the pandemic, we put in place rigorous business continuity and employee safety plans. We obtained essential business certification in most states in the U.S. We've upgraded our facilities with adequate PPE supplies to provide a safe working environment. And to comply with health and safety standards, we enabled work-from-home solutions globally. And we set up a COVID-19 war room with real-time connectivity to global sites for continuous monitoring of our SLAs.

From a customer perspective, we enhanced our communications between Exela, account managers and our customers with high-frequency touch points to ensure business continuity. We pivoted to a new technology-enabled solution, which helped our clients minimize interruption to their business functions. As I mentioned, we've seen strong growth in our sales metrics, driven by our demand for our home office solutions or home office.

And finally, we -- finally, we rapidly diverted volumes to unaffected offshore delivery locations. Overall, we are pleased with our execution, which has enabled us to maintain 96% of our SLAs to our customers. We believe our strong performance is helping to differentiate us from our competitors in the market.

Second, we have quickly moved to adjust our operating capacity to match lower levels of demand and volumes in order to mitigate the impact on our margins. We adjusted our active FTEs by approximately 14% in response to an estimated 10% volume reduction due to COVID-19. Some of this volume reduction is the result of increased delays in our pipeline, which is partly due to changes in our customers' priorities in this environment as well as they -- as well as when they explore larger transitions to digital transformation, including our DMR, payments and billing and digital solutions.

Third, we've improved our liquidity position in support of our needs in this uncertain environment and today have a total liquidity in excess of $100 million. And fourth, our ongoing operational turnaround and discipline has further helped us navigate the COVID-19 situation.

We are fortunate to have a resilient business model that is supported by our strong customer base, the mission-critical nature of our solutions we provide, favorable customer contracts and our unique global delivery model, which combines on-site with nearshore and offshore delivery. We believe we are well prepared for an -- from an operational perspective as volumes are expected to normalize in the second half of 2020.

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

(Operator Instructions) The first question today will come from [Trent Porter with Nuveen].

My first one is a tough one, you might not be able to answer it, because I think Matt asked it last quarter. But now that you've got a judgment today that you plan on appealing by July, it just -- if you had to pay the $57 million today, it looks like you'd be getting close to the -- your $40 million minimum liquidity threshold. So I wonder if you could talk in just broad terms maybe how these things typically play out? Let's say, the appeal goes -- is unfavorable, would you have to pay it immediately? Or do you typically get time to pay it? And other -- notwithstanding the potential asset sale proceeds, are there liquidity considerations that we're not thinking of? And then I have one follow-up.

Trent, thanks for the question. I'll try to keep it high level. We are going ahead with the appeal. And from your question and what are the steps involved, we do have 45 days to submit an appeal brief, as they call it. And then, typically, the Delaware Supreme Court has a fairly forthright process for appeals that last anywhere from 6 to 9 months. But in light of COVID-19, the time line could be longer. That's the status update that I can provide you.

In terms of the payout, what's going to potentially happen, something that I probably won't discuss in full details here, but I'll tell you that the company feels confident that there's no immediate imminent payout expected since the appeal process will probably take its time.

Great. Well, that's very helpful. And then you've talked about -- and forgive me, I don't remember covering this on the last call. You've talked about the COVID-19-related volumes improving in the second half. And just to get better understanding of what the assumptions that are baked into that, I was wondering if you could talk a little bit or just flesh out a little bit more what kinds of accounts that -- of yours where you're seeing this volume decline? And maybe your ballpark, if you could quantify the exposure you have to COVID vulnerable verticals? And then after that, I'll get back in queue.

Yes, sure. I'll probably give a very high level answer, and then Ron can add to whatever I missed. The broader answer, Trent, is that health care and some of our print business, which we'd like to call up integrated communication services, was probably impacted. But you have to look at it in the context of where our customer concentration is. Our customer concentration is in the financial sector and health care, and it's not on the travel or hospitality, right? Therefore, the impact overall for us -- our perspective was not as huge as some of the other companies, I would put it that way.

Okay. That makes...

Yes. Yes. Go ahead.

That makes sense. I'm sorry, I'm writing as you're talking. Just one quick one before I leave. I just wanted to clarify your $300 million to $305 million revenue target in -- for the second quarter target estimate, whatever you want to call it. If I strip out your -- the COVID impact, there's still a $40 million decline. I'm assuming that's coming primarily from the transition accounts that impacted the first quarter?

Trent, it's correct.

It's a combination of both, but that's correct.

And the next question will come from David Foropoulos from Unum.

I just was curious on page -- on your presentation on Page 6, you talk about the profitability, the stranded cost related to the transition revenue. Is there any way you can -- if you say you'd have $150 million of annualized revenue for this year, say we take a 1/4 of that, how does -- how do the cost line up with that for this quarter? I'm just kind of trying to just see how the margins are working out here? Because it looks like you're on the LMCE revenue, you're at 15% EBITDA margins versus 23.3% last year. So I just really wanted to drill a little bit further on the stranded cost.

Okay. And you're looking at it from a Q1 perspective, right, David?

Absolutely, yes. Yes.

Okay. Again, I will give you a directional answer here. As you know, there's a timing element involved, right, as the revenue trends drop off, the cost comes off later. And one of the reasons we call this stranded cost is not only there's 100% of the variable costs do not go out in line with the revenue decline, number two, there's a fixed cost element involved, right? That's one key thing to keep in mind. If I were to give you a direct answer, we estimate -- internal estimates are anywhere from 2% to 3% of standard costs that are still in the system. The way I look at it if you look at Q1 versus -- Q1 '20 versus Q1 '19, 23% margins versus 20% margins, granted revenue was down, we should have adjusted cost down as well. It's not happened quick enough. So simple terms, 2% to 3% of stranded costs in the quarter are still in there. Broader terms, we need to do a lot more to get the margins back up to where it was historically.

Okay. Great. I have another question. In terms of that you guys have talked about further divestitures. And is that -- do you foresee that? And I know it's hard to calibrate when these happen. But is that a 2020 time frame, the way you guys are looking at that?

We -- I'd like to stick to the original time line of 12 to 18 months, right? When we set this in November, we said 12 to 18. From a management perspective, we'd like to get it done as soon as possible to alleviate all of the liquidity concerns that's probably out there. But we are shooting for as soon as possible, but the time line still remains 12 to 18 months.

Okay. And then my final question is, if you're -- you talked about gross margin improvement with volumes and stranded costs coming off and such. When we exit Q4, what would be kind of these normalized margins that you're thinking about, gross margins? And second, with that, do you think you could be cash flow positive in Q4?

That's our goal, right? That's our goal. And let me -- since, David, you're asking me this question as one of the early -- as an early question, let me kind of give you a thought, because we're talking about transition costs, we're talking about -- sorry, transition revenue, we're talking about standard costs and whatnot. I'll point out to 2 or 3 of our publicly disclosed items from the past. As you saw last year, one key element is revenue net of LMCE, we saw 2.9% growth, even though on a GAAP basis, it was not the case, right? In that, you have anywhere from $270 million to $300 million of postage or pass-through costs. Now don't get me wrong. That's low margin. When it's an integrated solution, we still like to have it. But if it becomes just pass-through, literally no margins, it doesn't make sense for us, number one. That's a top line perspective.

From -- in Q3 and -- Q2 and Q3, we had listed our business transformation slides, where if you go back and refer to it, you'll see 45% to 50% of the company is at 35% margins. And then you'll see there's an element of 15% to 18% margins for some of our revenues. And then there's another one, the 20%, right? So ideal world, we want to get back to the higher margin side of the business, right?

Third point is you can look at our fact sheet, FY '17 versus '18 versus '19, what were our gross margins. We have seen a declining trend. We want to reverse that. That's the key element of both whether you're calling it -- now looking at the transition revenue, fixing our cost, end of the day, it's about getting better with our gross margins, and then the cash flows will follow. Sean? Sean, are we still on?

The next question will come from Brian King of Congruent.

Yes. I was just wondering if you could provide more color on pricing? Are customers trying to push -- pushing harder on pricing in light of corona going forward? If you could just speak more on that, I think that would be helpful.

This is Ron. No, that's a great question. So you have to think about the nature and the relationship we have with these customers. Our -- I'll give you an example. The top 20 customers that we have with the company have been with us an average of 16, 17 years now. And so we have long-term agreements with them, 3 to 5 years. The more technology they have, the longer the term. Some contracts are in the 7-year to 10-year range. But because of that relationship, as we came into this, I'll call it, a downdraft from the volumes from the way the world kind of stopped for that moment in late March and April, we were able to navigate through that. We have guaranteed minimum pricing anyway in our long-term contracts, but we partnered with them. We're their technology partner. And as a result of that, they look to us to be able to pivot to work-from-home solution or remote or off-site that they didn't have before. So for us, it was never a conversation about can you do it for less money? Can you give us longer terms? Which is another question that's probably out there. We just did not see that kind of traffic. It was more of a cry for help. Especially in health care and in the financial services, Exela is deemed an essential service partner.

So as a matter of fact, we are the ones that help to move the mission-critical services that these companies, our clients and customers offer. So it was -- it really was sort of that 911 type of call. Can you help solve it? And I think I didn't talk about Slide 13, but if you look at the deck, you could see the -- these are testimonials from the firefight. The men and women that work for Exela were on the front line and worked 24/7 to ensure that our customers did not see a break in service. And like I said, we were able to maintain 96% of our SLAs during this, what I'll call, storm.

The next question we will have will come from Allen Kato of Beach Point Capital.

I guess, first, could you help us understand a bit more of what the actual services are within transitional revenue? And I had a bit of trouble understanding, I think, one of the other caller's questions. What is the stranded cost opportunity associated with that? Or what is the EBITDA contribution from those transitional revenues?

Sure, Allen. To address both of your questions, right, let's talk about transition revenue. I wouldn't want to categorize it by a certain bucket. I'll go back and emphasize what our focus is, which is, as Ron mentioned, base expansion continues to be the focus, top 200 customers and growth there continues to be our focus. What we kind of want to look at more closely is the unpredictable, nonrecurring or any customer return or margin -- customer margins that's unlikely to achieve our long-term margins, right? That's why I kind of pivoted it back to a couple of things that we have talked about in the recent past.

Take out our LMCE revenue -- postage LMCE revenue, actually, we have revenue growth. Impact of low margin on our business is continuing to create a margin compression, and we need to reverse that, right? So that's -- so when I kind of summarize this, transition revenue is nothing but we -- us looking at customers -- customer margins or areas where we need to start pushing for more margin improvement. If it doesn't make sense for the business, it's better that we exit it, focus on the margins, focus on the margin dollars. So if you ask me what industry, what bucket, what customer, I don't think we have that kind of a categorization as such to talk about, at least not on this call.

Stranded cost, again, it's more of a term that we are using here to indicate that when there is a revenue decline, the variable cost is not 100% relatable to it in the same month, same quarter. It comes off, but slower than the revenue drop, number one. Number two, we also have an element of fixed cost that has to come out eventually, whether we call it facility consolidations, looking at the way we work, managing capacity, it's a much bigger exercise. So that is where I gave the comparison of, hey, when we were making 22%, 23% margins in the past, it's not happening right now. In a time when revenue is declining, we need to adjust our costs, be it the leftover variable cost or the fixed that has not filtered out, that has to go out of the system. That's what we mean by the stranded cost concept.

Got it. Okay. And then, I guess, what causes the timing disconnect between the lost revenue and then the associated costs? Is it just planning for headcount reductions? Or what's kind of the underlying driver for that?

I would say the majority is that. It's really headcount and capacity management. So better, real time, more quicker way we can do it, the better off we are.

Got it. So the 3,000 FTEs that have been labeled as nonactive, those are still employed by the firm, is that right?

That is correct. Only point there is -- I don't want -- so even if you looked at our presentation, right, there's between 902 (sic) [920] FTEs that we talk about from a savings perspective versus the 3,000. There is a difference. The 3,000 inactive is more in Q2 and related to the volume declines related to COVID. So while there -- in Q2, there's an interplay between COVID-related revenue decline and with transition revenue. It's going to be hard to pinpoint and say, which is what, but I want to keep that in mind when you look at the 3,000 FTE number. That's more specific to the Q2 and related to COVID. Once the volumes are back up, those employees could get back to being in the workforce.

Got it. Just 2 more quick ones. When you take that all into consideration, do you see -- what do you see as the path to bringing the company back to high few hundreds of adjusted EBITDA, like low 200s of cash EBITDA as was the case in 2018?

Right. I think I'll put it in one line, profitable revenue growth, right? We need revenue. We need revenue growth, but at the same time, it's very important that there's margin growth, not just in percentage terms, but in dollar terms as well. So I think this -- as you see a lot of what we are saying in the recent past is focused towards how do we improve our margins.

Got it. So when you talk about the transitional revenue being margin accretive, that's on a percentage basis. But on a gross margin dollars basis, is it going to be pretty much offset by the stranded costs you take out?

Right.

Okay. Got it. And I guess one last question, I guess, more holistically looking at kind of liquidity, I think you guys said there's $106 million at the end of June, which implies some moderate amount of unlevered free cash flow. But when you think about that level of liquidity relative to $140 million of debt service per year. And I think based on adjusted EBITDA recently, doing more asset sales at 6x won't necessarily delever the company. So how do you think about the long-term support needed for the capital structure and kind of how to provide that? And I guess one thing I forgot to add on liquidity is when you appeal the judgment, is there a bond required to be posted?

Yes. Allen, a few different questions there. I realize it's an important question as well. So I'll put it this way. The company has always met its obligation towards any of these payments, right? That's number one. We have additional levers as well to further improve our liquidity, if need be, number two. Long term, obviously, it all is going to fall back on operational performance, right? I mean, we have other levers, we have financing options, we have whatnot. But long-term goal, as we've been focusing here and talking about, is execution, execution at the operational level to start generating operational cash flows.

In terms of the last question that you asked, I do not have -- maybe the legal team -- or I need to touch this with the legal team and whatnot. At least from what I know, which is probably a little bit early here, is there are potentially options to proceed with the appeal without having to pay the bond. But then again, as I said, I'll caveat it by saying I do not know enough on that, and that's something that our legal folks should probably address at some point in time.

The next question will come from Jerry Wang with Carlyle.

Just had a quick one. I think on Page 12, we have your sales win closed in the quarter was up pretty materially. Can you just say what dollar amount that is associated with in the Americas and EMEA?

This is Ron. I don't know that we had disclosed that level of detail, Jerry. But on -- I mean, excuse me, Shrikant, did you -- I don't think we had that information quantified. Did we?

Yes, Jerry, let's do this. We can get the number for you probably at a later point in time. I do not have it off, let me put it that way. We do know it on a percentage basis year-over-year growth.

That will conclude today's question-and-answer session. I would like to turn the conference back over to Ronald Cogburn for any closing remarks.

Thanks. And once again, we want to thank everybody for participating today in the call, and we appreciate your questions. And you know, as always, you can reach out to us directly through ICR through Will Maina or directly to myself or to Shrikant. Thanks again, and we'll see you on the Q2 call. And everybody, stay safe in this environment. Thanks. Bye.

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